Global securities watchdog IOSCO issues world's first set of crypto regulations

IOSCO’s paper aims to set out how clients should be protected and how crypto trading should meet standards in public markets.

Global securities standard setter International Organization of Securities Commissions (IOSCO) has released a detailed recommendation on the global approach to regulating crypto assets and digital markets, which will be open to the public for comments until July 31.

In a statement, the IOSCO says that this is a major initiative designed to improve global standards of regulation of crypto assets, setting out how clients should be protected and how crypto trading should meet the standards that apply in public markets. The IOSCO regulates more than 95% of the world’s securities markets in some 130 jurisdictions, including Singapore.

Within IOSCO, a Fintech Task Force (FTF) chaired by the Monetary Authority of Singapore’s (MAS) Lim Tuang Lee was established to oversee the paper’s recommendations. The FTF is made up of 27 of 35 board member jurisdictions.

The recommendations are aimed at the activities performed by crypto asset service providers (CASPs), covering a range of activities including offering, admission to trading, ongoing trading, settlement, market surveillance and custody, as well as marketing and distribution to retail investors.

In a media briefing on May 23, IOSCO says the paper was developed in March 2022, prior to the Terra-Luna crash and FTX collapse, therefore, suggesting that it wasn’t merely a reaction to those events. That said, the paper is designed specifically to mitigate such risks.

IOSCO’s proposed standards cover six areas with 18 recommendations. The areas are conflicts of interest; abusive behaviours; cross-border risks; custody and client asset protection; operational and technological risk; and retail distribution.

For instance, CASPs typically integrate multiple functions and services under a single roof — this can lead to conflicts arising from engaging in these activities and functions in a vertically integrated manner. As an example, a CASP that allows margin trading may have an incentive to offer margin to an affiliate on terms better than it offers to other users.

To this end, IOSCO recommendations include proposing regulators to require a CASP to have effective governance and organisational arrangements, as well as to include systems, policies and procedures that would address conflicts of interest.

Meanwhile, abusive behaviours include market manipulation, insider trading and fraud. In the case of FTX, millions of customers’ deposits were diverted into its sister firm Alameda to make undisclosed venture investments, luxury real estate purchases and political donations. To prevent this, IOSCO recommendations include suggesting regulators have market surveillance requirements applying to each CASP, effectively mitigating market abuse risks.

In Singapore, the MAS has issued two public consultation papers on Oct 26, 2022, proposing safeguards to reduce the risk of consumer harm from cryptocurrency trading as well as to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.

The consultation for the papers closed on December 21 last year and will be finalised in the middle of this year, says Lim. He adds that the MAS’s proposals are in line with IOSCO’s recommendations.

While there are overlaps between regulatory bodies that have already set out robust frameworks to monitor crypto players and protect customers, Lim says that IOSCO’s recommendations will help to level the playing field globally.

IOSCO’s proposed recommendations do not cover activities, products or services provided in the decentralised finance (DeFi) area. It will consider issues in relation to DeFi and will publish a consultation report with proposed recommendations this summer.

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