IOSCO Urges Regulators to Restrict Crypto Firms' Consolidation of Functions

The International Organization of Securities Commissions (IOSCO) has published a comprehensive report outlining crucial policy recommendations for the global regulation of cryptocurrencies. The report, made available for public consultation, emphasizes the need to prevent crypto companies from consolidating multiple functions within a single legal entity or group of affiliated entities.

The IOSCO aims to avert potential conflicts of interest arising from vertical integration, which could compromise market integrity and investor protection.

As a global policy forum comprising regulators overseeing 95% of the world's securities market across 130 jurisdictions, the IOSCO has taken a proactive approach to addressing the rapid growth of the crypto industry. Last year, the organization formed a Fintech Task Force (FTF) dedicated to formulating effective crypto policy recommendations.

The report highlights eighteen new recommendations encompassing six key areas.

These include,

• Mitigating conflicts of interest arising from vertical integration,
• Addressing cross-border risks,
• Enhancing regulatory cooperation, while implementing stringent measures to combat market manipulation,
• Insider trading, and fraud.

Industry experts have welcomed IOSCO's initiative, acknowledging the long-overdue need for coordinated regulation of crypto activities across jurisdictions. However, they also caution that establishing a global baseline of regulatory standards is a challenging task that necessitates careful implementation to achieve its intended efficacy.

IOSCO's emphasis on conflicts of interest and vertical integration stems from the extreme collapse of FTX, which was once the world's third-largest cryptocurrency exchange.

FTX exchange faced a bank run following rumours that FTX's CEO, Sam Bankman-Fried, had engaged in backdoor lobbying against industry competitors.

Binance, the largest crypto exchange, badly influenced the situation by announcing the liquidation of its position in FTT, FTX's native token.

The bank runs exposed liquidity issues resulting from FTX's commingling of customer funds and their subsequent transfer to its sister company, Alameda Research, after incurring losses from ill-fated trades.

In light of these events, the IOSCO's recommendations seek to prevent similar scenarios by urging regulators to disallow crypto companies from combining various functions under a single legal entity. By enforcing such restrictions, IOSCO aims to safeguard market stability, protect investor interests, and reduce systemic risks associated with the consolidation of crypto-related activities.

The IOSCO's report is open for public feedback until July 31. The organization encourages interested parties to review the recommendations and contribute their comments via email.

In conclusion

IOSCO's release of its comprehensive policy recommendations represents a significant step towards establishing a cohesive framework for regulating the global crypto industry.

By advocating for the separation of functions within crypto companies, IOSCO strives to enhance transparency, accountability, and investor confidence. 

The lessons learned from the FTX collapse serve as a sobering reminder of the importance of robust regulatory oversight in this rapidly evolving sector.