The International Organisation of Securities Commissions (IOSCO), has released a report advising regulators on their approach to “crypto asset trading platforms” (CTPs). The report suggests that any crypto assets considered securities should follow the same regulatory principles as conventional securities but does not provide guidance on how to define crypto assets as securities in the first place.
The report, which is based on a survey of existing regulatory approaches in member jurisdictions, is titled Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms. It offers non-legally binding advice on dealing with the differences between existing securities trading platforms and their crypto equivalents.
These differences present several concerns for regulators, but the report concludes that crypto assets considered securities should follow the same regulatory principles as conventional securities. It states, “Many of the issues related to the regulation of CTPs are common to traditional securities trading venues, but may be heightened by how CTPs are operated.”
The securities watchdog turns to cryptocurrency
A group comprised of regulators from jurisdictions around the world, IOSCO is responsible for creating guidance to inform the activity of securities exchanges in 95 percent of the world’s securities markets. The principles defined by the organization help to create consistent standards across the industry for a broad range of products and services, including Brave New Coin’s set of Liquid Indices.
As the crypto asset industry matures, authorities are likely to turn to the IOSCO for guidance. Its report follows a call at the 2018 G20 communique for regulatory bodies “to continue their monitoring of crypto assets and their risks, according to their respective mandates, and assess multilateral responses as needed.”
As a first step towards this, the paper outlines the risks and regulatory considerations that authorities might consider when assembling a regulatory framework for crypto trading platforms.
Anywhere that regulators have determined that a crypto asset is a security, the basic IOSCO principles of securities regulation are said to apply, however, several differences between traditional securities exchanges and cryptocurrency trading platforms are highlighted as potential areas of concern. These include access, safeguarding assets, market integrity, price discovery, technology, and conflicts of interest.
Conflicts of interest
One of the key considerations regulators are advised to address is the potential for conflicts of interest in crypto asset trading platforms, which are said to have a different internal structure to existing securities exchanges. The report states, “While CTPs perform functions that are similar to trading venues, they may also perform functions typically performed by intermediaries, custodians, transfer agents and clearing houses.”
Firms like Coinbase and Kraken offer a full suite of services to both retail and institutional buyers and operate in a different way to traditional securities exchanges, where functions are usually carried out by independent parties. “Both trading venues and crypto asset trading platforms may have conflicts that arise from the commercial interests of the platform or venue, its owners and operators, the businesses that raise capital on the platform or venue, and the participants who trade on the platform or venue,” states the report. “Those crypto asset trading platforms that position themselves to provide end-to-end services including, for example, the admittance and trading of the crypto-asset, settlement, custody, market making, and advisory services may have additional conflicts.”
To mitigate potential conflicts of interest between different stakeholders, which are said to stem from “information asymmetry, market abuse, and unfair pricing,” regulators are advised to perform an evaluation of the policies and procedures of crypto asset platforms.
Thorny issues remain
Elsewhere in the report, regulators are given advice on how to handle other unique characteristics of crypto exchanges — including details on custodial mechanisms, KYC procedures, and the need for the transparency of operations.
But in recognition of the “continuously evolving nature of crypto asset markets,” the report ultimately concludes that it is not appropriate at this time to “prescribe new standards or requirements.” The report provides no new guidance on how crypto assets might be categorized as securities in the first place. “The IOSCO guidance, in short, proposes members treat crypto assets that are securities as securities, under their respective regulatory regimes,” lawyer Philip Moustakis told Brave New Coin. “Unfortunately, the guidance likely will not bring any further clarity to the thornier question for crypto asset issuers in the U.S. of what features may or may not support a finding by the SEC or a court that a given crypto asset is a security.”