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Crypto venues ask for clarity, but about what isn’t clear

Gemini’s COO wants to the firm to be regulated but the industry struggles to articulate what exactly this means.

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Gemini, the New York-based crypto exchange founded by the Winklevoss brothers, is now operating in Singapore and Hong Kong, and looking to add more regional markets, thanks to a recent fundraise.

The firm raised $400 million last month, valuing it at over $7 billion. This is its first funding from external sources. The proceeds will go to supporting market expansion, says Noah Perlman, New York-based COO, in a call with DigFin.

Despite this vote of investor confidence, Gemini and other crypto exchanges that wish to serve retail investors in a compliant fashion are still struggling to work with regulators to craft the necessary regulation.

“The bedrock of a healthy financial market is to provide for KYC, sanctions screening, and a fair and efficient market,” Perlman said. This includes rules for best execution, transparency, and consumer protection.

Compliance expert

Perlman recently joined the firm after running the financial-crimes compliance unit of Morgan Stanley. He’s built a career in traditional finance working with regulators and overseeing a major house’s compliance functions.

However, Gemini (like other crypto exchanges) is finding it is impossible to port a crypto business onto TradFi regulations, or to simply cut and paste existing regulations onto a crypto business.



This isn’t new: those players in crypto who wish to be regulated have been begging for clarity from authorities for several years.

In the U.S., where regulation is divided among a plethora of agencies, both at the federal and state level, there is still no agreement as to whether cryptocurrencies such as bitcoin are currencies, commodities, or securities.

“Just let us know,” Perlman implored. “The industry can work around what you decide.”

He said he thinks most regulators are open-minded on this. Other than states such as China that have outlawed most activities around crypto,  regulators don’t want to push the industry out of their jurisdiction. This is for two reasons. One, the industry is now a big source of jobs and wealth creation. Two, in most places, unfriendly regulation merely pushes crypto into the shadows – which means consumers aren’t being protected at all.

What’s the ask?

However, when asked about what kind of regulations the industry does want, Perlman couldn’t give a clear answer.

DigFin asked what areas of crypto should be better regulated or be considered a priority. In TradFi, regulations govern market making, price formation, and best execution. Should these measures apply to crypto, and how?

What laws should be amended? The U.S., for example, still regulates securities based on New Deal legislation from the 1930s. How much of this is germane to securities tokens or cryptocurrency? Can it be applied to the regulation of networks? If not, what laws would the industry want to see passed?

What kind of compliance rules should accompany the advent of programmable money? How should stablecoins be regulated? DeFi apps like Gemini’s Earn product?

“Our vision is to unlock financial, personal creative freedom,” Perlman said, “which we can do with the appropriate regulations. Otherwise the lack of regulation just pushes activity into the shadows, and the business goes to non-regulated entities instead of companies like Gemini that play by the rules.”

DigFin found the compliance expert unable to specify how that vision could be realized. Maybe as a business, Gemini prefers to keep its cards close to its chest. Or maybe the industry itself doesn’t really know what it wants and is punting the ball to the regulators.

The Travel Rule

One area Perlman could speak about was the Travel Rule.

The Travel Rule is the work of the Financial Action Task Force, a multilateral body responsible for combating money laundering and terrorist financing. The Travel Rule says virtual asset service providers such as crypto exchanges and fintechs operating digital wallets must embed information about the origin and destination of payments with the transaction.

The Travel Rule exists in correspondent banking, although no one in traditional payments calls it this – it’s a function embedded into TradFi rails, usually in the form of a SWIFT message. Most international wholesale payments rely on SWIFT messages to tell all the banks who’s doing what, so the data accompanies the money.

There’s no SWIFT in crypto. A bitcoin transaction is visible to the entire blockchain, but as a sender and receiving hash.

Therefore, to comply with this requirement, crypto exchanges have had to work with banks or otherwise put in place KYC and AML functions, which fit unnaturally on a blockchain transaction. “It’s like putting a square peg into a round hole,” Perlman said.

After you? No, after you

Exchanges such as Gemini are worried that if regulatory clarity does arrive, it will be so heavy that it makes a compliant business model impossible. “Can we solve this with a method that adheres to the spirit of the law, but as a technical matter doesn’t adhere to the language of current rules?” he wondered.

Hong Kong is one such market where Gemini is lobbying for regulation – but so far, the Securities and Futures Commission has been pretty clear: it is regulating institutional activity and not retail activity. Regulated exchanges such as OSL can serve accredited investors. The retail investor can go to other exchanges but not in a regulated manner.

This is a painful situation for companies that want to serve the mass market in a regulated way.

In other markets, there is little to no clarity. Decisions are a “black box”, Perlman said. Some authorities go through the motions of studying options but are just kicking the can down the road. Others might prefer not to have their judgment questioned.

Gemini says it wants to do the right thing and work with regulators to take crypto out of its Wild West phase. DigFin wonders if the difficulty may be that what the industry ultimately wants is incompatible with regulation, and that authorities can’t work their heads around how to make things work, even if they are open to trying.

It is telling that crypto professionals are also unable to articulate what such a solution would look like.

But Perlman is right about one thing: without rules of the road, investors have no choice but go to the fly-by-night dealers. And by now it should be clear that a lot of people want to speculate in cryptocurrency. Governments might hope that the problem will go away once central banks issue their own digital currencies – but if so, it’s a naïve hope.

Perhaps it’s time for mass-market firms such as Gemini to form a transparent industry voice that can publicize suggested legal changes and best practices. It’s not just crypto exchanges that crave clarity.

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Crypto venues ask for clarity, but about what isn’t clear