IOSCO seeks to set standards for global crypto regulation
One of the common complaints of crypto enthusiasts is the lack of consistent regulation of crypto. The lack of regulatory certainty, and the likelihood that crypto will ultimately be treated very differently in different parts of the world, is also given as a key reason for the slow widespread adoption of crypto, especially in the institutional realm.
Picking up on this theme, and seeking to remedy it, the International Organization of Securities Commissions Organisation (IOSCO) – whose membership regulates more than 95% of the world’s securities markets in more than 130 jurisdictions – has announced that has it has issued for consultation detailed recommendations to jurisdictions across the globe as to how to regulate crypto-assets.
In a major initiative designed to improve global standards of regulation of crypto-assets, the IOSCO has set out how clients should be protected and how crypto trading should meet the standards that apply in public markets.
Crypto consultation report
The IOSCO consultation report proposes 18 policy recommendations that IOSCO plans to finalize in early Q4 this year to support greater consistency with respect to regulatory frameworks and oversight in its member jurisdictions, to address concerns related to market integrity and investor protection arising from crypto-asset activities.
The proposed 18 Recommendations cover six key areas, consistent with IOSCO Standards:
- Conflicts of interest arising from vertical integration of activities and functions,
- Market manipulation, insider trading and fraud,
- Cross-border risks and regulatory cooperation,
- Custody and client asset protection,
- Operational and technological risk, and
- Retail access, suitability, and distribution.
Proposed IOSCO recommendations on crypto regulation
The proposed recommendations are principles-based and outcomes-focused and are aimed at the activities performed by crypto-asset service providers (CASPs). They apply IOSCO’s widely accepted global standards for securities markets regulation to address key issues and risks identified in crypto-asset markets.
The proposed recommendations are activities-based and follow a ‘lifecycle’ approach in addressing the key risks identified in this report. They cover the range of activities in crypto-asset markets that involve CASPs from offering, admission to trading, ongoing trading, settlement, market surveillance and custody as well as marketing and distribution (covering advised and non-advised sales) to retail investors.
The recommendations do not cover activities, products or services provided in the so-called “decentralized finance” or “DeFi” area. The FTF DeFi workstream is considering issues in relation to DeFi and will publish a consultation report with proposed recommendations later this summer.
Crypto regulation consistency
One of IOSCO’s goals is to promote greater consistency with respect to how IOSCO members approach the regulation and oversight of crypto-asset activities, given the cross-border nature of the markets, the risks of regulatory arbitrage and the significant risk of harm to which retail investors continue to be exposed. IOSCO is also seeking to encourage optimal consistency in the way crypto-asset markets and securities markets are regulated within individual IOSCO jurisdictions, in accordance with the principle of ‘same activities, same risks, same regulatory outcomes’.
Cooperation among regulators
The proposed recommendations also cover the need for enhanced cooperation among regulators. They aim to provide a critical benchmark for IOSCO members to cooperate, coordinate and respond to cross-border challenges in enforcement and supervision, including regulatory arbitrage concerns, that arise from global crypto-asset activities conducted by CASPs that offer their services, often remotely, into multiple jurisdictions.
Jean-Paul Servais, Chairperson of IOSCO said:
“As the G7 Finance Ministers and Central Bank communiqué of 13 May has once again reminded us, the time has come to put an end to the regulatory uncertainty that characterises crypto activities. Today’s consultation paper received unanimous support from the IOSCO Board and is the outcome of an intense period of regulatory risk analysis, information sharing and capacity building. As such, it will mark a turning point in addressing the very clear and proximate risks to investor protection and market integrity risks.
With 130 members around the world regulating more than 95% of the world’s securities markets, IOSCO is best positioned to deliver an effective and globally consistent set of policy recommendations. The strong support of the IOSCO Board will ensure the timely implementation of the recommendations by all IOSCO members to limit the risk of regulatory arbitrage. Strengthened cooperation between our members while supervising these markets through a global framework will contribute to protecting investors better and to credible deterrence of non-compliant actors.”
Lim Tuang Lee, Chairperson of the IOSCO Board-Level Fintech Task Force, set up to develop the policy recommendations, said:
“The Recommendations in IOSCO’s Consultation Report set expectations and guardrails to regulate and supervise crypto-asset markets, which are inherently cross-border in nature. Crypto-asset service providers need to address unacceptable conflicts of interest and take far more seriously the right of clients to have their monies and assets carefully minded and accounted for. It is time for Regulators to work together across borders and various jurisdictions to ensure that investor protection and market integrity are upheld in crypto-asset markets.”
The IOSCO has opened a public consultation on its recommendations and aims to finalise them by the end of the year. Thereafter, it expects that jurisdictions will review their current regulatory frameworks to ensure that they comply with the standards and fix any gaps promptly. Comments on the consultation are due on or before 31 July 2023.
A copy of the IOSCO’s consultation paper on crypto regulation can be downloaded here.