BY CHRIS MARQUETTE

Proponents who tout the revolutionary potential for digital assets may turn to a more traditional model to protect investors and pre-empt additional scrutiny: self-regulation.

A group known as the Virtual Commodity Association is working to establish an industry-sponsored regulator tasked with governing the market. It would function in a similar manner to stock markets, where at least some conduct is policed by the industry itself.

The VCA’s working group consists of four virtual currency exchanges: Bitstamp Inc., bitFlyer USA Inc., Bittrex Inc., and Gemini Trust Company LLC. If these groups are able to create a self-regulatory organization, they expect it would oversee virtual commodity markets, similar to the way stock exchanges and a broker-based organization function as de facto regulators. The broker organization is the Financial Industry Regulatory Authority, which is governed by the industry as well as public members.

The idea is gaining steam as the call widens to legitimize the trading of digital assets. Financial regulators are concerned that cryptocurrencies and digital tokens lack oversight, leading them to deny applications for bitcoin exchange-traded funds, for example.

While the Commodity Futures Trading Commission established in 2015 that bitcoin and other cryptocurrencies are legally considered commodities, they occupy the same category as gold or oil, which are considered “exempt.” No federal agency has authority over spot markets of exempt goods, although the CFTC does have enforcement power on fraud or manipulation.

The reason for the exemption is these cash transactions are for immediate delivery, settled on the spot and supported by a commercial endeavor, such as a farmer selling corn. Lawmakers have long sought to keep these markets free from interference from regulators.

Virtual commodities raise new issues, however, including uncertainty about the commercial use of bitcoin and speculative interest from investors. The VCA could play a role in resolving those issues, though it’s unclear how quickly participants are moving on the idea.

Cameron and Tyler Winklevoss, co-founders of Gemini Trust, proposed to create the self-regulatory organization in March to regulate virtual commodity exchanges and custodians in the U.S. digital asset industry.

CFTC Commissioner Brian Quintenz has been calling for such a regulator since early 2018, saying an independent body has to step up and enforce the rules around cryptocurrencies. A piecemeal combination of state and federal regulators have jurisdiction over the cryptocurrency industry, though a glaring hole remains in digital asset oversight concerning the spot market, Quintenz said last year.

Although state regulators and the Treasury Department’s financial crimes enforcement network division regulate cryptocurrency platforms as money-service businesses, there are enough distinctions to merit a separate regulatory approach, Quintenz has said.

He cited efforts to establish cryptocurrency self-regulatory organizations in the U.K. and Japan. These regulators have several advantages, such as quicker oversight on spot platforms compared to a federal approach, and they are funded by their members instead of the government, according to Quintenz.