The crypto industry still suffers from a negative reputation. That’s why some companies have decided to join self-regulatory organizations to boost their image.
Even though the crypto industry has grown rapidly over the past years and has moved more into the mainstream, the industry still has a reputation issue. ICO scams, bad publicity, and scandals have given crypto businesses a hard time.
That’s one reason why regulations are essential, as they give the sector greater legitimacy and enhance users’ trust.
The trend goes in the right direction: Crypto-industry regulations are becoming stricter. Just recently, the German financial markets regulator Bafin announced companies related to crypto trading or crypto custody would need a Bafin-issued license from 2020 onwards.
European regulatory bodies are also looking into licensing requirements for crypto-related fintech companies. A recent report published by the European Securities and Markets Authority (ESMA) found current licensing, compliance, and capital requirements are not adequate for digital exchanges and recommended the EU Commission to create a common pan-European framework.
Long story short, a lot is happening in the regulatory sphere, but it’s not happening fast enough. Therefore, Swiss-based crypto businesses have set out to regulate themselves, at least for the time being.
Self-regulatory Organizations are regulated by FINMA and supervise their members
According to Swiss law, financial intermediaries operating on a commercial basis must either hold a FINMA license or be a member of a self-regulatory organization (SRO) recognized by FINMA. SROs themselves are regulated and supervised by FINMA.
The role of SROs is to define the due diligence requirements and monitor whether affiliated financial intermediaries comply with them. SROs must also establish controls to ensure that their members meet their obligations.
Just like other financial industry service providers, crypto businesses can also apply for a membership with an SRO. The idea is simple: Instead of getting a FINMA license themselves, crypto businesses become a member of a FINMA-regulated SRO to prove their compliance with Anti-Money-Laundering regulations and Swiss financial law.
Crypto businesses join SROs to gain legitimacy in the financial marketplace
Many Switzerland-based crypto businesses have chosen this route. The Financial Services Standards Association (VQF) – a FINMA-recognized SRO that offers a full range of compliance services to financial intermediaries in the parabanking sector – already counts 88 members from the crypto industry.
That’s about seven percent of the organization’s member base. Bitcoin Suisse, for example, was one of the first VQF crypto-members and has been a member since 2014.
VQF is the largest SRO in Switzerland. As there are no crypto-specific regulations, Swiss crypto businesses have to play by the rules of the traditional financial market. A membership at an organization such as SRO offers a way to gain a certain level of legitimacy, without having to go all the way to a FINMA license.
Simon Wälti from VQF says, “From our perspective, it’s not possible to observe a certain trend. However, we still get new requests for memberships from businesses in the crypto industry.”
A membership in an SRO might provide some level of legitimacy in Switzerland’s financial market place, but it’s only a second-best option. Crypto business also increasingly apply for FINMA licenses directly, Bitcoin Suisse for example, which has applied for a banking license.
Ultimately, the goal should be to create a clear legal framework that all crypto businesses need to comply with and a transparent licensing regime. At that point, companies won’t need an SRO membership anymore to prove their legitimacy.