Mark Zuckerberg started Facebook in 2004. But it wasn’t until April 10, 2018 that he found himself sitting in the glare of a congressional hearing in Washington, D.C. Under fire for data policies - or lack of them - that resulted in the misuse of personal information for political ends, Facebook’s CEO conceded in one resounding soundbite: “I think that it is inevitable that there will need to be some regulation” of heretofore unfettered Internet services.
Compare Zuckerberg's journey, leading a high-profile public company on an avowed mission to “bring the world closer together,” with that of his onetime Harvard-student partners Cameron and Tyler Winklevoss. Their claims that Zuckerberg stole their ideas for Facebook, as dramatized in the 2010 film The Social Network, led to a reported $65 million legal settlement. They became Bitcoin investors and in 2013 said that they held $11 million in cryptocurrency, a hoard that would have been worth about $1 billion at the market peak late last year.
Bitcoin’s pseudonymous inventor — Satoshi Nakamoto — and early enthusiasts fell somewhere on the political spectrum between libertarian and anarchist, but the Winklevosses went into the cryptocurrency exchange business and chose not to go rogue. In 2014 they founded Gemini Trust Co. — “Gemini” because they are twins, “trust company” for the type of charter granted the following year by the New York State Department of Financial Services.
At www.gemini.com, the company proclaims its trading and custodial services to be “institutional grade” and, in stressing its fiduciary responsibilities, says, “we must meet the capitalization, compliance, anti-money-laundering, consumer protection, and cybersecurity requirements as set forth by the NYSDFS and protect the interests of our customers first and foremost.”
Gemini worked with Cboe Global Markets to launch the first Bitcoin futures contracts in December. In April, Gemini took a step common to many securities exchanges around the world, adopting SMARTS Market Surveillance technology, an offering of Nasdaq.
“Since launch, Gemini has aggressively pursued comprehensive compliance and surveillance programs, which we believe betters our exchange and the cryptocurrency industry as a whole,” Tyler Winklevoss said in the announcement. SMARTS “will help ensure that Gemini is a rules-based marketplace for all market participants,” he said.
Zuckerberg and his frenemies ultimately found common ground in acceptance of regulation and compliance. Their convergence puts a favorable gloss on regulation at a time when deregulation is in vogue and Congress and the Trump administration are chipping away at the Dodd-Frank Act. Such roll-back initiatives are, by definition, retrospective. Issues surrounding digital currencies, initial coin offerings (ICOs), the underlying blockchain technology, and fintech as a whole force all parties to be forward-looking, and the dialogue is remarkably harmonious. Both Commodity Futures Trading Commission chair J. Christopher Giancarlo and Securities and Exchange Commission member Hester Pierce have expressed receptivity to innovation, or at least learning more about it.
Still, there are uncleared hurdles. The Winklevosses have yet to win SEC approval for a Bitcoin exchange-traded fund, though they were awarded a U.S. patent on May 8 for “systems, methods, and program products for operating exchange-traded products holding digital math-based assets.” On May 14, New York State authorized their Gemini exchange to offer custody and trading services in three additional emerging currencies: Zcash, Litecoin, and Bitcoin Cash.
And they are far from alone in pursuing a “within the system” strategy that welcomes and even embraces regulation.
“It's hard to do this credibly if you're not part of the financial system,” says Charles Cascarilla, co-founder and CEO of Paxos Trust Co., whose company was chartered in New York State five months before Gemini, under the name itBit Trust Co., in May 2015. The bona fides of Paxos' blockchain settlement technology for capital markets and precious metals and the itBit Bitcoin exchange are underscored by the 80-employee company's board of directors, which includes former Federal Deposit Insurance Corp. chair Sheila Bair, ex-New Jersey Senator Bill Bradley, and retired NYSE Euronext chief executive Duncan Niederauer.
To be sure, crypto and fintech regulation are works in progress, and it is only natural — even constructive — for there to be pro-and-con tension. Entities including the CFTC, Britain's Financial Conduct Authority, and several U.S. states have supported lightly supervised “sandboxes” to encourage safe experimentation by entrepreneurs. That contrasts with New York's bid to construct a regulatory framework; aside from the trust companies, the Empire State has since 2015 licensed four virtual currency operations.
The so-called BitLicense has been criticized in crypto circles as too onerous; KrakenFX CEO Jesse Powell recently tweeted, in reaction to a questionnaire from the New York attorney general's office, that the state is “hostile to crypto.” (Powell has said that SEC registration - currently optional but potentially mandatory for crypto platforms - is a more likely path for Kraken.)
However, one BitLicensee, XRP II, is associated with Ripple, a blockchain company positioning itself as a partner of traditional banks. Former New York State financial services superintendent Ben Lawsky, architect of the BitLicense, is a Ripple director.
Another BitLicensee, Coinbase, responded positively to the New York questionnaire, saying it supports “action to bring further transparency to the virtual currency markets. We are happy to provide information about the policies and programs we have in place to help ensure our customers can safely transact and invest in virtual currencies.”
Perhaps no one has stated it quite as directly as Eric Demuth, co-CEO of the Vienna-based Bitpanda exchange, in a May 7 Bloomberg article: “We'd be happy to have regulations, so we know where we stand.”
Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals.