The International Organization of Securities Commissions (IOSCO), a global body for securities regulators, has put forward 18 recommendations to regulate the global crypto industry. The recommendations cover six key areas such as market manipulation, insider trading and fraud as well as conflict of interest arising from ‘vertical integration’ of various activities and functions by crypto firms.
Other key areas covered include cross-border risks and regulatory cooperation, custody and client asset protection, operational and technological risk, and retail access, suitability and distribution. The global regulatory body plans to finalize the recommendations around the fourth quarter of 2023.
IOSCO Addresses Multiple Issues
According to IOSCO, many crypto firms adopt a ‘vertically integrated’ business model where they engage in multiple activities, such as exchange trading, brokerage, market-marking, custody and settlements under ‘one roof’. The global watchdog believes that this creates conflicts of interest for the firms.
It is, therefore, proposing that crypto asset service providers (CASPs) should have “effective governance and organizational requirements in place to effectively address” these conflicts. Additionally, the commission believes that measures, such as obtaining separate registrations and adopting legal disaggregation, could solve the issue.
Furthermore, IOSCO believes that a conflict of interest arises in situations where a CASP may front-run clients’ orders in favour of their own transactions or those of a related party. Front running is a type of market manipulation in which a trader or broker takes advantage of non-public information about a large upcoming trade to make a profit. In this type of scenario, the trader or broker typically buys or sells the security before the public announcement of the trade in order to profit from the expected price movement.
To address this, IOSCO is calling on crypto firms to put in place “systems, policies and procedures that provide for fair, orderly, timely execution and in the best interest of clients.”
On market manipulation, IOSCO explained that the crypto industry’s market integrity risks have been worsened by the “fragmented, cross-border nature” of crypto markets. The risks include manipulative market practices, such as Ponzi schemes and wash trading, as well as insider dealing and fraudulent, misleading or insufficient disclosure.
To address this, IOSCO is calling for “effective systems and controls to identify and monitor for manipulative market practices and to prevent leakage of insider information.”
IOSCO Launches Public Consultation
IOSCO explained the recommendations were developed by the IOSCO Board's Fintech Task Force (FTF) in alignment with the organization’s Crypto-Asset Roadmap published in June 2022. Jean-Paul Servais, the Chairperson of IOSCO, noted that the recommendation “is the outcome of an intense period of regulatory risk analysis, information sharing and capacity building.”
“Crypto-asset service providers need to address unacceptable conflicts of interest and take far more seriously the right of clients to have their monies and assets carefully minded and accounted for,” added Lim Tuang Lee, the Chairperson of the IOSCO Board-Level Fintech Task Force.
In a statement released on Tuesday, IOSCO disclosed that it has opened a public consultation and issued a consultation report on the recommendations and expects to receive comments until July 31, 2023. After consultation, the body also expects that its 130 members across the globe “will review their current regulatory frameworks to ensure that they comply with the standards and fix any gaps promptly.”
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