What are the global regulations on the supervision of encrypted assets that the SEC is committed to adopting?What global regulations is the SEC adopting for supervising encrypted assets?
In May 2023, the International Organization of Securities Commissions (IOSCO) released the Consultation Report on Policy Recommendations for Crypto and Digital Asset Markets. The release of the report marks further development in the regulatory standards of the global cryptocurrency industry. IOSCO, as a global securities regulatory organization aimed at promoting cooperation and regulatory standards in global securities markets, made its first statement on cryptocurrency regulation with the publication of the Risk Alert on Virtual Assets in 2014, followed by several other documents on the cryptocurrency industry. This article will trace the origin of IOSCO’s cryptocurrency policy documents, and explain their history, current state, and future.
1. Early Focus on Risks in the Development of Cryptocurrencies
In the early stages of the cryptocurrency industry’s development, the market value and user base were relatively small, with mainly technology enthusiasts and early adopters participating. It did not attract widespread attention, and corresponding regulatory measures had not been established for this nascent industry. It was not until the bankruptcy of the Mt.Gox trading platform in 2014, which severely impacted the virtual asset industry and caused market panic and price fluctuations, that the industry started to gain attention. Additionally, the virtual asset industry has experienced rapid development and changes in recent years. With the continuous rise in the price of virtual assets such as Bitcoin, it has attracted more investors and institutions, leading to calls for stronger regulation of virtual asset trading platforms and investor protection.
In 2014, IOSCO released the Risk Alert on Virtual Assets, which identified the following risks associated with virtual assets: virtual asset transactions often occur anonymously, making it difficult to trace the identities of the parties involved and increasing the risks of money laundering and other illegal activities; the virtual asset market lacks a unified legal and regulatory framework, exposing investors to legal risks and regulatory uncertainties; the prices of virtual assets are highly volatile, posing significant investment risks and losses for investors; the storage and trading of virtual assets depend on blockchain technology and digital wallets, which carry technological vulnerabilities and security risks.
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While reminding industry investors about the risks of virtual assets, IOSCO also called on regulatory authorities to strengthen the regulation of the virtual asset market to protect the rights and interests of investors and ensure market stability. Regulatory authorities in various countries have responded positively to IOSCO’s risk alert by taking measures to enhance the regulation of cryptocurrency trading platforms. The U.S. Securities and Exchange Commission stated that certain cryptocurrencies may be considered securities and are subject to securities regulations. The Financial Transactions and Reports Analysis Centre of Canada included cryptocurrency traders in the scope of anti-money laundering and counter-terrorism financing regulations, requiring compliance with the provisions on anti-money laundering and counter-terrorism financing, as well as customer due diligence and reporting. The Australian Taxation Office also published guidelines clarifying the tax treatment of virtual assets. Some countries have also issued warnings to investors about virtual currencies, urging them to be cautious of investment risks.
2. The Introduction and Improvement of the Principles of Cryptocurrency Asset Supervision
(1) Principles of Cryptocurrency Asset Trading Platforms
In 2017, the ICO (Initial Coin Offering) model, where startups raise funds through token issuance, quickly gained popularity. The rapid development of the ICO market has led to a series of risks and controversies, including investor protection, market manipulation, and information disclosure. Many ICO projects have been investigated and punished by regulatory agencies due to fraudulent activities and illegal operations. The U.S. Securities and Exchange Commission (SEC) investigated Diamond Reserve Club for unregistered securities issuance and fraudulent activities. These cases have led to calls for strengthened regulation and investor protection in the ICO market.
In 2018, IOSCO released the “Principles for Crypto-Asset Trading Platforms”. This document aims to establish a set of global regulatory principles for crypto-asset trading platforms, including compliance, transparency, security, and prevention of market manipulation. It also sets out a series of requirements: ICO projects should provide sufficient, accurate, and timely information disclosure, including project background, objectives, risk factors, token structure, and use of raised funds. Regulatory agencies should ensure that ICO projects comply with applicable investor protection regulations, including anti-money laundering and counter-terrorism financing rules. Regulatory agencies encourage investors to fully understand the risks of ICO projects and remind them to be aware of investment risks and potential fraudulent activities. Regulatory agencies should ensure that ICO projects comply with applicable securities laws and regulatory requirements, including registration, licensing, and regulatory disclosure. Regulatory agencies should enhance international cooperation, share information and experiences, and jointly address regulatory challenges in the ICO market.
Although the document provides a basic regulatory framework for regulatory agencies worldwide, clarifies regulatory goals, scope, and the responsibilities and powers of regulators, emphasizes the importance of risk management, and requires effective protection of investor rights, it highlights the significance of global cooperation and opposes market manipulation. It plays a certain positive role in establishing a sound regulatory mechanism for the crypto-asset industry. However, the document only provides guiding principles, without specific standards and regulations, and lacks enforceability, resulting in certain deficiencies in implementation. Although regulatory agencies in various countries have issued warning notices about the risks of ICOs, some countries have also formulated specific laws and regulations requiring ICO projects to comply with securities laws and regulations, and to disclose information and protect investors. However, due to differences in regulatory positions and regulations between countries, these principles have not been fully implemented, and the globally coordinated regulation needed for the development of the crypto-asset industry has not been established.
(2) Issues, Risks, and Regulatory Considerations Related to Cryptocurrency Asset Trading Platforms
In 2019, the sudden death of the founder of the cryptocurrency asset management platform QuadrigaCX resulted in billions of dollars worth of crypto assets being unable to be retrieved, further exposing the risks and regulatory deficiencies in the cryptocurrency asset management industry. Against the backdrop of rapid development in the cryptocurrency asset management industry and the challenges faced by regulatory agencies in formulating appropriate regulatory policies and frameworks, IOSCO released the “Issues, Risks, and Regulatory Considerations Related to Cryptocurrency Asset Trading Platforms”. It points out the current issues related to cryptocurrency asset trading platforms, including market risks, operational risks, money laundering and terrorism financing risks, investor protection issues, and cross-border regulatory challenges. It also provides regulatory suggestions covering transparency, stability, and investor protection to ensure the soundness of cryptocurrency asset management activities.
Regulatory Applicability: Regulatory agencies should assess the risks and impacts of cryptocurrency asset management activities, clarify whether cryptocurrency asset management activities are applicable to existing regulatory frameworks, and accordingly formulate regulatory policies.
Investor Protection: The report emphasizes that protecting the rights and interests of investors is an important task for regulatory agencies. Regulatory agencies should ensure that cryptocurrency asset management institutions comply with appropriate disclosure requirements, provide accurate, comprehensive, and timely information to prevent fraud and manipulation, and effectively safeguard the rights and interests of investors.
Risk Management: The report proposes risk management measures that cryptocurrency asset management institutions should take, including risk assessment, risk monitoring, and risk management policies. Regulatory agencies should require cryptocurrency asset management institutions to establish sound risk management frameworks to ensure the safety of investors’ funds and the stability of the market.
Transparency and Disclosure: The report emphasizes that regulatory agencies should establish appropriate transparency and disclosure requirements to ensure that investors can obtain information including investment strategies, risk management, and performance.
Cross-Border Cooperation: The report calls for enhanced cross-border cooperation and information sharing among countries, and the formulation of unified regulatory standards and policies to address cross-border risks and regulatory challenges in cryptocurrency asset management.
The release of this report provides important references and guidance for global cryptocurrency regulatory agencies, highlighting the importance of compliance, transparency, and risk control of cryptocurrency trading platforms. It promotes the formulation of regulatory policies and frameworks, and promotes the healthy development of cryptocurrency asset management and investor protection. At the same time, the report also reminds cryptocurrency asset management institutions and investors to pay attention to risks and compliance, strengthen risk management and transparency, and ensure market stability and investor interests.
III. Globalization and Systematization of Cryptocurrency Regulation
(1) “2022-2023 Crypto Roadmap”
In 2022, IOSCO released the “2022-2023 Crypto Roadmap”, which outlined the blueprint for the globalization and systematization of cryptocurrency industry regulation. According to the resolution of the IOSCO Board, a board-level Financial Technology Task Force (FTF) was established, chaired by the Monetary Authority of Singapore (MAS), responsible for formulating, supervising, delivering, and implementing IOSCO’s regulatory agenda on financial technology and cryptocurrency assets, and coordinating IOSCO’s cooperation with the Financial Stability Board (FSB) and other standard-setting bodies on financial technology and cryptocurrency-related matters.
(2) “Policy Recommendations Consultation Report on Cryptocurrencies and Digital Asset Markets”
In May 2023, IOSCO officially released the “Policy Recommendations Consultation Report on Cryptocurrencies and Digital Asset Markets”, marking significant progress in global cryptocurrency regulation. The report made a general recommendation to all regulatory authorities, suggesting that regulatory agencies should not create any differences in regulating cryptocurrency assets and traditional finance, in order to eliminate the regulatory differences between cryptocurrency assets and traditional finance, promote a fairer competitive environment between cryptocurrency assets and traditional finance, and reduce regulatory arbitrage risks. Based on the principle of “same activity, same risk, same regulatory outcome”, the report provides targeted policy recommendations covering conflicts of interest, market manipulation, cross-border risks, asset protection, and other aspects, to regulate the cryptocurrency industry globally, strengthen consistency and applicability of regulatory oversight of the cryptocurrency industry, protect the legitimate rights and interests of investors, enhance market confidence, and maintain market environment. The main policy recommendations are as follows:
Regulatory authorities should adopt a regulatory and supervisory approach to regulate and supervise the trading of crypto assets, other crypto asset services, and the issuance, marketing, and sale (including investment) of crypto assets in a manner that is consistent with the IOSCO securities regulatory objectives and principles, as well as relevant supporting standards, recommendations, and good practices. The regulatory approach should strive to achieve regulatory outcomes that are equivalent to or consistent with the requirements of traditional financial markets in terms of investor protection and market integrity.
Regulatory authorities should require crypto asset service providers to have effective governance and organizational arrangements commensurate with their activities, including systems, policies, and procedures. Regulatory authorities should require crypto asset service providers to have systems and procedures in place and disclose relevant systems and procedures to clients and potential clients. In the trading process, fair and prompt execution of all client orders should be provided based on non-discriminatory principles, and order information should be accurately recorded, while pre-run client orders should be limited.
Regulatory authorities should require crypto asset service providers operating markets or acting as intermediaries (directly or indirectly on behalf of clients) to provide pre-trade and post-trade disclosures in a form and manner consistent with the requirements of traditional financial markets or achieve regulatory outcomes that are similar to those of traditional financial markets. Regulatory authorities should require crypto asset service providers to establish, maintain, and disclose to the public appropriate standards for their systems and procedures for the issuance, trading, and settlement of crypto assets, particularly substantial and procedural standards for making such decisions. Regulatory authorities should require crypto asset service providers to manage and mitigate conflicts of interest surrounding the issuance, trading, and listing of crypto assets. Regulatory authorities should take enforcement actions against illegal activities involving crypto asset market fraud and market abuse, taking into account the extent to which these activities are not covered by existing regulatory frameworks. These illegal activities should encompass all relevant fraudulent and abusive conduct, such as market manipulation, insider trading and illegal disclosure of insider information, issuance of false or misleading statements, misappropriation of funds, money laundering, and financing of terrorism.
Regulatory authorities should have market surveillance requirements applicable to each crypto asset service provider to effectively mitigate the risk of market abuse. Regulatory authorities should require crypto asset service providers to establish governance, policies, and procedures around material non-public information, including information on whether the crypto asset is allowed to be listed or traded on their platforms, as well as information related to client orders, trade execution, and individual identities.
Regulatory authorities recognize the cross-border nature of the issuance, trading, and other activities of crypto assets and should have the ability to share information and cooperate with regulatory authorities and relevant agencies in other jurisdictions regarding such activities. This includes establishing available cooperation arrangements and other mechanisms with regulatory authorities and relevant authorities in other jurisdictions. These measures should be adapted to the authorization and ongoing supervision of regulated crypto asset service providers and provide extensive assistance in enforcement investigations and related litigation.
When considering the application of existing frameworks or new frameworks, regulatory authorities should apply the IOSCO recommendations on the protection of client assets, which are applicable to crypto asset service providers holding or safeguarding client assets. Regulatory authorities should require crypto asset service providers to place client assets in trust or otherwise segregate them from the proprietary assets of crypto asset service providers.
Regulators should require cryptocurrency service providers to disclose the following information to customers in clear, concise, and non-technical language: 1. The method of holding customer assets and arrangements for protecting these assets and their private keys; 2. The use (if any) of independent custodians, sub-custodians, or affiliated custodians; 3. The extent to which customer assets are aggregated or pooled in a pooled client account, the rights of individual clients to aggregated or pooled assets, and the risks of any loss arising from aggregation or pooling activities; 4. The risks associated with the direct or indirect handling or transfer of customer assets by cryptocurrency service providers; 5. Full and accurate information regarding the obligations and responsibilities of cryptocurrency service providers in the use of customer assets and private keys, including repayment terms and associated risks.
Regulators should require cryptocurrency service providers to have their own systems, policies, and procedures for conducting regular and frequent reconciliations of customer assets, under appropriate independent assurance. Regulators should require cryptocurrency service providers to adopt appropriate systems, policies, and procedures to reduce the risks of loss, theft, or unavailability of customer assets.
Regulators should require cryptocurrency service providers to disclose in clear, concise, and non-technical language all significant sources of operational and technical risks, and to have appropriate risk management frameworks (such as personnel, processes, systems, and controls) in place to manage and mitigate such risks. Regulators should require cryptocurrency service providers to implement appropriate systems, policies, and procedures for disclosing information relevant to new customers and to incorporate it as part of the ongoing service to existing customers. This includes assessing the suitability and appropriateness of specific cryptocurrency asset products and services provided to each retail customer.
The report demonstrates the urgent need for the cryptocurrency policy industry to establish a global regulatory framework, as well as the grand blueprint drawn by IOSCO. “IOSCO’s new blueprint will drive global regulatory mechanisms towards greater coordination and consistency,” “promote the globalization and harmonization of cryptocurrency asset regulation,” and “stimulate investment and development in the cryptocurrency asset industry.” However, the report is only a step towards establishing a global regulatory framework and does not mean that the task is complete. Although IOSCO’s report has some degree of consistency with the cryptocurrency asset regulatory systems in the European Union and the United States, these principles and recommendations are also consensus reached through coordination with member organizations such as the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission. However, in the face of the ambitious goal of establishing a consistent regulatory mechanism globally, IOSCO does not have the authority to enforce the adoption of these rules and recommendations by national regulatory authorities. This makes it particularly important to consider how to bridge the gap between theory and practice.
 IOSCO. (2014). Securities Market Risk Outlook 2014-15
 IOSCO. (2013). Principles for Financial Benchmarks (Final Report)
 IOSCO. (2013). Cyber-Crime, Securities Markets and Systemic Risk
 IOSCO. (2018). Guidance Regulation of Crypto Asset Activities in ADGM
 IOSCO. (2019). Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms
 IOSCO. (2019). Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms (Consultation Report)
 IOSCO. (2020). Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms (Final Report)
 IOSCO. (2020). Investor Education on Crypto-Assets(Final Report)
 IOSCO. (2022). Crypto-Asset Roadmap for 2022-2023
 IOSCO. (2023). Policy Recommendations for Crypto and Digital Asset Markets(Consultation Report)
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