GDF Calls on Agencies for Greater Co-Regulation and Cross Border Coordination with the Global Crypto and Digital Assets Sector

“For the third year running, our annual members survey cites “lack of regulatory clarity” as a top challenge for the industry. Against a heightened increase for crypto policy and regulation already in 2022, we call on policymakers and agencies to further engage with the industry through the GDF co-regulation model,” says Lawrence Wintermeyer, executive co-chair of GDF.

The GDF annual member survey cited “lack of regulatory clarity” as a top challenge for the industry in 2022 for the third year running. This supports the call from agencies for the development of a global crypto and digital assets framework in 2022, calling for greater cross border coordination of policy and regulation for the global crypto and digital assets sector.

Already in 2022, we are witness to an increasing focus on policy and regulation for the crypto and digital assets sector with banking, securities, and tax laws as they may apply to stablecoins, decentralized finance, non-fungible tokens, and cryptocurrencies, including the on-going requirements for adherence to KYC/AML/CFT regimes.

The priority now is greater than it has ever been for a measured approach, in accordance with regulator’s priorities and objectives, to global policy and regulations, and we call on policymakers and agencies to further engage with the industry through the GDF co-regulation model:

  • GDF supports right size regulation of the crypto and digital assets sector through a global framework that will deliver meaningful compliance
  • GDF calls on regulators, agencies, and policymakers to further engage in our co-regulation model, a stewardship platform that sits in between the industry and regulators
  • GDF calls for greater support from regulators in further building out the GDF Codes of Conduct, to better meet requirements for conduct standards, in absence of regulations or in support of developing policy frameworks
  • GDF supports high standards of conduct for the protection of customers and investors
  • GDF supports the development of fair, transparent and competitive global markets
  • GDF members are committed to demonstrating to customers, employees, stakeholders, shareholders, policymakers, and regulators that they adhere to high standards of conduct and meaningful compliance.

The crypto and digital assets sector has the optimal conditions for a co-regulation model. Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard Kennedy School and author of Fundamentals of Regulatory Design, shows that whereas responsibilities in the development of regulation have traditionally fallen on either the regulator or the regulated industry, in reality, all of these responsibilities can be shared. Regulators can collaborate with industry in the identification and analysis of risk, or share responsibility for implementation, for example.

By choosing which responsibilities are shared, we can open up new structures for regulation. This allows us to accommodate a sector in which technological innovation is both fast and can fundamentally change the activity that is being regulated. The end result is suitable regulation for an evolving industry, and meaningful compliance.

During the 2017 ICO run, GDF convened the global crypto and digital assets sector in the development of taxonomies and codes of conduct. Since 2018, 10 GDF codes have been developed by global industry practitioners and have been held to account through a rigorous process of peer review, open to global public consultation, an in the full purview of agencies and regulators in the GDF Regulator Only Forum, a quarterly forum with the voluntary attendance of over 25 conduct regulators and agencies.  

“Regulatory clarity and greater certainty for the crypto and digital asset space took many steps forward in 2021. Through the GDF Regulator Only Forum and our Regulators DeFi Knowledge Series, we are enabling the cross-border, cross-industry dialogue needed to promote sound policies for the global sector. As we progress, industry engagement with regulators is key to balancing consumer protection and new innovation,” says Jeff Bandman, GDF board member and former LabCFTC head.

Over 140 GDF member firms are in the Code program and attest to the Overarching Principles Code, before choosing to attest to further codes by industry vertical, asset class, or compliance category. Over 100 global firms, many of today’s market leaders, have attested to one or more of the Codes, and the program is growing to new regions outside of the US, Europe and South-East Asia, to LatAm, Sub-Sahara Africa, and the greater APAC region in 2022.

Though some outside of the crypto and digital asset sector promote the narrative of the “lawlessness” within the space, much of the global community has shown itself to be aligned with the key regulatory mandates and published financial crime rates often appear lower than in the traditional financial system.

Those who attest to the GDF Codes publicly attest to the legislation and regulation that applies to them in the relevant jurisdiction. The global crypto and digital assets sector comprises many professionals who have come from banking, capital markets, conduct regulators, and other agencies, and are fully aware of their ethical and fiduciary obligations.

In addition to GDF Codes, the industry response to the FATF’s Travel Rule guidelines has been to actively develop solutions, including IVSM-101, the InterVASP messaging standard, developed by industry in response to the FATF travel rule requirement, with the collaboration of a number of regional associations. The private sector response is often quicker than the jurisdictional movements in the crypto and digital assets sector, where only 58 jurisdictions have implemented the guidelines for virtual asset service providers.

GDF has recently mobilized a working group to focus on global shared market surveillance, engaging many of the world’s largest crypto exchanges. The group is developing a framework to include best practices for conducting market surveillance within an exchange; means for sharing insights from market surveillance amongst exchanges; and a proof of concept for enabling shared market surveillance. The group has discussed the scope of the effort, including ties to digital identity, the implications posed by DeFi, issues such as what constitutes market abuse, data protection across jurisdictions, communication with regulators, and governance.

This is another excellent example of how the industry has demonstrated that it is self-starting and collaborates across the global sector to establish best practices, and in this instance, across the (global) crypto spot and derivatives market. It does not come as a surprise for many within the GDF community, who are dedicated to and focused on building the generation of financial services, seeking to improve greater inclusion, diversity, and competition.

Beyond codes and standards, GDF has established a governance node for FinP2P, an open source decentralized private market digital securities network, which is leading the way in this space following a pilot engaging many of the world’s top financial institutions. This is a healthy indication of the trust engendered in GDF in the community to fulfil this important role for financial institutions.

Technology that moves private market securities onto smart contracts on the blockchain will open up an estimated $1 trillion market for primary and secondary funding to all investment segments and bring the access and transparency of public markets to private markets, in an already regulates segment of the industry.

Being digitally native, cryptoassets are borderless. This is as true with the emergence of cryptocurrencies and digital tokens and is as or even more pertinent to activity in the DeFi industry. Divergent regulatory approaches are in danger of stifling innovation in home jurisdictions while incentivizing activities to move off-shore, further complicating conduct regulation, making compliance ineffective, and promoting regulatory arbitrage.

“Meaningful compliance is the result of committed engagement with industry on the evolving challenges, together with innovative approaches to regulation that meet the demands of new technologies. GDF looks forward to greater dialogue and commitment with policymakers, agencies and regulators in our co-regulatory model as the crypto and digital asset sector matures and continues to demonstrate its financial and social utility,” says Wintermeyer.

GDF believes that the best way to achieve a global, coordinated approach to the development of standards and regulation for the crypto and digital assets sector is through a co-regulatory model. The onus would be placed on the sector to demonstrate it is adhering to high standards that align with policymakers and regulators, while relevant (global) policies and regulations are fully considered to meet both the jurisdictional requirements regimes, as well as the requirements for global stability.

“We need an enabling environment that harvests the opportunities and mitigates the risks of crypto and digital assets. Innovation will depend on whether a jurisdiction’s environment creates barriers or opportunities and encourages engagement through the use of regulatory tools such as sandboxes and safe harbours. GDF’s co-regulatory approach will be more important than ever in the year ahead in terms of advocacy, standard setting, and education on behalf of its members,” says Greg Medcraft, GDF board member, and former OECD director and IOSCO chair.

Through further industry engagement in a co-regulation model and cross-border collaboration with policymakers, agencies, and regulators, we can all make the most out of the innovation that this sector offers and continue to develop a better emerging landscape to engender meaningful industry compliance for the benefit of consumers and stakeholders globally.