REGULATION

IOSCO Proposes Crypto Regulation Recommendations to Establish Global Standards for Crypto Service Providers

2023/5/24

The International Organization of Securities Commissions (IOSCO) released a report today (23rd) regarding regulatory policies for the cryptocurrency industry, aiming to address issues of credibility and investor protection in the crypto market. The report provides policy recommendations for areas such as cryptocurrencies, assets, and markets, seeking public feedback with the goal of completing this regulatory framework by the end of the year.

Table of Contents

What is IOSCO?

IOSCO is an organization composed of securities and futures regulatory agencies from various countries and regions, and is one of the major international standard-setting bodies for financial regulation. It is dedicated to establishing stable global capital markets and a comprehensive global regulatory framework. Its jurisdiction covers over 130 jurisdictions and more than 95% of securities markets. As of today, it has 238 member countries.

IOSCO Provides Basic Following Standards, Not Uniform Regulations

Recently, the EU finalized its crypto regulatory framework MiCA on May 17, contrasting with the stricter enforcement in the United States. As a global financial regulatory body, IOSCO, in response to the closures of crypto companies like FTX and 3AC in 2022, subsequently announced regulatory recommendations for crypto policies.

The official document states that these recommendations were developed under the leadership of IOSCO's Financial Technology Working Group FTF, providing basic global following standards for crypto asset service providers, with detailed specifics to be determined based on individual country requirements. These recommendations do not cover products and services in the decentralized finance (DeFi) sector. FTF's understanding of this area is still under research, with related reports set to be released this summer.

IOSCO Regulatory Framework Focus

IOSCO proposes recommendations with the key goals of "market integrity" and "investor protection," covering the following six critical areas:

Conflicts of interest arising from interactions and vertical integration: Focus on potential conflicts of interest that may arise for crypto-asset service providers (CASP) in their investment and asset management activities.
Market manipulation, insider trading, and fraud: Prevent improper conduct by market participants.
Cross-border risks and regulatory cooperation: Lower high-risk issues unique to crypto cross-border activities through international regulatory cooperation.
Custody and protection of user assets: Supervise how CASPs manage client assets and ensure their protection.
Operational and technological risks: Audit CASPs' management and operations to ensure the security and stability of their business.
Retail market participation, appropriateness, and distribution: Focus on how CASPs provide products or services to retail investors, ensuring that services meet user needs and risk tolerance.

Details of IOSCO Regulatory Recommendations

The following summarizes the recommendations based on the content of the document, with most regulations aimed at CASPs:

Overall recommendations: In terms of investor protection and market integrity, regulatory framework standards must achieve the same regulatory effect as traditional financial markets to promote fair competition between crypto and traditional finance, and help prevent arbitrage.
CASPs should establish clear governance, organizational norms, and operational models, including their systems, programs, and policy directions.
CASPs should disclose clearly and concisely their exact roles, content, and purposes in any activities in the crypto market.
CASPs should have transparent and efficient trading systems to ensure fair, orderly, and timely execution of all user orders.
CASPs should establish appropriate listing standards to ensure that only cryptocurrencies and assets meeting certain requirements can be listed for trading. This includes disclosing information about the issuing team, accurate and verifiable key information, and adhering to traditional financial market principles of informing investors of risks.
Law enforcement agencies should take action against fraud and abuse in the crypto asset market, including market manipulation (such as Ponzi schemes, trade fraud), insider trading, misleading or insufficient disclosure of information.
Regulatory authorities should establish effective systems or control measures to monitor market manipulation and prevent internal data leaks. The crypto market should be subject to the same monitoring standards as traditional financial markets.
Due to the cross-border nature of the crypto industry, regulatory authorities should share information and cooperate.
CASP-managed crypto assets should be tracked or subject to regular audits to confirm the latest records and status of user crypto assets, including their nature, amount, location, and ownership.
CASPs should segregate user funds from operational assets.
CASPs should disclose in simple non-technical terms how they hold and protect assets and private keys for their users, as well as the functions and risks of the services they provide.
CASPs should adopt appropriate and audited systems and programs to reduce the risk of user asset loss, theft, or inaccessibility.
CASPs should provide comprehensive disclosures and basic education to retail and new users regarding product services and related risks.

IOSCO's Stance on Cryptocurrency Legalization, Tinged with Conservatism

During a briefing, Servais, representing IOSCO, faced a question about whether the policy would legalize cryptocurrency, stating:

His words seem to imply a response to recent protests from certain UK legislative groups, which opposed the UK government's classification of cryptocurrencies under financial services regulation, arguing that investments in unbacked crypto assets like Bitcoin and Ether are akin to gambling and should be regulated under gambling-related laws.