The nine policy recommendations aim to address "market integrity and investor protection concerns" arising from DeFi by supporting "greater consistency of regulatory frameworks and oversight" in member jurisdictions.

The recommendations cover six key areas:

1. understanding DeFi arrangements and structures;

2. achieving common standards of regulatory outcomes;

3. identification and management of key risks;

4. clear, accurate and comprehensive disclosures;

5. enforcement of applicable laws; and

6. cross-border cooperation.

The DeFi policy recommendations are complementary to the Policy Recommendations for Crypto and Digital Assets (CDA) Markets published in November 2023.

The two sets of IOSCO recommendations have been developed in accordance with IOSCO’s Cryptoasset Roadmap 2022/2023, and the interoperability between the two sets of recommendations is detailed in the Umbrella Note which has been published alongside the DeFi Final Report.

These recommendations "elaborate the regulatory expectations, either through application of existing rules or development of new rules, depending on the jurisdiction, to address the key areas of harm observed in these markets."

The 18 recommendations, which are principles-based and outcomes-focused and aimed at the activities of cryptoasset service providers, cover six key areas:

1. conflicts of interest arising from vertical integration of activities and functions;

2. market manipulation, insider trading and fraud;

3. custody and client asset protection;

4. cross-border risks and regulatory cooperation;

5. operational and technological risk; and

6. retail distribution.

The final guidance, which follows October 2021's proposals for consultation, reconfirms that if a stablecoin arrangement performs a transfer function and is determined by authorities to be systemically important, the stablecoin arrangement as a whole would be expected to observe all relevant principles of the Principles for Financial Market Infrastructures (PFMI).

The consultation paper provides preliminary guidance which confirms and clarifies that stablecoin arrangements should observe international standards for payment, clearing and settlement systems. Deadline for comments is 1 December 2021.

The report presents four areas of guidance, covering the following activities:

• Developing educational content about cryptoassets.
• Informing the public about unlicensed or fraudulent firms.
• Using a variety of communication channels to inform investors.
• Forging partnerships to develop and disseminate educational materials.

IOSCO said that its members have expressed concern in recent years about the use of cryptoassets in areas from trading, custody, clearing and settlement, accounting, valuation, intermediation and investment funds.

The report states that global stablecoin initiatives may, depending on their structure, present features typical of regulated securities or other regulated financial instruments or services.

The paper starts with an overview of different stablecoin designs, before moving to a hypothetical case study that raises many global financial regulatory issues. This hypothetical case study is based on a hypothetical stablecoin used for domestic and cross-border payments which uses a reserve fund and intermediaries to achieve a stable price vis-à-vis a basket of low volatility currencies.

The paper then sets out how this hypothetical case study could interact with the perimeter of securities market regulators'' remit. It also explores how the IOSCO principles and standards could apply to global stablecoin proposals, such as the one in the hypothetical case study, and then assesses the broader implications for securities regulators.

The issues are grouped into four broad categories, with the first three mapping IOSCO''s objectives, namely: reducing systemic risks, ensuring market integrity and resilience, and protecting consumers and investors.

Other relevant risk categories are also assessed at a high level, including cyber risk and operational resilience, with the report noting that many firms dealing in cryptoassets have lost assets owing to mismanagement or lack of operational controls, security strategies and procedures.

"Stablecoin issuers should be able to explain how they will act to mitigate operational resilience risks, including internal vulnerabilities and threats. Issuers should be able to articulate the strategic operational risk model for both their own organisation as well as the ecosystem more broadly, as well as what plans they have in place should a breach, such as a hack or data loss, occur," the report said.

The report then turns to risks in respect of governance, culture, competition and market access, data, ethics, and anti-money laundering and counter-terrorist financing.

IOSCO concludes that a global stablecoin that would be widely adopted could create benefits to market participants, including consumers and investors, but also "exacerbate existing risks and create new risks in financial markets".

"Stablecoin proposals could, in the long-term, replicate existing financial products and services with the stablecoin ecosystem as a new payment medium or core component of market infrastructure," the report said.

IOSCO added that it also intends to work with international bodies and standard setters, such as the Financial Stability Board, to better understand stablecoin proposals and risks.

In parallel, IOSCO announced that it had worked with the Committee on Payments and Markets Infrastructure (CPMI) to carry out a separate preliminary analysis on the application of the Principles for Financial Market Infrastructure (PFMI) to stablecoin arrangements. This analysis concluded that the PFMI apply to global stablecoin arrangements where such arrangements perform systemically important payment system functions or other FMI functions that are systemically important; and could therefore apply to the hypothetical case study.

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.

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.