Global securities regulators issue new recommendations for digital asset regulation

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An association of global securities regulators has made a series of recommendations for regulating digital assets, including that countries should seek to achieve the same regulatory outcomes as those required in traditional financial markets.

The recommendations were issued by the International Organization of Securities Commissions (IOSCO), a global body comprising securities and/or futures regulators from 131 jurisdictions worldwide, including the United States, China, and the United Kingdom. The members also include 33 non-primary regulators and 70 affiliate members taking an interest in securities regulation, such as self-regulatory organizations, stock exchanges, and financial market infrastructures.

The IOSCO’s mandate is to develop, implement, and promote regulatory standards that enhance investor protection and reduce systemic risk. They also share information with exchanges, provide technical and operational assistance, and establish global cross-border transaction monitoring standards.

The recommendations come after the IOSCO established a Fintech Task Force (FTF) in March 2022. Chaired by the Monetary Authority of Singapore (MAS), it was charged with “developing, overseeing, delivering and implementing IOSCO’s regulatory agenda with respect to Fintech and crypto-assets.”

Published this week, the recommendations number 18 in total and are split into six key categories:

1. Conflicts of interest arising from vertical integration of activities and functions: This category covers risks arising from digital asset service providers engaging in multiple functions under one roof, such as exchange trading and brokering. The IOSCO recommends that digital asset providers be required to have effective governance and organizational requirements in place to mitigate these issues, including legally segregating these functions and their related assets. Another recommendation is that such organizations should accurately disclose the capacity in which it is acting at all times.
2. Market manipulation, insider trading, and fraud: Noting the lack of effective market surveillance and manipulative market practices in the digital asset industry, the IOSCO recommends that digital asset service providers have effective systems and controls to identify and monitor illicit activity be codified in law.
3. Cross-border risks and regulatory cooperation: There are several recommendations addressing cross-border risks, with the IOSCO highlighting that “experience has shown that [digital asset service providers] often present themselves as operating in a borderless manner and tend to take an ambivalent approach to regulatory compliance.” IOSCO recommends that national regulators adopt common best practices to help ensure effective supervision and enforcement.
4. Custody and client asset protection: The IOSCO recommends that controls be embedded within regulatory frameworks to ensure that digital asset service providers holding customer assets do so securely, safely, and without inappropriate mixing of assets.
5. Operation and technological risk: The IOSCO recommends that national regulators require digital asset service providers to disclose in a clear, concise, and non-technical manner all sources of operational and technological risk, as well as maintain an appropriate risk management framework.
6. Retail access, sustainability, and distribution: One recommendation addresses this heading and implores countries to introduce new regulations that put the burden on digital asset providers to assess and onboard retail investors who are aware of and deemed suitable to take on the “greater speculative risks inherent in this market.”

All in all, the recommendations pursue an outcome-based regulatory approach and are principally aimed at digital asset service providers. In that way, there is less focus on classes of assets or their technical underpinnings in favor of adopting a “same activities, same risks, same regulation/regulatory outcomes” principle. In that vein, the report takes special care to say that the recommendations are designed to apply to all kinds of digital assets, including stablecoins.

On publication of the recommendations, IOSCO Chair Jean-Paul Servais said:

“As IOSCO chair, I am pleased with the publication of the IOSCO Report on Crypto and Digital Asset markets, which is the first and most important step to ensure investors are protected and crypto-asset markets operate fairly, efficiently and transparently. This report is a key component of the international framework for these markets envisaged by the G20 and Financial Stability Board (FSB).

“Next, our attention turns to ensuring the adoption and implementation of the recommendations to support optimal consistency in the way crypto-asset markets and activities are regulated across IOSCO member jurisdictions.”

The IOSCO’s fintech task force is expected to publish similar recommendations focusing on decentralized finance, which are projected before the end of 2023.

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