"Gemini" Risk Control Interview: How the Traditional Financial Regulatory Framework Maps to the Crypto Industry

Source: Yahoo Fiance

Original author: Daniel Kuhn

Translator: Moni

Source: Odaily Planet Daily

Editor's note: This article has been deleted without changing the original intention of the author.

Blockchain technology has brought many innovations to the traditional financial industry, but if legal protection measures are still outdated, it will be difficult for us to make progress-and this is exactly what Yusuf Hussain thinks.

As Chairman of the Virtual Commodities Association (VCA), Yusuf Hussain hopes to bring a real financial governance structure to the crypto industry, and the virtual commodity association he leads is also working to become an industry self-regulatory organization designed to help industry participants manage their own affairs Set standards of ethics, conflict, and judgment, just as the Financial Industry Regulatory Authority (FINRA) manages stocks, corporate bonds, securities futures, and options trading intermediaries.

At this stage, the Virtual Goods Association is composed of business consultants, law firms and legal compliance experts, and four cryptocurrency exchanges. These four exchanges are Gemini, bitFlyer, Bittrex and Bitstamp, Yusuf Hussain is also currently the risk leader of the Gemini exchange.

In a recent interview, Yusuf Hussain talked about how to map traditional financial risk management to the cryptocurrency industry. Let ’s take a look at what he talks about.

As the head of risk of the Gemini Exchange, you have a very high reputation in the field of risk and supervision, but at the same time you are the chairman of the Virtual Commodities Association. Can you talk about any overlap between these two roles?

There is still some connection between these two roles, because the risks assumed by crypto organizations and even the entire crypto industry are the same, and so far we still do not have a clear regulation. At present, the risk management practice of the blockchain and crypto industries is mainly to narrow the regulatory gap through remedial measures. I hope that the Virtual Goods Association will solve the "regulatory uncertainty" problem.

Can you talk about the process of the virtual goods association applying for the status of "industry self-regulatory organization"?

The Virtual Goods Association is one of the few associations applying for the status of "Industry Self-Regulatory Organization", but there are actually many ways to apply for this status. If you only look at the minimum requirements, market regulators need to submit an association applying for "industry self-regulatory organization" status to Congress, and Congress will decide whether to designate the applicant as an "industry self-regulatory organization" in accordance with relevant laws. The Virtual Commodities Association recognizes that there is a specific way to pass legislation in the same way that the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) have designated "industry self-regulatory organizations" to assume self-regulatory responsibility for traditional brokerage companies and futures contract markets.

If the responsibilities of the "industry self-regulatory organization" are simply refined, it basically includes two parts: 1. law enforcement; 2. cross-market supervision. There are six committees in the Virtual Commodities Association, two of which focus on law enforcement and cross-market surveillance, and maintain liaison with the US Commodity Futures Trading Commission (CFTC) and the United States Securities and Exchange Commission (SEC).

How to map the existing traditional financial regulatory framework to the cryptocurrency industry?

Currently there are about 13 exchanges. You can buy or sell commodities or securities on its platform, but retail investors cannot buy these assets directly. They must be registered with the National Futures Association (NFA) as a futures contractor ( futures contracts merchant). Broker dealers need to register with an industry self-regulatory organization in order to process orders in the market. Once a broker dealer trades on behalf of customers, it must take a series of risk compliance tasks, such as first ensuring that investors are really rich, Also make sure your counterparty does own the stock you want to buy.

The next step involves fund clearing and settlement, which usually takes two to three days, because it will involve many counterparties, as well as custodians and trusted intermediaries. Using cryptocurrencies, retail consumers can interact directly with exchanges or choose to interact with brokers and dealers. Blockchain allows consumers to buy and sell directly, because the clearing operations of the exchange can be completed in real time. In fact, exchanges play multiple roles in the cryptocurrency industry, not only bringing efficiency to the blockchain industry, but also effective integration.

When we develop encryption products, we will first ask what kind of position this product has in the traditional industry, and which regulators' terms of reference will touch this product. When the compliance framework is finalized, a single exchange can provide multiple products such as futures, exchange-traded funds (ETFs), commodity cash, foreign exchange and securities-related stablecoins.

Bitcoin exchange-traded funds are constantly being delayed, do you have any opinion?

I'm the chairman of the Virtual Goods Association, so what I say represents the views of the Virtual Goods Association. The US Securities and Exchange Commission has rejected the Bitcoin exchange-traded fund proposal and has recently issued a 100-page rejection letter. The content of this letter is the same as before, and the reason for basically rejecting it is to worry about the market manipulation of cryptocurrencies. The Virtual Goods Association hopes to achieve data sharing and cross-market surveillance, which are actually vested interests of the crypto industry. In closed-door meetings of the US Securities and Exchange Commission and the US Commodity Futures Trading Commission, regulators agreed that cross-market surveillance is necessary for the crypto industry to mature.

What is the most important industry development in 2020?

In 2020, the federal and state regulators will pay more attention to the blockchain and crypto industries, and there will be more and more global discussions on issues. Some jurisdictions want to pave the way for the widespread use of cryptocurrencies, and the United States may gradually fall behind in this regard.

On the other hand, in terms of risk compliance, the crypto industry has also begun to reflect on itself. In the past, cryptocurrency exchanges and custodians did not think that anti-money laundering (AML) and other regulations were needed because these are the opposite of cryptocurrencies, but now they realize that they cannot challenge reasonable regulation. After all, finance is the most regulated in the world One of the industries.

Do you think regulators have turned their attention to Libra?

It's not just Libra, we'll see a lot of bills coming out, including the Token Taxonomy Act that I've been following from the beginning. Now we have seen many bills surrounding cryptocurrencies, some of which were introduced because of Libra. But broadly speaking, Libra's dialogue with regulators is still ongoing. Of course, as legislators are also starting to learn more about crypto and blockchain technology, we will see bills that are properly worded. Frankly speaking, I don't want to comment on Libra, as Cameron Winklevoss and Tyler Winklevoss, the founders of the Gemini exchange, have publicly commented on Libra .

What do you hope for in 2020?

What I want to happen is to designate an "industry self-regulatory organization" status for the crypto association, and we have established the right relationship with the regulator.

Can you share the views of the Virtual Commodities Association on the securities / commodity transition?

Each member organization of the Virtual Commodities Association has its own listing framework, which explains the meaning of securities or commodities. Taking the Twin Star Exchange as an example, we are very careful and only list digital assets that are considered commodities. Exchanges need to have a dialogue with regulators on how to establish a framework, and under this framework, they need to explain how cryptocurrencies fit into the "Howey Guidance."

When the cryptocurrency industry applies traditional financial rules, you will always see some subconscious reactions. The key here is how to use relevant laws and regulations.

Do you see an internal conflict in the interaction between privacy and transparency?

Many exchanges see the need to implement escrow infrastructure, a solution that guarantees transparency without sacrificing privacy. In particular, in recent years, a series of exchange runaway events have occurred. Those exchanges that have not been audited by the “Big Four” accounting firms can hardly prove that they are safe and trustworthy institutions.