Setting the standard for global crypto regulation

Responding to news that the International Organisation of Securities Commissions (IOSCO) has today issued a consultation on detailed recommendations for regulating cryptoassets across the globe, Marina Reason, a partner in Herbert Smith Freehills' financial services regulatory practice, has said that: "as the FCA led this workstream, perhaps it is no surprise that the IOSCO policy recommendations bear similarities to the model proposed by HM Treasury in February."

Marina says: "They follow a similar 'activities-based' approach in addressing risks in the crypto-asset lifecycle by covering activities provided by crypto-assets service providers such as offering, admission to trading, ongoing trading, settlement, market surveillance and custody as well as marketing and distribution to retail investors. IOSCO is also advocating that crypto-assets are regulated in accordance with the principle of ‘same activities, same risks, same regulatory outcomes’.

Focusing on why the recommendations have been made, Marina adds: "IOSCO is keen to ensure that we do not see another crypto collapse. The recommendations relating to conflicts of interest aim to mitigate the risks posed by vertically integrated crypto-assets business models. This is where crypto-assets service providers wear different hats under the same roof and provide multiple services like exchange trading, brokerage, proprietary trading, as well as custody and settlement.

However, she notes that: "The IOSCO consultation does not cover DeFi, which will follow in the summer, but given the rapidly evolving nature of the sector, coming up with sensible solutions to how DeFi should be regulated may prove challenging. DeFi was left out of EU's Markets in Crypto-assets Regulation, or 'MiCA',  but the European Central Bank has already called for it to be included in MiCA 2.0. The UK government also plans eventually to regulate centralised financial services activities and their DeFi equivalents but is gathering further views before consulting on next steps.

Marina concludes: "In contrast to the EU and UK discussions so far, the IOSCO proposals make no mention of the environmental impact of crypto-assets or any sustainability-related disclosure or reporting requirements. In the EU, where the sustainability of crypto-asset was much debated by co-legislators during the legislative process, ESMA will be developing technical standards on the content, methodology and presentation of information related to principal adverse environmental and climate-related impact in the coming months. HM Treasury notes the parallels between crypto-assets and securities markets and, pending the results of a call for evidence, is mooting the application of similar ESG-related reporting requirements, acknowledging however that this may be more challenging for the crypto-asset market."