Regulators develop scaffolding for cryptoassets

For the most part, the fledgling cryptoasset sector has grown unregulated. But, increasingly, policy-makers are looking for ways to get their arms around the fast-developing space.

The International Organization of Securities Commissions (IOSCO) published a report on Tuesday on using so-called global supervisory colleges — formal cooperative mechanisms for overseeing firms that operate in multiple jurisdictions — in the securities markets.

The report indicated there’s interest among regulators in using these kinds of arrangements, which are designed to increase cooperation and information sharing, and to reduce the risks of regulatory arbitrage and market fragmentation, to help oversee emerging market segments that aren’t yet well regulated, such as cryptoasset trading platforms.

“In recent years, the number of cryptoassets has grown exponentially, and jurisdictions and authorities, including IOSCO members, have raised concerns about cryptoassets in areas ranging from disclosure, trading, custody, clearing and settlement, accounting, valuation, and intermediation, to the exposure of investment funds to cryptoassets,” the report said.

The crypto sector has also specifically raised the risk of regulatory arbitrage, as firms operate globally amid a wide divergence in regulation, opening the door to unregulated crypto trading firms serving investors without oversight in certain markets.

“These risks highlight the need for appropriate cooperation and communication between regulatory authorities seeking to ensure investors are protected,” IOSCO said.

To that end, the report suggested that supervisory colleges could be useful, allowing regulators that have the authority to oversee crypto firms in their market to work with other jurisdictions to “better understand overall business operations and risks of the [crypto platforms].”

These supervisory structures could also help regulators uncover and mitigate possible harm to investors arising from unlicensed cross-border activities.

The report sets out good practices for regulators to follow in developing supervisory colleges, covering issues such as governance, confidentiality arrangements and cross-border operations.

Alongside the regulators’ efforts to develop mechanisms to help oversee the growing crypto segment, the industry trade group International Swaps and Derivatives Association Inc. (ISDA) said it’s working to develop standards to support the development of crypto derivatives markets.

“The aim is to align the crypto derivatives market with the existing spot market by creating strong legal foundations,” said ISDA chief executive Scott O’Malia, in a release.

Last month the ISDA published a consultation paper to examine issues that may arise in setting standards for crypto derivatives, including considerations around disruption events, valuation and documentation in the crypto space.

“We think there is a need for standard derivatives documentation that is tailored to reflect the unique features of this asset class,” he said, noting that unique features in the crypto market, such as the existence of “forks,” where a blockchain is fundamentally modified, need to be considered.

The ISDA said that developing contractual standards for crypto derivatives is a priority for the group this year.

“Robust contractual standards for digital asset derivatives will promote greater efficiency, deeper liquidity and reduced risk in this fast-growing market,” O’Malia said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.