In a press conference today (23 May), the international regulator set out an 18-point blueprint for regulators to properly manage the risks from the crypto industry, broken into six key areas.
The first, conflicts of interest, was especially centred around the widespread vertical integration of various crypto activities ‘under one roof', which the report emphasised should be properly disclosed and separated.
Tuang Lee Lim, chair of the IOSCO Board-Level Fintech Task Force, pointed to the recent collapse of FTX as a prime example, noting how the brokerage also operated a trading house, Alameda Research, issued its own tokens and allegedly gave preferential treatment to the other arms of its business.
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Lim added that in some cases, it may be right for regulators to break up firms that cannot sufficiently mitigate conflict of interest within vertical integration.
Secondly, the report looked to cross-border risks and regulatory cooperation, with Matthew Long, director of payments and digital assets at the Financial Conduct Authority, emphasising that regulators must work together as "crypto is such a global phenomenon".
Custody and client asset protection was another key area, with Lim again using FTX as an example, where customers saw billions in funds trapped within the organisation following its collapse.
The report also focused on market manipulation, insider trading and fraud, noting the variety of pyramid and Ponzi schemes, ‘pump and dump' schemes and wash-trading that was prevalent within the crypto market.
"We had to focus on areas of high risk, we had to focus on areas where consumers are losing their money and where we have genuine concerns about the market," said FCA's Long.
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Finally, the report looked to both operational and technological risk, and retail access, suitability and distribution.
"Recent global events have shown us very clearly why we need this work," added Long.
Other areas, such as decentralised finance and tokenisation of assets, were not covered in the paper, though Lim noted the new guidelines emphasised the importance of disclosing risks associated with these technologies.
'Turning point'
Describing the paper as a "real turning point for cryptoassets", Jean-Paul Servais, chair of IOSCO, said it was now the first body to publish "a globally consistent framework" for the crypto industry.
He noted that while some regions had developed detailed regulations on the crypto industry, others are lagging behind, such as the EU, which only has a "limited aspect of supervision with only a focus on anti-money laundering".
However, Servais acknowledged IOSCO's role as purely an advisory body, arguing that regulators "will have to lobby at a political level" to push for the changes to be implemented in their respective jurisdictions.
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The consultation paper will open to comment later today and close on 31 July, with a final paper due to be published in the last quarter of this year.
Servais attributed the short 60-day window for consultation to a "sense of urgency" within regulators to address the problems the crypto industry could pose.
Asked about the Treasury Select Committee's decision to regulate crypto as gambling, Servais argued the matter was "out of scope" for IOSCO.
Meanwhile, Long stressed that IOSCO recognised "people should be prepared to lose all their money" when investing in crypto but said "that is a question for government".
Servais concluded: "Today's consultation paper received unanimous support from the IOSCO board and is the outcome of an intense period of regulatory risk analysis, information sharing and capacity building.
"With 130 members around the world regulating more than 95% of the world's securities markets, IOSCO is best positioned to deliver an effective and globally consistent set of policy recommendations."