Consultation launched to set global standards for crypto regulation

The International Organization of Securities Commissions (IOSCO) has opened a consultation on 18 policy recommendations (68 pages/730KB PDF) for regulators in its member jurisdictions to adopt in regulating cryptoassets. The proposals are set to address concerns related to market integrity and investor protection arising from the rapidly growing cryptoasset activities globally, and support countries seeking to establish compliant markets for the trading of crypto or digital assets. The consultation indicates that cryptoassets should be regulated in a similar way to capital markets and financial services.

Experts say the move may be a significant one for setting global standards of cryptoassets regulation. Financial services legal expert Hannah Ross of Pinsent Masons said that “the IOSCO consultation provides one of the clearest indications yet for the direction of travel of cryptoasset regulation both globally and in the UK, particularly in respect of centralised cryptoasset market activities”.

In the UK, the Financial Conduct Authority (FCA) has set higher and clearer standards of consumer protection across financial services with its new Consumer Duty, which will come into force in July 2023.

“The consultation’s approach, if adopted in the UK, could bolster the FCA’s and the government’s work to better protect vulnerable customers, in particular in the areas of financial promotions and treating customers fairly. It will be very interesting to see how any future government proposals on the regulation of cryptoassets will fit in with the FCA’s new consumer duty,” said Ross.

The global nature of cryptoassets has posed a significant challenge in working out how to appropriately regulate them, according to Tom Aries of Pinsent Masons, as it requires effective cooperation and coordination among national and international regulators.

With 130 members around the world regulating more than 95% of the world's securities markets, the IOSCO is well positioned to drive greater consistency in regulatory frameworks, approaches, and standards between jurisdictions.

“Given the global reach and respect IOSCO has, the recommendations it has put forward may provide a good starting point for national and international regulators to rally round in finding the right solution to this challenge,” said Aries.

“The IOSCO consultation seems to suggest that there is a growing consensus that the model for cryptoasset regulation should imitate as appropriate that of traditional rules and regulations for capital markets,” he added.

However, IOSCO’s direction of development is in contrast to the UK Treasury Committee’s recent comments on how the UK should regulate cryptoassets. In its Regulating Crypto report, the committee recommended that the government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.

From a consumer risk perspective, Pinsent Masons’ Sébastien Ferrière said, the IOSCO’s approach to push for an FCA-style regulatory framework seems to be more fitting.

“The IOSCO consultation provides a good reminder that – unlike gambling markets/ ‘exchanges’ which are closed to individual providers – cryptoassets are traded on open, inter-connected, cross-border markets that expose consumers to similar risks as those which subsist in the currency derivative or equity markets that the FCA regulates. It is therefore unsurprising that the IOSCO’s consultation seeks to push international focus toward FCA-style regulation of crypto markets,” said Ferrière.

There are other challenges in implementing IOSCO’s recommendations in the UK, as Ferrière pointed out.

“Despite IOSCO’s call for international regulators to quicken the pace of crypto regulation, there remain some barriers to the immediate implementation of IOSCO’s recommendations in the UK. The FCA’s regulatory perimeter does not currently include cryptoasset firms, apart from registration and oversight for money laundering. Legislative change will need to get through parliament before  jurisdiction is extended” he said.

The IOSCO’s consultation will close on 31 July 2023, and the policy recommendations are to be finalised by the end of the year.

Co-written by Tom Aries and Sébastien Ferrière of Pinsent Masons.