Global - IOSCO publishes its final report on issues, risks and regulatory concerns relating to crypto-asset trading platforms
In February this year, the Board of the International Organization of Securities Commissions ("IOSCO") published its final report on Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms ("Final Report"). The Final Report is a consideration of public comments received on the IOSCO's initial consultation paper (published in May 2019), and examines key issues associated with the trading of crypto-assets on secondary markets, and trading platforms that facilitate the secondary trading of crypto-assets (i.e. crypto-asset trading platforms, or "CTPs").
IOSCO's aim is to assist its members in evaluating and addressing (with reference to IOSCO Principles) various issues and risks that may arise in the regulation of CTPs. Many of these issues may be similar to those encountered when trading traditional securities or other financial instruments on traditional exchanges. However, due to the operational models of some CTPs, unique risks may arise, pushing regulators to consider alternative regulatory approaches. Set out below are some of the key considerations included in the Final Report:
1. Access to CTPs
Understanding the criteria for accessing a CTP, and the on-boarding process for participants, is important from a regulatory perspective. These will assist in preventing criminal or illegal trading activity, and may also protect investors by limiting participation on the CTP to eligible participants or participants with specific risk tolerance levels. The Final Report made reference to IOSCO Principle 33 for guidance, which states that the market and/or regulator should ensure that access to the system or exchange and associated products is fair, transparent and objective. In particular, transparency of criteria enables participants and regulatory authorities to determine how access is granted or denied, or suspended or terminated.
2. Safeguarding participant assets
If a CTP holds participant assets, regulatory authorities should also carefully consider how such assets are held and safeguarded - for example, what arrangements are in place in the event of a loss, including a loss due to theft from, or the bankruptcy of, the CTP. The Final Report made reference to IOSCO Principle 31, which provides the following guidance: where CTPs have control of, or are otherwise responsible for, assets belonging to a client which they are required to safeguard, they should make adequate arrangements to safeguard clients' ownership rights (e.g. through segregation and identification of those assets).
3. Mechanisms used by CTPs to facilitate resiliency, integrity and reliability of critical systems
CTPs often hold participant assets and funds, and inadequate technology systems and procedures could heighten the risk of loss for CTP participants. The Final Report made reference to IOSCO Principle 33, which states that regulatory authorities should require trading venues to have in place mechanisms to ensure resiliency, reliability and integrity of critical systems. While prevention of failures is important, trading venues should also be prepared for dealing with such failures, and establish, maintain and implement an appropriate business continuity plan.
IOSCO has highlighted that, given the evolving nature of crypto-asset markets globally (including in emerging market jurisdictions), it will not be possible or appropriate to provide a definitive list of issues and outcomes at this time. It will continue to monitor the market, and review and update the report where necessary.