Whilst national crypto regulatory frameworks are still taking shape post-FTX and the TerraLabs implosion, the International Organization of Securities Commissions Organizations’ (IOSCO) crypto-regulatory framework is to be welcomed. IOSCO has provided global jurisdictions with comprehensive guidelines on regulating cryptocurrencies. The framework comprises a total of 18 measures, all of which have been drawn from pre-existing frameworks. The primary focus of IOSCO’s recommendations is on how clients should be protected, and covers:
· how crypto trading should meet the standards that apply in public markets
· managing conflicts of interests
· preventing market manipulation
· facilitating cross-border regulatory cooperation
· ensuring secure custody of cryptocurrencies
· addressing operational risks
· safeguarding the interests of retail customers.
The recommendations, if widely accepted by the 130 members of IOSCO, are expected to make regulations between national regulators uniform whereby reducing exploitations, regulation arbitrage and grey areas. Top regulatory bodies that have been busy include Germany’s BaFin, Japan’s Financial Services, the US Securities and Exchange Commission and Britain’s Financial Conduct Authority. Jean-Paul Servais, Chairperson of IOSCO, believes that “IOSCO is best positioned to deliver an effective and globally consistent set of policy recommendations”, commenting further that “the proposed regulations as a turning point, marking a concerted effort to address pressing risks to investor protection and market integrity”. And the proposals have garnered unanimous support from the IOSCO board, so reflecting the culmination of a rigorous phase of regulatory risk analysis and information exchange. The recommendations in IOSCO's report establish guidelines and regulatory measures for overseeing cross-border crypto-asset markets. It emphasises the need for crypto-asset service providers to address conflicts of interest and prioritise the careful management and accountability of clients' funds and assets. The report calls for collaborative efforts among regulators across jurisdictions to uphold investor protection and crypto-asset market integrity.
Meanwhile, support for the regulations has begun pouring in. Matthew Long, Director of Digital Assets at the Financial Conduct Authority in Britain, underscored the significance of the forthcoming regulations in response to recent global developments. He emphasised their purpose of safeguarding the security and stability of the cryptocurrency market. As reported in the Guardian newspaper, Long stated: “I recognise the risks … I recognise the issues in the market, and we’re trying to do something about it. But what we’re saying is we need a global solution to that, because crypto is such a global phenomenon.” Haydn Jones, Global Lead of Blockchain and Crypto Solutions at Kroll, emphasised the importance of IOSCO’s recommendations in tackling illicit activities and unlocking the vast potential advantages stemming from the foundational technology of cryptocurrencies. Furthermore, the Thai and Singapore authorities have both banned digital exchanges from offering lending and staking services to retail customers. The Thai regulators are keen to ensure that retails investors are protected and insist on the following risk statement visible: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly, because you may lose your entire investment.”
The support of the IOSCO board will facilitate the prompt adoption of the recommendations by all IOSCO members, thereby mitigating the risk of regulatory arbitrage. This collective commitment ensures a cohesive approach toward implementing the guidelines across jurisdictions, preventing regulatory inconsistencies and disparities. Servais adds to this further: “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.” IOSCO expects that its members, including regulatory bodies such as the UK's FCA and the US’s SEC, should prioritise investor protection and maintain "market integrity" by implementing measures that are on par with, or in alignment with, the requirements observed in traditional financial markets. However, the UK’s treatment of the crypto market might be a bone of contention. The UK, with its framework still in development, currently treats the crypto markets “as high-risk industries” with calls from some for legislation to be passed to treat the dealing of cryptocurrencies in a similar fashion to gambling, whilst IOSCO hopes to harmonise the regulations by which the traditional and crypto financial markets abide. IOSCO is confident that its members will not persistently violate its recommendations, as sustained non-compliance would be unsustainable; the organisation expects its members to adhere to the guidelines to maintain regulatory consistency and effectiveness. Ultimately, the onus is on governments in different jurisdictions. The proposed measures include mandating trading platforms to publicly disclose their assessment process for vetting cryptocurrencies before enabling trading. They are also required to provide transparent explanations regarding the storage and protection of clients' crypto assets, ensuring their segregation from the firm's proprietary assets that may be used for independent trading purposes. IOSCO expects member states to review and align their regulatory frameworks with the standards, rectifying any shortcomings. They are also initiating a public consultation on the recommendations, aiming to finalise them by the end of 2023, and IOSCO has asked for comments to be sent to them before the 31st of July 2023.
Regulation around cryptocurrencies is high on the global agenda we have had IOSCO's regulatory framework, the EU's MICA has been ratified and the Financial Stability Board (the global body of financial policymakers) will release its recommendations in July aimed at reducing financial stability risks from cryptocurrencies. It is inevitable that more regulation of cryptocurrencies is on its way with many suggestions being drawn from the experience of traditional existing financial market regulations. The challenge is to allow innovation to flourish and take the best parts of existing regulation and compliance guidance. However, regulators need to be mindful that both decentralised technologies and less reliance on intermediaries offer the promise of stronger risk controls, more transparency and so, in time, greater confidence in financial markets attributes that regulators openly strive for.