Never has the question of how securities laws should apply to cryptocurrency been more urgent. That’s the view of Lim Tuang Lee, assistant managing director, capital markets for the Monetary Authority of Singapore.
Lim also serves as chair of the fintech task force at the International Organization of Securities Commissions (IOSCO). The task force was recently charged with developing a set of crypto-specific policy recommendations for securities regulators across the globe.
The global crypto regulatory landscape is a patchwork, and jurisdictions vary widely in terms of how lenient they are toward crypto projects that may resemble traditional securities. Some let some firms operate in ways that others deem illegal.
International guidelines are urgently needed, Lim said in a recent speech in London, adding that the dramatic crash of the crypto market earlier this year factored heavily into IOSCO’s decision to produce "common standards." He also cited recent crypto hacks and scams.
The global securities watchdog aims to publish the recommendations by the end of next year. But will they make a difference? While IOSCO is influential, its recommendations won’t be binding. And some argue that it may already be too late.
First established in 1983, IOSCO is a forum through which national securities regulators exchange information on securities markets. In 1998, the organization — which now has more than 130 member jurisdictions — adopted a set of financial regulatory benchmarks called Objectives and Principles of Securities Regulation. These benchmarks have been endorsed by the G20.
Crypto has been on IOSCO’s radar since at least 2017, when the organization established the initial coin offering network to help members exchange insights about crypto. In 2019, the watchdog issued a statement asserting that stablecoins could fall under the purview of securities regulators.
Now the organization has decided to go a step further. “We believe that time is now … to make this change in approach,” a spokesperson for the IOSCO general secretariat said in an emailed response to The Block’s questions. “There have been significant developments in the crypto sector in terms of product structuring and offerings, the investors in the sector and its global reach.”
It’s not only because of the market crash. In his speech, Lim also said that hacks and scams, which have been a fixture in crypto for years, have highlighted concerns over the crypto market’s fairness and resilience. Attackers have stolen more than $2 billion from DeFi protocols since 2020, according to The Block Research.
“The DeFi market and its participants have … operated either outside the scope of existing regulatory frameworks or are not compliant with applicable regulations,” Lim said.
The traditional financial system works with intermediaries, which have obligations such as fiduciary duties towards investors and best interests for brokers. Traditional financial regulation is geared toward those intermediaries. Since DeFi protocols are peer-to-peer systems without intermediaries, it is not possible to regulate them using traditional frameworks.
'Better late than never'
IOSCO’s new initiative will be led by its fintech task force, which is chaired by the Singapore Monetary Authority and currently has 27 members from IOSCO Board member jurisdictions.
The project will have two workstreams, according to a roadmap issued last month: one focused on crypto and digital assets generally and one focused specifically on DeFi.
The crypto workstream will be led by United Kingdom’s Financial Conduct Authority and will focus on “pushing for a fair and transparent market and orderly trading” and “addressing suitability concerns and manipulation” among other things. The US Securities and Exchange Commission will lead the DeFi workstream, which will focus on “applying IOSCO principles and standards in DeFi common activities, products and services” and “highlighting the links between DeFi, stablecoin and crypto asset trading.”
If successful, IOSCO and its fintech task force might help bring about international harmonization, said Yuliya Guseva, a law professor and the head of Rutgers Law School’s blockchain and fintech program. She says this is needed to stop a “race to the bottom” in which jurisdictions compete to attract crypto companies — even the ones that “may not be good, bona fide businesses” — with lenient regulatory regimes.
Even if the organization rolls out useful recommendations, however, they will be non-binding, meaning that member states can theoretically ignore them — unless other members "name and shame" them for not complying, says Lee Reiners, policy director at the Duke Financial Economics Center.
“If policymakers were really concerned about divergent responses to crypto around the world,” Reiners says, then the finance ministers within G20 would encourage all members to follow IOSCO recommendations.
Either way, it may be too late, acknowledges Guseva. There are already hundreds of DeFi projects and more than $35 billion is deposited in DeFi protocols, according to DeFi Pulse. Guseva says the pandemic has likely contributed to the delay. Still, she says: “I think, better late than never. They need to develop it now.”
“We don’t have time; investors have lost a lot of money already,” Reiners says. “The longer they wait, the more investors will be taken advantage of.”
According to IOSCO general secretariat, the goal will be to balance speed with lasting impact. “We need to ensure that our output is reliable and useful in the long term,” the spokesperson said. “We aim to do this phase of our work as quickly as we can.”
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