Bitcoin is punk rock. It’s cypherpunk money — alternative money. Anarchism comes to mind. So, too, does the exhausted adage that Bitcoin — and crypto writ large — is a digital Wild West.
That adage is largely true. After all, this is the same industry where one of the larger exchanges had a $850 million hole blown in its finances after its payment processor, a makeshift stand-in for a banking relationship, “lost” the money. And then there are the seemingly perennial exchange hacks, literal Ponzi schemes and ICO cash grabs.
These events don’t define this market, but they do exemplify it at its most untamed. But on the opposite end of the spectrum, you have a more subdued and regulated bitcoin market: Bakkt, the CME bitcoin futures, trading on Germany’s second largest stock exchange, etc.
Because the markets took bitcoin seriously before politicians did, those who built business on and around Bitcoin had to make up the rules as they went along — or, in the case of those trying to tighten up for regulators, anticipate best practices.
The latter is what the U.S.-based Association for Digital Asset Markets, or ADAM, wants to accomplish. The coalition of leading Bitcoin and blockchain companies has a self-described mission to “promote integrity, fairness, and efficiency in digital asset markets.” Toward this end, it has published a 12-page code of conduct for participants to standardize what it believes are best practices in regard to transparency, compliance, risk management, business ethics anti-money laundering and others.
“ADAM is an industry association consisting of several large market participants in markets for digital assets. It was formed to develop and establish professional standards for trading in [this market],” Jonah Crane, an ADAM member who helped draft the code, told Bitcoin Magazine.
Minding the Gap
ADAM’s inaugural members include some of the biggest players in the market’s institutional sphere, such as Mike Novogratz’s Galaxy Digital, Genesis Global Trading and Paxos. With the release of its code of conduct, it welcomed five newcomers — Anchorage, BitGo, BlockFi, CMT Digital and Tagomi — to bring its ranks to a total of 15 members.
The code sticks to the basics. Crane told us that the ADAM team kept it “principles-based at the outset” — by focusing on the fundamentals of best practices, the code can stay ahead of regulation and stay relevant in the future “in a rapidly evolving industry with rapidly evolving best practices.”
“As the code is adopted by our members, we think that will have a meaningful impact of standards of conduct in the market,” he said.
Of course, this isn’t a self-regulatory organization, which “involves delegation of specific authorities from regulatory agencies,” Crane clarified. Registered self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority (FINRA) have the prerogative to take action against bad actors in financial markets, but their jurisdictions are limited and dictated by the U.S. Securities and Exchange Commission (SEC).
ADAM is not an SRO. Rather, it’s a sort of consortium that encourages accountability and responsible standards of conduct among its members.
“We don’t pitch ourselves as an SRO because we are aware we can’t just declare ourselves as an SRO,” Crane explained. “We don’t stand in for regulation in any shape or form, but we do think there is an important role for the industry to play to establish higher standards of conduct. Our hope is that will help the market to grow and to thrive.”
While ADAM doesn’t stand in for formal regulators, its code of conduct may serve as a placeholder for a lack of clear rules and mandates in the underlying bitcoin spot market. In the U.S., at least, this isn’t just a product of bitcoin being an emerging (and often stigmatized) asset class. It stems from the U.S. Commodities and Futures Trade Commission’s (CFTC) hands-off mandate with cash commodities markets.
“There is a regulatory gap, specifically for the underlying spot market for commodities,” Crane said. “The CFTC has enforcement authority in respect to fraud or manipulation in the cash markets for commodities, but they can’t regulate them and set prescriptive rules and practice in the way they do for futures markets, or the way the SEC does for securities markets.
“We do believe there is an important gap to be filled. In order for the industry to gain greater traction amidst institutional investors in particular we need to establish a baseline of competence. Standards need to improve for that to happen,” Crane said.
Missing Link for an ETF?
Bitcoin has had a relatively short but complicated relationship with the “suits,” the institutional investors. ADAM is partly predicated on making bitcoin palatable to this investor class, as Crane’s comments convey.
When we asked him if something like ADAM might help pave the way for a bitcoin ETF — that long-pursued holy grail of institutional exposure that has continuously ended in rejection by the SEC — Crane said that the coalition’s main directive isn’t ushering in an ETF. That said, the code could engender practices that address some of the SEC’s concerns when rejecting ETF proposals.
“The questions that the SEC and others have raised in the context of ETF filings highlight some of the shortcomings that we hope ADAMs code of conduct will address,” he said.
If ADAM increases its membership, he continued, it could broaden the code of conduct’s reach so far that the majority of the U.S.’s major market makers and liquidity providers are acting according to its standards. This could address the SEC’s concerns, which boil down largely to fears of market manipulation and custody.
ADAM’s code contains, among many sections, a page on “Market Integrity.” Here, it seems to address the SEC’s insistence on Surveillance Sharing Agreements — a common tactic used between financial exchanges to police market manipulation — for a bitcoin ETF.
“Members will … Implement timely, and appropriately independent, trade surveillance mechanisms; Implement rules prohibiting submission of orders or other activity that would constitute Disruptive Trading Practices,” the code reads.
It also has a section on proper custody of assets, which prescribes “Regular risk assessments … Physical safeguards, secure authentication methods (including, where appropriate, multi-factor authentication), and other information access controls … Industry-standard encryption of information in-transit and at rest … [and] Appropriate redundancy and contingency planning with respect to the management of Digital Asset keys.”
Improving Confidence in the Bitcoin Market
Whether or not the code paves the way for a bitcoin ETF, its members have high hopes that it will present another face to crypto’s Wild West persona. Zac Prince, CEO of ADAM member BlockFi, told us that his team members “were excited to join based on the high quality, institutional pedigree of the existing members [and] enthusiastic supporters of SRO-type initiatives that help provide sophistication and orderly market facilitation for the ecosystem.”
Something like an ADAM membership, Prince believes, could become something like a badge of good faith for market participants. And whether they be regulators, accredited investors, institutions or retail investors, this badge — and the code that underpins it — could inspire greater transparency and, by effect, greater confidence in the bitcoin market as a whole.
“In the absence of clear regulation around crypto in the U.S., it’s important that retail consumers have a way to distinguish good actors from bad,” Prince said. “Membership in ADAM has the potential to become a stamp of approval of sorts; a [Better Business Bureau] of crypto that lets people know a company will treat them well and safeguard their funds.”
Especially in the face of outlandish reports that the bitcoin price is largely manipulated, something like ADAM could ultimately be crucial for legitimizing bitcoin in the eyes of the world.
“With so much public discussion around manipulation in the crypto market, the Market Integrity standards, if widely adopted, could go a long way to giving people more confidence in the asset class as a whole,” concluded Prince.
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