IOSCO Offers Policy Recommendations on Crypto Assets

IOSCO offered policy recommendations to "support jurisdictions seeking to establish compliant markets for the trading of crypto or ‘digital’ or ‘virtual’ assets." The recommendations are intended to promote international consistency in regulatory frameworks "given the cross-border nature of the markets, the risks of regulatory arbitrage and the significant risk of harm to which retail investors continue to be exposed."

In its Consultation Report, IOSCO recommended that regulators and crypto asset services providers ("CASPs"):

• seek to achieve investor protection and market integrity consistent with traditional financial markets in order to facilitate a "level-playing field";
• implement governance and organizational requirements aimed at mitigating conflicts of interest stemming from vertical integration, such as providing disclosures regarding the role and capacity of CASPs;
• address "inherent conflicts of interests" within order handling and trade disclosures when a CASP front-runs a client’s orders in favor of its own by establishing policies and procedures that provide "orderly, timely execution" in the best interest of clients;
• require transparency in trade disclosures to ensure price discovery and competition;
• practice "substantive and procedural" listing and delisting standards for crypto assets;
• prohibit crypto asset issuers from listing and trading crypto assets where they have a material interest in order to mitigate conflicts of interest;
• establish effective systems and controls to account for market integrity risks that have been "exacerbated" by the cross-border nature of the crypto-asset markets - such risks include (i) the lack of effective market surveillance, (ii) manipulative market practices, (iii) insider dealing and (iv) "fraudulent, misleading, or insufficient disclosures";
• adopt best practices in coordination with other IOSCO members on an international scale in order to ensure effective supervision and enforcement, and reduce the risk of money laundering;
• consider disclosures of custody-related risks regarding asset segregation, re-use of assets, liability and ownership;
• avoid the "inappropriate mixing of assets"; and
• examine the "broad spectrum" of operational risks that can result in lax controls, in addition to risks stemming from distributed ledger technology and smart contracts.