T Skevington and M Bacina
IOSCO reports on regulating crypto-asset trading platforms
The International Organization of Securities Commissions (IOSCO) has released a report titled 'Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms'.
The report was prepared to assist IOSCO members in evaluating the issues and risks relating to trading platforms that facilitate the secondary trading of crypto-assets (Crypto-asset Trading Platforms or CTPs).
The report adopts a broad definition of crypto-assets, defining them as:
a type of private asset that depends primarily on cryptography and [Distributed Ledger Technology] DLT or similar technology, as part of its perceived, or inherent value
The key considerations for regulators identified in the report are:
Access to CTPs - particularly around KYC obligations;
Safeguarding participant assets - particularly around appropriate custody of crypto-assets;
Conflicts of interest - the extent to which conflicts of interest exist due to the internal structure and organisation of a CTP and, if so, how they are managed;
Operations of CTPs - the extent to which information about how CTPs operate is available to their participants;
Market integrity - prevention and/or detection of market abuse on CTPs;
Price discovery - how is efficient price discover supported by CTPs; and
Technology - mechanisms used by CTPs to facilitate resiliency, integrity and reliability of critical systems.
At a high level, the report finds that "many of the issues and risks associated with trading on CTPs are similar to the issues and risks associated with trading traditional securities or other financial instruments" and that accordingly, the IOSCO's ordinary core objectives and principles for securities regulation are relevant to CTP providers. IOSCO identifies the key supporting principles as effective price discovery, appropriate transparency, market integrity and fair access, principles which could be mistaken as descriptors for many well-known crypto-asset projects.
Interestingly, the report notes in multiple sections that while the reduction of systemic risk is one of IOSCO’s core objectives, financial stability questions posed by crypto-assets or CTPs are not addressed. The reasons given for this are:
The G20 Ministers of Finance and Central Bank Governors acknowledged in the Communiqué following their March 2018 meeting in Buenos Aires that crypto-assets are not a material risk to financial stability,
In July 2018, the FSB agreed that crypto-assets do not pose a material risk to global financial stability issue at this time.
It is surprising that this was not addressed further, given the concerns expressed by central banks globally, including our own Reserve Bank of Australia, about the systemic risk posed by globally relevant private stablecoin projects like Libra.
While the report is careful to note that it is not intended to suggest or prescribe particular regulatory action which members should take in relation to CTPs, it does provides toolkits for each identified key consideration. Similarly, the report does not include an analysis of the criteria that are (or should be) used by regulatory authorities to determine whether a crypto-asset falls within its remit.
IOSCO is the leading international policy forum for securities regulators and is recognised as the global standard setter for securities regulation. The organisation's membership regulates more than 95% of the world's securities markets in more than 115 jurisdictions.