Global securities regulators push for worldwide digital asset oversight with 18 new policy recommendations

The International Organization of Securities Commissions (IOSCO) has released the final report of its 18 policy recommendations for digital assets designed to bring uniformity and robust oversight.

IOSCO is a global cooperative of securities regulatory agencies that aims to maintain fair and efficient markets. It was established in 1983, and its membership regulates more than 95% of the world’s securities markets in more than 130 jurisdictions.

The finalized “principles-based” and “outcomes-focused” guidelines aim to align the regulatory frameworks of IOSCO member jurisdictions, addressing pressing concerns regarding market integrity and investor protection in digital asset activities.

Global Imperative of Consistent Regulatory Frameworks

At the core of IOSCO’s recommendations is the pursuit of greater consistency in regulating digital asset activities across borders. This approach echoes the U.S. Securities and Exchange Commission’s cited principles of “same activities, same risks, same regulation/regulatory outcomes” and seeks to minimize regulatory arbitrage and protect retail investors exposed to significant risks in the crypto markets.

By drawing parallels with the regulation of traditional financial markets, IOSCO stresses the need for adaptable regulatory frameworks yet consistent in their treatment of various crypto-asset activities, including those involving stablecoins.

The comprehensive recommendations span critical areas, including conflicts of interest, market manipulation, cross-border risks, custody and asset protection, operational risks, and retail distribution. Each area addresses specific aspects of digital asset operations, from governance and disclosure of conflicts in vertically integrated CASP business models to tackling abusive market behaviors and enhancing cross-border cooperation for effective supervision. A notable emphasis is placed on safeguarding client monies and assets, managing operational and technological risks, and ensuring suitable retail distribution practices.

Enhancing Market Integrity and Protecting Investors

IOSCO’s guidelines respond to the “fragmented” nature and the “lack of transparency” of the crypto market, which it attributes to significant investor losses and market manipulations. By setting clear expectations to control and monitor manipulative practices and prevent misuse of inside information, these recommendations aim to fortify market integrity and shield investors from undue harm.

Recognizing the varied regulatory environments across jurisdictions, IOSCO’s recommendations are designed for flexibility in implementation. They encourage regulators to evaluate the applicability of their frameworks to digital assets and consider specific requirements to address the identified risks and investor harm.

In recognizing the unique challenges of specific digital assets such as stablecoins, IOSCO extends its recommendations to cover these assets, with additional guidance on disclosures and the custody of reserves. This inclusion highlights the growing importance of stablecoins in the crypto market and the need for regulations that address their specific risks and uses.

IOSCO’s 18 recommendations for digital assets.

Overarching Recommendation Addressed to All Regulators: Common Standards of Regulatory Outcomes.
Organizational Governance: Addressing conflicts of interest in vertically integrated CASP business models.
Disclosure of Role, Capacity, and Trading Conflicts: Requiring CASPs to accurately disclose each role and capacity in which they act.
Order Handling: Ensuring CASPs handle client orders fairly and equitably.
Trade Disclosures: Transparency requirements for CASPs operating as market operators or trading intermediaries.
Admission to Trading: Setting standards for listing and delisting crypto-assets on CASP platforms.
Management of Primary Markets Conflicts: Addressing conflicts of interest in the primary markets for crypto-assets.
Fraud and Market Abuse: Systems and controls to identify and monitor for manipulative market practices.
Market Surveillance: Effective systems for market surveillance to prevent market manipulation.
Management of Material Non-Public Information: Preventing the misuse of insider information in crypto markets.
Enhanced Regulatory Co-operation: Promoting international regulatory cooperation in crypto-asset oversight.
Overarching Custody Recommendation: Safeguarding client monies and assets held by CASPs.
Segregation and Handling of Client Monies and Assets: Proper handling and protection of client assets.
Disclosure of Custody and Safekeeping Arrangements: Clear disclosures regarding the custody of client assets.
Client Asset Reconciliation and Independent Assurance: Ensuring the reconciliation and independent assurance of client assets.
Securing Client Money and Assets: Implementing controls for the security of client assets.
Management and Disclosure of Operational and Technological Risks: Addressing operational and technological risks at CASPs.
Retail Client Appropriateness and Disclosure: Assessing the suitability of retail clients for crypto-asset investment and ensuring proper disclosures.