Earlier today, the International Organization of Securities Commissions (IOSCO, the global standard setter for securities regulation) released a report regarding cryptocurrency regulation.
It would be easy -- but incorrect -- to dismiss the report as generating nothing new. It is very true that the IOSCO Report starts from a familiar place:
"Where a regulatory authority has determined that a crypto-asset or an activity involving a crypto-asset falls within its jurisdiction, IOSCO’s Objectives and Principles of Securities Regulation2 (IOSCO Principles) and the Assessment Methodology3 (the Methodology) provide useful guidance in considering the novel and unique issues and risks that arise in this new market...this Final Report does not include an analysis of the criteria that are used by regulatory authorities to determine whether a crypto-asset falls within its remit. Rather, it focuses on the trading of crypto-assets on CTPs when the regulatory authority has determined that it has the legal authority to regulate those assets or the specific activity involving those assets."
Those of us following this sector intensively for the last few years know this formulation. Policy trajectories at the national level consistently have asserted that only some cryptocurrency activities fall within the traditional securities regulation perimeter. While UK and European policymakers favor functional regulation, the Securities and Exchange Commission in the United States has asserted that all activities potentially fall within the SEC's regulatory jurisdiction and it reserves the right to enforce the securities laws accordingly. Regular litigation has backed up those assertions with concrete action, although enforcement activities de facto have limited the ambit of jurisdictional activity as noted in this Finextra blogpost.
Consequently, it is a bit coy for the report to downplay its significance.
The importance of the report is NOT that it changes initial jurisdictional determinations. The importance is that it sets out international standards for HOW to regulate cryptocurrency trading platforms. Those standards will look familiar to financial market infrastructure providers like exchanges and clearinghouse. They cover a wide swath of operations:
Access to CTPs;
Safeguarding participant assets;
Conflicts of interest; Operations of CTPs;
Price discovery; and
The issues and policy priorities within each of these sections are not surprising. As C | P | C Report subscribers know, the global policy community has been discussing these issues for over a year. The report itself represents the culmination of a multi-month survey and consultation process among policymakers, including a March 2019 IOSCO Consultative Paper which we analyzed here. Just as importantly, IOSCO makes clear that this is not their last word on the topic:
These components will serve as the foundation for additional supervisory activity at the national level throughout 2020. Strategists and investors can now evaluate how much embedded regulatory risk individual cryptocurrency trading platforms are exposed to by comparing platform policies and procedures in relation to these standards and national requirements.
The report also represents an indirect play with respect to central bank digital currencies. Increased regulatory scrutiny of cryptocurrency trading introduces additional friction and costs for traders in this space. As traders and their customers discover the burden of operating under a regulatory umbrella, the relative costs and attractiveness of relying on (yet-to-be-issued) central bank digital currencies increases.
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