What has happened?

IOSCO has published its final report on the issues, risks and regulatory considerations associated with CTPs, which includes key considerations to help regulatory authorities address those issues.

What does this mean?

The emergence of cryptoassets is an important area of interest for regulatory authorities across the world, including those with authority over secondary markets and the trading platforms that facilitate the secondary trading of cryptoassets.

Regulatory authorities have been looking at the issues such as whether cryptoassets are securities or other financial instruments, whether they fall within their regulatory jurisdiction, and, if they do, how to address the novel and unique issues and risks associated with these assets and the CTPs where they trade.

IOSCO members have raised concerns about cryptoassets in areas ranging from trading, custody, clearing and settlement, accounting, valuation, and intermediation, to the exposure of investment funds to cryptoassets.

In January 2018, IOSCO issued a statement on concerns related to initial coin offerings (ICOs), noting there are clear risks associated with them, such as the targeting of retail investors through online distribution channels by parties often located outside of an investor's home jurisdiction. IOSCO also announced the establishment of the ICO Network, where members can discuss and share experiences and concerns with their counterparts.

IOSCO's final report, Issues, Risks and Regulatory Considerations Relating to Cryptoasset Trading Platforms, helps regulatory authorities evaluate the issues and risks relating to CTPs within the context of their regulatory frameworks.

As well as describing the issues and risks, the report provides related toolkits for each of the key considerations.

The key considerations relate to:

• access to CTPs,
• safekeeping of participant assets, including custody arrangements,
• identification and management of conflicts of interest,
• transparency of operations,
• market integrity, including the rules governing trading on the CTP, and how those rules are monitored and enforced,
• price discovery mechanisms, and
• technology, including resiliency and cyber security.

The operational model adopted by a CTP and the existing regulatory framework can determine the extent to which issues or risks exist, are relevant or have already been mitigated. IOSCO recognizes the market is new and evolving rapidly and, as a result, the key considerations and toolkits are not intended to suggest or mandate any particular regulatory action or requirement. They represent areas that IOSCO believes jurisdictions could consider in regulating CTPs. The toolkits give examples of measures that regulatory authorities can use to address the key consideration and associated issues.

Securities regulation

IOSCO notes that where a regulatory authority has determined that a cryptoasset is a security and falls within its remit, the basic principles or objectives of securities regulation should apply. The report's principles and methodology only offer guidance and are not intended to be a mandatory set of standards or requirements for jurisdictions to adopt in their regulation of CTPs.

The final report draws on comment letters to IOSCO's consultation report in May 2019, which was based on a survey of the regulatory approaches to CTPs that member jurisdictions are applying or considering.

The report does not include an analysis of the criteria that is used by regulatory authorities to determine whether a cryptoasset falls within its remit, but focuses on secondary market trading of cryptoassets on CTPs. The report also does not look at issues related to ICOs.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while keeping track of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

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