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  • K Kim and S Pettigrove

IOSCO consults on crypto policy

As regulators around the world are preparing and implementing licensing regimes for digital assets, the International Organization of Securities Commissions (IOSCO) has commenced a consultation on 18 policy recommendations for managing crypto-asset markets.

The global standard setter for securities regulation described the recommendations as ‘principles-based’ and ‘outcomes-focused’. The recommendations focus on the activities of crypto-asset service providers (CASPs). The Paper’s executive summary reveals IOSCO’s intentions to:

Finalize [the 18 policy recommendations] 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 18 recommendations cover a wide range of activities by CASPs:

  1. Common standards of regulatory outcomes (which reflects the principle of 'same risk, same regulatory outcome')

  2. Organizational governance

  3. Disclosure of role, capacity and trading conflicts

  4. Order handling

  5. Trade disclosures

  6. Admission to trading

  7. Management of primary markets conflicts

  8. Fraud and market abuse

  9. Market surveillance

  10. Management of material non-public information

  11. Enhanced regulatory cooperation

  12. Overarching custody recommendation

  13. Segregation and handling of client monies and assets

  14. Disclosure of custody and safekeeping arrangements

  15. Client asset reconciliation and independent assurance

  16. Securing client money and assets

  17. Management and disclosure of operational and technological risks

  18. Retail client appropriateness (i.e. suitability) and disclosure

The recommendations were designed to cover all classes of crypto-assets including stablecoins and intended to address issues identified in recent events in the industry. Annex B provides a list of these market events and this includes the high profile FTX colllapse, the Coinbase insider trading case and the de-pegging of Circle’s USDC. However, the paper does not cover decentralized finance (DeFi) and a separate consultation report is anticipated in respect of DeFi later this year.

According to the chair of the IOSCO Board-Level Fintech Task Force, in charge of developing the policy recommendations:

The Recommendations…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 interests and take far more seriously the right of clients to have their monies and assets carefully minded and accounted for.

Further, in acknowledging the current definitional and interpretive discrepancies between jurisdictions, IOSCO has sought to clarify some common misconceptions. In particular, it addressed the 'common market parlance' of labelling CASPs as 'exchanges' which fails to consider whether the CASP is operating as a trading intermediary or as a market operator. It then set out specific recommendations for each scenario as well as broad requirements that apply to all CASPs.

As IOSCO regulates over 95% of the global securities markets across 130 jurisdictions and covers all major emerging markets, their recommendations will have significant weight with governments at the national level and global coordination on crypto regulation. It is expected to establish a ‘critical benchmark’ for member jurisdictions to follow and to promote consistency in regulation according to the principle:

same activities, same risks, same regulatory outcomes.

This consultation follows IOSCO's 2020 report on regulating crypto-asset trading platforms and will be open for submissions until 31 July 2023. Once the recommendations are finalized, member jurisdictions (including Australia) will be expected to review their domestic regulatory frameworks around crypto-assets to ensure compliance with the new standards.

Separately, this week, the World Economic Forum has weighed in with its own recommendations for crypto policy and regulation. Its paper on Pathways to the Regulation of Crypto Assets considers differing regulatory approaches between jurisdictions and makes three broad recommendations for international bodies:

  1. Promote a harmonized understanding of taxonomy/classification of crypto-asset and activities.

  2. Set out best practices and baseline regulatory standards for achieving the desired regulatory outcomes.

  3. Encourage passportability of entities and data sharing.

For regional and national regulators, the paper recommends:

  1. Cross-sector coordination

  2. Regulatory certainty

  3. Using technology for regulation by design

Both the WEF's paper and the IOSCO consultation are likely to be poured over by regulators as they continue to work on implementation of domestic regulatory regimes for digital assets.


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