Iosco’s regulatory blueprint for harmonising digital assets and crypto

by George Iddenden, Reporter, The Payments Association

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IOSCO’s new policy recommendations aim to create a unified global framework for regulating digital assets and cryptocurrencies, enhancing market integrity and investor protection.

The urgency to regulate the rapidly expanding digital asset and cryptocurrency sector is palpable. The market’s notorious volatility and susceptibility to manipulation have sounded alarm bells for investor protection and fair trading practices, making it a pressing challenge for governments and financial institutions worldwide.

Not only this, but the degree of anonymity that cloaks certain crypto transactions makes the sector the perfect breeding ground for money laundering and terrorist financing, threatening the integrity of the market to a large degree. These alone underscore the imperative for comprehensive regulatory frameworks.

Playing a pivotal role in global financial regulation, the International Organisation of Securities Commissions (IOSCO) is instrumental in fostering investor market integrity. In the realm of cryptocurrencies and digital assets, IOSCO’s role is significant. It provides guidance and recommendations to regulate Crypto-Asset Service Providers (CASPs), aiming to establish standards that mitigate potential risks and ensure fair trading practices.

In November last year, IOSCO implemented policy recommendations for Crypto and Digital Asset Markets (CDA Recommendations) to establish a globally coordinated framework for regulating Crypto-Asset Service Providers (CASPs). These recommendations aim to address potential areas of harm such as market manipulation, money laundering, and investor protection through measures like licensing, capital requirements, and robust AML/CFT compliance, fostering a responsible and secure environment for cryptocurrencies and digital assets to thrive.

The market’s notorious volatility and susceptibility to manipulation have sounded alarm bells for investor protection and fair-trading practices

According to NChain’s Sales Solutions Leader, Brett Johnson, “This harmonisation is poised to be a key driver in the wider acceptance and incorporation of blockchain technology and crypto assets into the mainstream financial ecosystem.”

What are the recommendations?

Market volatility and manipulation are two of the most significant issues hindering the application of crypto space. The industry body believes that by implementing robust market surveillance mechanisms, including advanced technologies and data analytics to monitor trading patterns, the issue of market manipulation will be mitigated.

The recommendations aim to increase transparency and promote fair trading practices in cryptocurrency markets. Crypto-Asset Service Providers (CASPs) are expected to provide accurate and timely information to investors and regulators, including details on pricing, trading volumes, and order book data. These requirements ensure that market participants have reliable access to information.

Regulators are urged to establish and enforce rules promoting fair trading practices in cryptocurrency markets. This may involve implementing measures to prevent front-running, spoofing, and other manipulative trading strategies that can distort market prices and undermine investor confidence.

The recommendations also suggest that regulatory oversight of CASPs is necessary to ensure that they comply with relevant laws and regulations. Regulators are encouraged to conduct regular inspections and audits of CASPs to assess compliance with regulatory requirements and detect potential misconduct or violations.

Regulating and licensing CASPs is a significant priority laid out in the recommendations. IOSCO has put a great deal of emphasis on establishing a licensing framework for CASPs, which includes entities like cryptocurrency exchanges and wallet providers. The aim is to improve market integrity and protect investors.

Being used heavily as a means of paying for goods and services abroad represents a difficulty in its own right. Cross-border payment methods are notoriously difficult to regulate given the different jurisdictions will often have their own frameworks. The recommendations aim to promote cross-border cooperation and harmonisation by facilitating information sharing, coordinating regulatory enforcement actions, and developing common standards and best practices.

Harmonised regulation

VE3 Director, Manish Garg, believes that the recommendations made by IOSCO address critical issues in the crypto-asset space, including investor protection, market integrity and systemic risks. The aim, of course, is to create a harmonised regulatory framework that can be adapted globally.

While Garg acknowledges the good intentions of the proposed regulations, he also recognises the challenges that may arise in their implementation. These challenges stem from the rapidly evolving nature of the crypto market, differences in national regulatory frameworks, and the need for international cooperation. Garg believes these factors could hinder the uniform enforcement of the guidelines, thereby affecting their effectiveness in promoting transparency, fairness, and efficiency in markets.

“The recommendations are well-crafted for promoting transparency, fairness, and efficiency in markets, but their effectiveness will largely depend on the ability of regulatory bodies worldwide to enforce these guidelines uniformly,” he says.

“The implications of implementing these recommendations include increased investor confidence, reduced risk of market manipulation, and fostering innovation within a regulated environment, potentially leading to broader adoption and integration of crypto assets into the global financial system.”

Johnson says key systematic risks have also sensibly been addressed through oversight mechanisms designed to mitigate negative spill over from the crypto market into the traditional financial ecosystem.

He added: “These recommendations may not mitigate the risks of investment in crypto assets entirely, but they mark an important step in the evolution of global regulation.” Moreover, the potential impact of a framework for CBDCs will have seismic impacts on both retail and wholesale models, helping to guarantee the currencies “operate within a secure and transparent market setting”.

Johnson argues that retail currencies mean a more secure everyday transaction for consumers; meanwhile, for its wholesale counterparts, the guidelines aim to drastically improve interbank settlements and overall systematic stability.

These recommendations may not mitigate the risks of investment in crypto assets entirely, but they mark an important step in the evolution of global regulation

Industry reception so far

So far, the industry has reacted largely positively to the recommendations, with the most enthusiasm being shown by investors who have welcomed the potential for less risk exposure and tightened security.

Crypto exchanges and other service providers, on the other hand, are currently attempting to navigate the delicate balance between fostering innovation and adhering to regulatory compliance, according to Johnson.

Despite most of the feedback being positive, there are still concerns about stifling the flame of innovation and the cost implications of compliance for smaller firms.

Johnson said: “With thoughtful implementation, these recommendations will pave the way for a future where crypto assets play an integral role in diversified investment portfolios and the broader financial ecosystem. With several spot bitcoin Exchange-Traded Funds (ETFs) already having been approved, a regulated crypto future seems closer than ever.  

Read the entire Payments Review spring edition here

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