It’s a new year and investors are eagerly searching for fresh sources of alpha.
One such area that has garnered attention is digital assets. The myriad sub-components of the sector have been well documented and analyzed but what about the firms dealing in issuing, trading and clearing these securities? What or who policies police these firms? Much like its cryptocurrency brethren, the unregulated sector needs guidance and a set of uniform principles to secure its place in the investment universe.
Enter the Association of Digital Asset Markets (ADAM).
ADAM is a private organization of member firms seeking to build a safer, stronger and more efficient digital assets marketplace. Membership is open to organizations involved in, or that seek to become involved in, the markets for digital assets, including trading venues (sometimes referred to as “exchanges”), custodians, investors, asset managers, traders, liquidity providers, and brokers. In collaboration with industry and legal experts, as well as academics, ADAM has developed a code of conduct that will set standards for professional conduct and efficient industry self-governance for digital asset markets.
ADAM published its draft of a Code of Conduct to promote integrity, fairness, and efficiency in digital asset markets in November of 2019. The Code is intended to inform market participants on best practices and to complement, not replace, existing regulation, part of a long-term effort to define and promote ethical conduct by all digital asset market participants.
The ADAM Code is divided into principles which guide and define appropriate, professional standards in the following areas:
- Compliance and Risk Management
- Market Ethics
- Conflicts of Interest
- Transparency and Fairness
- Market Integrity
- Information Security and Business Continuity
- Anti-Money Laundering and Countering the Finance of Terrorism
Traders Magazine Editor John D’Antona Jr. recently sat down with Jonah Crane, Advisor to ADAM to discuss the Code, its adoption and how a future with the Code will affect the markets.
TRADERS MAGAZINE: What specifically does the Code look to do?
Jonah Crane: First and foremost, the Code signals that ADAM members are committed to professional standards of conduct–the kinds of standards that institutional investors are familiar with from other markets and will expect if they are to enter these markets in a meaningful way.
Second, it will help improve standards of conduct in the industry. The Code of Conduct is not a substitute for regulation, but where regulatory gaps exist–and they do–the Code can act as a backstop, setting out minimum standards of conduct.
Finally, ADAM provides an opportunity for the industry to step up and provide some leadership in defining best practices. It’s in our interest to do so both because we want to live in a decent neighborhood, so to speak, and because we want that neighborhood to grow and flourish. Professional standards are necessary to continue attracting major institutional players into these markets, and we believe the Code will help move the needle on that front.
Who exactly put together the Code?
Crane: All of the ADAM founding members collaborated to draft the Code. We often borrowed concepts from other Codes of conduct or regulatory frameworks, but always started with the problem we were trying to solve and kept a clear picture of what the Code might mean in practice.
TM: How many firms are signed onto ADAM or part of the consortium that developed it?
Crane: ADAM has 15 members and we are proud of their caliber and leadership position across the digital asset ecosystem. The ten founding members are BitOoda, BTIG, Cumberland, Galaxy Digital, Genesis, GSR, HRT, Paxos, Symbiont and XBTO. We added five new members in November 2019 — Anchorage, BitGo, BlockFi, CMT Digital and Tagomi – and are actively looking to add more high quality members in the coming months.
TM: How important is the adoption of the code? Who is ADAM targeting for adoption – Exchanges? Banks? Money managers?
Crane: By the end of this quarter, all ADAM members will sign the Code, marking an important milestone as this comprehensive code of conduct for trading digital assets goes into effect. ADAM’s membership represents a large market share across key areas within digital asset markets, from exchanges to proprietary trading, and from custody to lending. We believe that as the Code goes into effect, others in the marketplace will view ADAM members as trusted players, which will create best practices and establish higher industry standards.
TM: Can the Code which was recently put together be amended or modified?
Crane: We released the draft of the Code to the public in November and will be finalizing the Code for adoption by the end of the first quarter. Yes, there is a mechanism to update the Code, as needed, to reflect evolving best practices or areas of interest for market participants, regulators, and other key stakeholders. The Code is principles-based, so it is flexible enough to address many potential issues that may arise. Digital asset markets are still nascent and evolving rapidly, so we expect best practices to change somewhat over time and those should be reflected in the Code.
TM: After looking at some of the areas the Code looks to address what is the easiest to address? What will be the most difficult? Why?
Crane: Complying with the letter and the spirit of our Code should be well within the reach of firms who understand basic standards of professional conduct and have a commitment to sound governance and risk management. That said, we believe there is tremendous value in coming together as an industry and committing to these standards. It sends a signal that ADAM members represent the kinds of firms you should be comfortable doing business and transacting with. And because not everybody in this industry abides by best practices, we do believe we will raise the level of professional conduct in digital asset markets.
In some of the areas where, as an industry, digital asset market participants have found it difficult to meet regulatory expectations–whether that’s custody, or market manipulation, or anti-money laundering controls–there may be a role for ADAM in defining industry standards in a more granular way. But for now, we have established core principles that leave market participants some room to determine how to achieve compliance.
Over time, the key challenges are likely in areas that call for cross-industry collaboration—such as market surveillance or developing a consistent approach to complying with the “travel” rule. Here, too, there may be a more defined role for ADAM to play.