IOSCO Publishes Global Encrypted Asset Regulatory Rules SEC Commits to Adopt

Author: TaxDAO

In May 2023, the International Organization of Securities Commissions (IOSCO) released the "Policy Recommendations for Crypto and Digital Asset Markets Consultation" Report), the release of the report marks the further development of regulatory standards for the global crypto asset industry. As a global securities regulator aiming to promote the cooperation of the global securities market and the formulation of regulatory standards, IOSCO issued the "Risk Warning on Virtual Assets" in 2014, making its first statement on the supervision of encrypted assets, and subsequently issued several regulations on Documentation for the cryptoasset industry. This article will review the origins of the crypto-asset policy documents released by IOSCO and explain in detail its history, current situation, and future.

1. Concerns about risks in the early stages of crypto-asset development

In the early days of the development of the crypto-asset industry, the market value and number of users were relatively small. It was mainly participated by technology enthusiasts and early adopters, and did not attract widespread attention. As an initial industry, corresponding regulatory measures have not yet been established. It was not until 2014 that the bankruptcy of the Mt.Gox trading platform severely impacted the virtual asset industry, causing market panic and currency value fluctuations. On the other hand, the virtual asset industry has experienced rapid development and change in the past few years, and as the prices of virtual assets such as Bitcoin continue to rise, it has attracted more investors and institutions to participate, triggering the strengthening of virtual asset transactions. The supervision of the platform and the voice of protecting investors.

IOSCO issued a "Risk Warning on Virtual Assets" in 2014. The document pointed out that virtual assets have the following risks: Virtual asset transactions are often conducted anonymously, making it difficult to track the identities of transaction participants, increasing the risk of money laundering and other illegal activities. ; The virtual asset market lacks a unified legal and regulatory framework, and investors may face legal risks and regulatory uncertainty; virtual asset market prices fluctuate greatly, and investors may face greater investment risks and losses; storage and trading of virtual assets Relying on blockchain technology and digital wallets, there are technical vulnerabilities and security risks.

While reminding industry investors about the risks of virtual assets, IOSCO also called on regulatory agencies to strengthen supervision of the virtual asset market to protect investors’ rights and interests and market stability. Regulatory agencies in various countries have responded positively to IOSCO's risk warning documents and have taken measures to strengthen the supervision of virtual currency trading platforms. The U.S. Securities and Exchange Commission’s statement noted that certain crypto-assets may be considered securities and subject to securities regulations; the Canadian Center for Financial Transactions and Reports Analysis brought cryptocurrency traders within the scope of anti-money laundering and counter-terrorism financing regulations, requiring them to Comply with anti-money laundering and counter-terrorism financing regulations, and conduct customer due diligence and reporting; the Australian Taxation Office has issued guidance clarifying the tax treatment of crypto assets. Some countries have also issued warning announcements about virtual currencies to remind investors of investment risks.

2. The introduction and improvement of encrypted asset supervision principles

(1) "Principles on Crypto-Asset Trading Platforms"

In 2017, the ICO (Initial Coin Offering) model for startups to raise funds by issuing tokens emerged rapidly. The rapid development of the ICO market has triggered a series of risks and controversies, including issues such as investor protection, market manipulation and information disclosure. A large number of ICO projects have been investigated and punished by regulators for fraud and illegal operations. The US Securities and Exchange Commission (SEC) investigated Diamond (Diamond Reserve Club) and accused it of unregistered securities issuance and fraud. These cases have sparked calls for increased regulation and investor protection in the ICO market.

In 2018, IOSCO released the "Principles on Encrypted Asset Trading Platforms", which aims to formulate a set of global regulatory principles for encrypted asset trading platforms, including exchange compliance, transparency, security, and market manipulation prevention , and put forward a series of requirements: ICO projects should provide sufficient, accurate and timely information disclosure, including project background, objectives, risk factors, token structure, use of raised funds, etc.; regulators should ensure that ICO projects comply with applicable investment Investor protection regulations, including anti-money laundering and anti-terrorist financing regulations; regulators encourage investors to fully understand the risks of ICO projects, and remind investors to pay attention to investment risks and potential fraud; regulators should ensure that ICO projects comply with applicable securities regulations and regulatory requirements, including registration, licensing, and regulatory disclosure; regulators should strengthen international cooperation, share information and experience, and jointly address regulatory challenges in the ICO market.

Although the document provides a basic regulatory framework for regulatory agencies in various countries, clarifies the regulatory objectives, scope and responsibilities and powers of regulators, emphasizes the importance of risk management, requires effective protection of investor rights and interests, and highlights the importance of global cooperation As well as opposition to market manipulation, it has a certain positive effect on establishing and improving the regulatory mechanism for the crypto-asset industry. However, the document only provides guiding principles and does not formulate specific standards and regulations. It lacks enforcement power and has certain flaws at the implementation level. Although regulatory agencies in various countries have issued warning announcements about ICO risks, some countries have also formulated specific laws and regulations requiring ICO project parties to comply with securities laws and regulations, conduct information disclosure, and protect investors. However, due to the positions of regulatory agencies and regulatory differences between countries, these principles have not been fully implemented, and the global supervision that is urgently needed for the development of the crypto-asset industry has not been established.

(2) "Issues, Risks and Regulatory Considerations Relating to Encrypted Asset Trading Platforms"

In 2019, the founder of crypto asset management platform QuadrigaCX died suddenly, leaving billions of dollars in crypto assets unrecoverable, further revealing the risks and inadequate regulation of the crypto asset management industry. In the context of the rapid development of the crypto asset management industry and the challenges faced by regulatory agencies in formulating appropriate regulatory policies and frameworks, IOSCO released "Issues, Risks and Regulatory Considerations Related to Crypto Asset Trading Platforms", pointing out that the current market for crypto asset trading platforms Risks, operational risks, money laundering and terrorism financing risks, investor protection issues and cross-border regulatory challenges, etc., and proposed regulatory recommendations covering ensuring the transparency, stability and investor protection of crypto asset management activities:

Regulatory applicability: Regulators should assess the risks and impacts of crypto asset management activities, clarify whether crypto asset management activities are suitable for the existing regulatory framework, and formulate regulatory policies accordingly.

Investor Protection: The report emphasizes that protecting investor rights is an important task for regulators. Regulators should ensure that crypto asset managers comply with appropriate disclosure requirements and provide accurate, comprehensive and timely information in order to prevent fraud and manipulation and effectively protect investor rights.

Risk management: The report proposes risk management measures that crypto asset management institutions should take, including risk assessment, risk monitoring and risk management policies. Regulators should require encrypted asset management institutions to establish a sound risk management framework to ensure the safety of investors' funds and the stability of the market.

Transparency and disclosure: The report emphasizes that regulators should establish appropriate transparency and disclosure requirements to ensure that investors have access to information, including on investment strategies, risk management and performance.

Cross-border cooperation: The report calls for strengthening cross-border cooperation and information sharing between countries, and developing unified regulatory standards and policies to address cross-border risks and regulatory challenges in crypto asset management.

The release of the report provides important reference and guidance for global encrypted asset regulators, emphasizing the importance of compliance, transparency, risk control and other aspects of encrypted asset trading platforms, promoting the formulation of regulatory policies and regulatory frameworks, and promoting To ensure the healthy development of crypto asset management and investor protection. At the same time, the report also reminds crypto asset managers and investors to pay attention to risk and compliance, strengthen risk management and transparency, and ensure market stability and investor interests.

3. Globalization and Systematization of Crypto-Asset Supervision

(1) "2022-2023 Crypto Roadmap"

IOSCO released the "2022-2023 Crypto Roadmap" document in 2022, drawing a blueprint for the globalization and systematization of crypto asset industry supervision. According to the resolution of the IOSCO Board of Directors, a board-level FinTech Working Group (FTF), chaired by the Monetary Authority of Singapore (MAS), is established to formulate, supervise, deliver and implement IOSCO’s regulatory agenda on fintech and crypto-assets, and Coordinates IOSCO’s cooperation with the Financial Stability Board (FSB) and other standard-setting bodies on fintech and crypto-related matters.

(2) "Cryptocurrency and Digital Asset Market Policy Recommendation Consultation Report"

In May 2023, IOSCO officially released the "Policy Recommendations Consultation Report on Cryptocurrency and Digital Asset Markets", marking significant progress in the regulation of global crypto assets. The report makes a general recommendation to all regulators, that is, it is recommended that regulators should not create any differences in the supervision of crypto-assets and traditional finance, with a view to eliminating the regulatory differences between crypto-assets and traditional finance and promoting the integration of crypto-assets and traditional finance. create a fairer competitive environment and reduce regulatory arbitrage risks. Based on the principle of "same activities, same risks, same regulatory results", the report puts forward targeted policy recommendations covering conflicts of interest, market manipulation, cross-border risks, asset protection, etc., to regulate crypto assets globally industry, strengthen the consistency and applicability of supervision of the crypto-asset industry, protect the legitimate rights and interests of investors, enhance market confidence, and maintain the market environment. The main policy recommendations are as follows:

Regulators should regulate and supervise the trading of encrypted assets, other encrypted asset services, and the issuance, marketing and sale (including investment) of encrypted assets in a manner consistent with the IOSCO securities regulatory objectives and principles and related supporting standards, recommendations and good practices. The regulatory approach should seek to achieve the same or consistent regulatory outcomes as traditional financial market requirements in terms of investor protection and market integrity.

Regulators should require cryptoasset service providers to have effective governance and organizational arrangements, including systems, policies and procedures, commensurate with their activities. Regulators should require crypto asset service providers to have systems and procedures in place and to disclose relevant systems and procedures to clients and potential clients. During the transaction process, it is necessary to provide fair and fast execution of all customer orders on a non-discriminatory basis, and accurately record order information, while limiting pre-running customer orders.

Regulators should require cryptoasset service providers that operate markets or act as intermediaries (either directly or indirectly on behalf of clients) to provide pre-trade and post-trade disclosures in the same form and manner as traditional financial market requirements, or to achieve compliance with traditional financial market requirements. similar regulatory outcomes. Regulators should require crypto-asset service providers to establish, maintain and appropriately disclose to the public the standards of their systems and procedures for the issuance, trading and clearing of crypto-assets, in particular the substantive and procedural criteria for making such decisions. Regulators should require crypto asset service providers to manage and mitigate conflicts of interest surrounding the issuance, trading and listing of crypto assets. Regulators should take enforcement action against offenses involving fraud and market abuse in crypto-asset markets, taking into account the extent to which these conduct are not already covered by existing regulatory frameworks. These offenses should cover all related fraud and abuse, such as market manipulation, insider trading and unlawful disclosure of inside information, publication of false and misleading statements, misappropriation of funds, money laundering and terrorist financing.

Regulators should have market surveillance requirements applicable to each crypto asset service provider in order to effectively mitigate the risk of market abuse. Regulators should require crypto-asset service providers to establish management systems, policies and procedures around material non-public information, including information on whether relevant crypto-assets are allowed to be listed or traded on their platforms, as well as information related to customer orders, trade executions and individuals. Identity-related information.

Regulators recognize the cross-border nature of crypto-asset issuance, trading and other activities and should have the ability to share information and cooperate with regulators and relevant agencies in other jurisdictions regarding such activities. This includes establishing available cooperation arrangements and other mechanisms with regulators and relevant authorities in other jurisdictions. These measures should accommodate the authorization and ongoing supervision of regulated cryptoasset service providers and provide broad assistance in law enforcement investigations and related proceedings.

Regulators should apply IOSCO’s recommendations on protecting client assets when considering the application of existing or new frameworks that apply to crypto asset service providers that hold or protect client assets. Regulators should require crypto asset service providers to place client assets in trust or otherwise segregate them from the crypto asset service provider’s proprietary assets.

Regulators should require cryptoasset service providers to disclose the following to customers in clear, concise and non-technical language: 1. How customer assets are held and the arrangements for protecting those assets and their private keys; 2. Use (if any If so) independent custodian, sub-custodian or related party custodian; 3. The extent to which client assets are aggregated or pooled in the comprehensive client account, individual clients’ rights to aggregated or pooled assets, and losses arising from any aggregation or pooling activities Risks; 4. Risks arising from the direct or indirect processing or transfer of customer assets by crypto-asset service providers; 5. Complete and accurate information about the obligations and responsibilities of crypto-asset service providers in using customer assets and private keys, including The terms of its return, and the risks involved.

Regulators should require cryptoasset service providers to have their own systems, policies and procedures in place to conduct regular and frequent reconciliations of client assets with appropriate independent assurances. Regulators should require cryptoasset service providers to adopt appropriate systems, policies and procedures to reduce the risk of customer assets being lost, stolen or inaccessible.

Regulators should require cryptoasset service providers to disclose all significant sources of operational and technical risk in a clear, concise and non-technical manner and to have an appropriate risk management framework (e.g. people, processes, systems and controls) in place to manage and mitigate this class risk. Regulators should require cryptoasset service providers to implement appropriate systems, policies and procedures for disclosing information relevant to new customers as part of ongoing services to existing customers. It also includes assessing the appropriateness and applicability of specific cryptoasset products and services to be offered to each retail customer.

The report demonstrates the crypto policy industry’s urgent need to establish a global regulatory framework and the ambitious blueprint drawn by IOSCO. “IOSCO’s new blueprint will promote the global regulatory mechanism towards a more coordinated system,” “will promote the globalization and consistency of crypto-asset regulation” and “stimulate investment and development in the crypto-asset industry.” However, the report is only a step towards establishing a global regulatory framework, and it does not mean that it is complete. Although the IOSCO report has a certain degree of consistency with the crypto-asset regulatory systems of the European Union and the United States, and these principles and recommendations are also in coordination with member organizations such as the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, in the face of global The ambition to establish a consistent regulatory mechanism, and the shortcomings of IOSCO’s inability to force national regulatory agencies to adopt these rules and recommendations, make how to achieve the leap from theory to practice particularly important.