Towards Global Consensus: Understanding IOSCO's Recommendations for Crypto Regulation
Understanding IOSCO's recommendations, unraveling diverse approaches and paving the path to tech-informed harmonization 🚀
Introduction
Global regulators around the world are increasingly recognising the need for a consistent and harmonized framework of regulations within the crypto industry. In response to this growing recognition, the International Organization of Securities Commissions (IOSCO) released its set of 18 Recommendations in May 2023 for public consultation, aiming to assist its members in applying IOSCO's Objectives and Principles for Securities Regulation (hereinafter referred to as “IOSCO Standards”) to crypto-asset activities within their jurisdictions.
Consistent with IOSCO Standards, the 18 recommendations cover six key areas, such as conflicts of interest arising from vertical integration of crypto asset service providers (CASPs), market manipulation, cross-border risks, custody and asset protection, operational and technological risks, and retail suitability. Some of the key recommendations are:
Establish or Adapt Frameworks: Regulators are encouraged to establish or adapt existing frameworks that achieve similar regulatory outcomes as traditional financial markets.
Conflicts of interest: Conflicts of interest in vertically-integrated cryptoasset businesses should be addressed by considering disaggregation and publishing effective policies and controls.
Market Abuse and Fraud: Regulatory action against market abuse and fraud is crucial to maintain market integrity. Implementing and maintaining market surveillance requirements ensures market transparency and aids in detecting and reporting suspicious activities.
Asset Protection: Emphasis is placed on safeguarding client assets held in custody. CASPs should adopt appropriate systems and procedures to mitigate asset loss or theft.
Technological Resilience: Regulators should consider technological resilience, particularly in decentralized finance (DeFi), to ensure robustness and security.
Listing Standards for Trading Platforms: Trading platforms should adopt substantive and procedural listing standards for cryptoassets and their issuers. These standards should include detailed information about control, ownership, trading history, and transfer protocols.
The recommendations are seen as a first step towards achieving global regulatory certainty for the industry. Jean-Paul Servais, chairperson of IOSCO, reiterated this imperative in a keynote address:
“As the G-7 Finance Ministers and Central Bank communiqué of 13 May has once again reminded us, the time has come to put an end to the regulatory uncertainty that characterizes crypto activities. Today’s consultation paper received unanimous support from the IOSCO Board and is the outcome of an intense period of regulatory risk analysis, information sharing and capacity building,”
IOSCO’s recommendations adopt a technology-neutral approach, guided by the principle of "same activities, same risks, same regulations”, seeking to foster harmonization and ensure effective oversight. They are principle and outcome-based, rather than prescriptive - allowing its member jurisdictions to apply existing or new regulatory frameworks while ensuring alignment with regulations governing traditional security markets.
The consultation period for these recommendations, which allowed stakeholders to provide valuable input, is closed as of today, July 31st.
The Principle of 'Same Activities, Same Risks, Same Regulatory Outcomes'
The recommendations are rooted in the principle of 'same activity, same risk, same regulation,' which underscores the importance of subjecting crypto-assets and intermediaries to equivalent regulation when they perform economic functions similar to traditional financial instruments and intermediaries. The principle aligns with the approach of technological neutrality which encourages regulators not to favor specific technologies and to let market mechanisms determine which solutions gain broad adoption. It is however important to analyze the challenges in adopting such an approach.
Technology neutrality in regulation has been a subject of debate, as it often leads to vague, ambiguous, or broad language in the laws. This vagueness poses difficulties for both regulators and those subject to the law, making it obscure and challenging to interpret. Moreover, the lack of specificity in technology-neutral provisions may result in low adoption of new technological possibilities and uncertainty about the range of regulation. Policymakers often fail to understand the context of the technology being regulated, leading to confusion and outdated results.
Although global organizations like the IMF and FSB still advocate for this approach, the inconsistency in its application among member jurisdictions is evident. For example, in January 2023, the Hong Kong Monetary Authority (HKMA), in collaboration with the Hong Kong SAR Government and financial regulators, released a Discussion Paper on crypto-assets and stablecoins which prioritizes a crypto-friendly stance based on the "same risk, same activity, same regulation" principle, while also fostering innovation across the board. In Switzerland, FINMA treats all technologies for the same business activity equally, including cryptoassets and blockchain-based applications. Switzerland's DLT-Law enables tokenization of financial instruments like bonds, shares, and derivatives as "DLT-Securities," while also offering them legal recognition and protection equivalent to traditional securities.
However earlier this year, the UK House of Commons Treasury Committee recommended treating crypto trading and investment as gambling due to “similar risks”, citing the same principle. Although rejected by the government, adopting this recommendation would have resulted in an oversimplified perspective based on limited knowledge of the industry - which could have led to inadequate protection for consumers and potentially misleading conclusions for regulators.
Given such diverse approaches taken by member states, one is posed with the question of - whether varied state action would undermine harmonization, potentially impacting the growth of the crypto market and creating fresh areas of regulatory arbitrage.
Conclusion: Embracing a Tech-Informed Approach
While a purely technology-neutral approach may fall short in effectively regulating new technologies, the "tech-informed" approach emerges as a more promising idea. By recognizing the necessity to understand and engage with specific technologies, this approach allows for the tailoring of appropriate regulations to effectively address the unique challenges of the crypto industry.
The EU serves as a prime example, demonstrating both a technology-informed approach to regulation and successful harmonization through initiatives like the Markets in Crypto Assets (MiCa) bill. The passage of the MiCA bill has brought regulatory clarity to the crypto industry, enabling firms to navigate compliance in a more harmonized and predictable manner across the 27 member states. By creating uniform rules for crypto-assets and introducing clear categories for tokens, such as asset-referenced tokens (ART) and e-money tokens (EMT), the MiCA bill demonstrates a tech-informed understanding of the diverse types of crypto-assets in the market.
Paris' thriving Web3 scene, supported by projects involving non-fungible token (NFT) and Web3, stands out as one of the recent highlights of the success of such tech-informed harmonization. Lisbon, according to a recent report, has become a top crypto destination, benefiting from the outflow of crypto talent from the US. The city's favorable tax laws and thriving decentralized finance (DeFi) scene have attracted founders of projects with European roots.
As countries navigate the diverse landscape of crypto regulation, IOSCO's non-prescriptive recommendations serve as a valuable resource and a baseline for shaping future policy decisions. Both the UK and Singapore exemplify this by actively contributing to the development of global regulatory standards for digital assets through IOSCO and FSB while also formulating their own informed crypto-specific policies. The UK's Future Financial Services Regulatory Regime introduces a new regulatory framework for crypto assets while Singapore has recently released investor protection measures for Digital Payment Tokens Services.
These measures reflect the essence of what IOSCO aims to achieve while appreciating the nuances of digital asset technology. By using these global norms as a foundation, countries can adopt a tech-informed strategic approach, tailoring their regulatory policies to effectively address these concerns.
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