On February 12, 2020, the Board of the International Organization of Securities Commissions (“IOSCO”) released a report titled Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms.  The report describes the risks associated with crypto-asset trading platforms (“CTPs”) and sets forth key considerations for regulators in addressing such risks.  IOSCO is an association of primary securities and futures regulators from over 100 different nations.  The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are ordinary and associate members, respectively, of IOSCO.

To prepare this report, IOSCO first issued a consultation report on May 28, 2019, which included a survey of the approaches member jurisdictions were currently undertaking or considering with respect to CTPs.  The final report draws upon the consultation report and includes a summary of the survey’s findings.

The report notes that many of the issues and risks associated with trading on CTPs are similar to the issues and risks associated with trading traditional securities or financial instruments on trading venues.  Consequently, IOSCO states that the three core objectives of securities regulation are relevant in the crypto-asset context.  The three core objectives are: (1) protection of investors; (2) ensuring that markets are fair, efficient and transparent; and (3) reduction of systemic risk.  Supporting these objectives are principles that foster efficient markets, including: effective price discovery, appropriate transparency, market integrity, and fair access.  The final report, to assist regulators in evaluating CTPs under their purview, sets forth the following list of key considerations:

  • Access to CTPs: Regulators should consider how access is provided to CTPs. If CTPs provide non-intermediated access to investors, regulators should understand who is responsible for the on-boarding process and how it is being performed.
  • Safekeeping of Participant Assets: If a CTP holds participant assets, a key consideration for regulators is how such assets are held and safeguarded. This includes understanding what arrangements are in place in the event of a loss, including a loss due to theft from, or the bankruptcy of, the CTP.  Regulators should also consider whether prudential mechanisms are in place to support the operations of the CTP.
  • Conflicts of Interest: Regulators should consider the extent to which conflicts of interest exist due to the internal structure and organization of a CTP and, if so, how they are managed.
  • Description of CTP Operations: Due to the prevalence of non-intermediated access to CTPs, regulators should endeavor to understand the extent to which information about CTPs’ operations is available to their participants.
  • Market Integrity: Regulators should consider the rules governing trading on the CTP and how such rules are monitored and enforced as well as the applicability of existing rules relating to market abuse. The capacity of CTPs to prevent and/or detect market abuse is also important.
  • Price Discovery Mechanisms: Regulators should consider how efficient price discovery is supported on CTPs.
  • Technology: Regulators should understand the mechanisms used by CTPs to facilitate resiliency, integrity, and reliability of critical systems, as well as how a CTP addresses cybersecurity and resilience.

In addition to providing these key considerations, the report lays out toolkits applicable for each such consideration.  The report emphasizes that, as these markets are new and rapidly evolving, the key considerations and toolkits are not intended to mandate any particular regulatory action or requirement.  Instead, they represent areas that IOSCO believes jurisdictions could consider in the context of the regulation of CTPs.  The report also explicitly states that IOSCO views national regulators as best-placed to define and delineate crypto-assets from traditional securities.

Regulators in the United States and the European Union have often (but not always) used IOSCO principles or guidelines in crafting their national regulations.  Therefore crypto-asset institutions should contemplate implementing the listed key considerations as best practices, positioning themselves to handle any forthcoming regulation.