Self-Regulatory Organizations: A Unique Model of Private Interests and Government Oversight

SROs make it easier for industry professionals and government regulators to collaborate, but it’s unclear whether the bitcoin industry will adopt them.


A self-regulatory organization, or SRO, is a non-governmental organization formed by participants of a particular industry or sector to assist in the regulation of enterprises in that area. The Financial Industry Regulatory Authority (FINRA), which comprises broker-dealers and works in tandem with its statutory partner, the United States Securities and Exchange Commission, is a good example of a self-regulatory body in financial services (SEC).

They work together to uphold the SEC’s basic goals of maintaining fair, efficient, and transparent markets, lowering systemic risk, and safeguarding investors. The SEC website lists 50 other self-regulatory bodies in addition to FINRA, including the New York Stock Exchange (NYSE) and Nasdaq Stock Market (NASDAQ).


Understanding Self-Regulatory Organizations

 If a self-regulatory organization (SRO) is required, it is usually determined by the nature of the industry, the level of competition in the sector, and the necessity for control. Either the industry’s member firms agree to form the organization itself, or the government can compel the formation of an SRO.

SROs are frequently used as forums for developing training resources or managing certifications within their industry.

The Series 7 exam, for example, is administered by the Financial Industry Regulatory Authority (FINRA) and must be passed by anybody who intends to become a general securities representative (broker). SROs operate as industry watchdogs in addition to creating and enforcing regulations.

They can work with other organizations to protect their industries from fraud and unethical behavior. Anti-Money Laundering (AML) and other compliance programs are also structured and enforced by FINRA.

Self-regulatory organizations have complete control over their policies, standards, and best practices, as well as the enforcement of their regulations and the resolution of disputes. Although self-regulatory groups are private, they are subject to government scrutiny; if there is a discrepancy between the regulations of the two bodies, the government agency takes precedence.

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FINRA and the SEC

The Securities and Exchange Commission (SEC), FINRA’s government partner, is involved in the rulemaking process from start to finish. The FINRA process has ten distinct steps that must be completed before it may send its proposed regulations to the SEC for approval and publishing.

FINRA submits its ideas to various internal and external groups, including the public, as part of its process to ensure that any new guidelines safeguard both investors and the integrity of the market. When a self-regulatory organization establishes rules, such rules become legally enforceable, and SROs hold companies in their territories accountable if they do not follow the policies they have agreed to.

Some key qualities of a well-run self-regulatory organization include, but are not limited to, the following:

Legislative Authority: If a self-regulatory organization’s regulations are approved by the government, the SRO does not need to be given the ability to enforce those restrictions. Because it is an SRO, FINRA, for example, already has the authority to enforce its rules. If a government entity micromanages an SRO, it ceases to function as a true SRO and becomes merely another government arm.

Regulatory Database: Self-regulatory organizations must keep organized records of people and groups within enterprises for a variety of reasons, the most important of which is to limit possible hazards to SRO member firms and the industry as a whole. SROs must also retain track of earlier complaints and disciplinary proceedings taken against regulated individuals or businesses.

IT Disruption Procedures: Procedures must be in place for self-regulatory bodies to detect any disruption or tampering with their computer systems. Every computer, phone, and other communication devices must also have automated backup and recovery software installed.

Resolution Process: Because of their unique function as liaisons, self-regulatory organizations should have strong conflict resolution mechanisms in place.

Strong Governance: All operations of a self-regulatory group must be transparent. It must establish a specified procedure for receiving input on how regulations are established, and it must not depart from that approach. An SRO should be unbiased.

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Self-Regulatory Organizations and the Cryptocurrency Sector

In the world of cryptocurrencies, self-regulation is a hot topic, with exchanges, government bodies, and commentators all weighing in with recommendations and hosting various talks.

Government regulators in key financial countries are strengthening their regulatory monitoring of crypto firms, despite the fact that no worldwide consensus has yet been achieved. Some believe that the oversight of a crypto self-regulatory agency will be insufficient to successfully control and shape the crypto regulatory landscape.

Others think that SRO regulation is either overly cumbersome or contrary to the free and democratic ideal that led to the creation of bitcoin.

On the SRO front, several actions are either underway or being discussed. Bitstamp, bitFlyer, Bittrex, and Gemini, four U.S. cryptocurrency exchanges, created the Virtual Commodity Association in August 2018 with the goal of “establishing an industry-sponsored, self-regulatory body to regulate virtual commodity marketplaces.”

Only a few months later, the Association for Digital Asset Markets (ADAM) was founded by ten institutional trading businesses with the goal of “bridging the gap between enterprises in digital asset markets and regulators.”

These activities are not limited to the United States. In early 2018, Japan and Korea each established self-regulatory organizations for their own crypto marketplaces in order to avoid any government intervention. In April 2018, the Japanese Virtual Currency Exchange Association (JVCEA) was established, while attempts in Korea are still ongoing.

SRO progress in Europe has been modest to date, with Switzerland standing out as an exception.

Many crypto enterprises in Switzerland have banded together to set their own standards through The Financial Services Standards Association (VQF), a self-regulatory body that offers services including compliance training to interested parties. The VFQ also provides its members with supervisory, inspection, audit, and other advising services.

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What Makes Collaboration Between SROs and Governments Effective? 

Bringing together subject area specialists and government entities can be a powerful and complementary paradigm. Self-regulatory bodies are, by definition, more active in the day-to-day operations of their industry.

When it comes to formulating laws and regulations, the SRO model encourages collaboration between industry professionals and government policymakers.

Governments and self-regulatory bodies aid all participants in the financial markets by ensuring a fair and ethical playing field. Self-regulatory organizations can provide an effective form of regulation for the complex and rapidly evolving financial services industry in this way.