How Will IOSCO’s Crypto, DeFi Policy Framework Shape The Industry?

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The securities regulators’ association, the International Organization of Securities Commissions (IOSCO) recently published the roadmap for the upcoming policy framework for the crypto industry. While on one hand, the foreseeable regulations aim to prioritize consumer protection and market integrity. On the other hand, it plans to de-anonymize the crypto sphere, further pushing for a drastic centralized shift.

What are IOSCO’s Crypto plans?

The association’s crypto regulation project is divided into two groups: the first will cover the “Crypto and Digital Assets (CDA)” regulation and will be headed by the UK Financial Conduct Authority (FCA) in collaboration with the Fintech Task Force (FTF) and other relevant IOSCO Committees.

Following this, the second group will be responsible for the legal framework of the “Decentralised Finance (Defi)” landscape and will be led by the U.S. Securities and Exchange Commission (SEC). Both departments aim to deliver a public report with proposed policy recommendations toward the end of 2023.

According to the published roadmap, the CDA department will closely look at “fair, orderly trading, transparent markets, suitability and market manipulation, and safekeeping, custody, and soundness”. Additionally, the Defi policymaking department addressed the sector as opaque, complex, and shape-shifting.

In an attempt to curb the highly anonymous and ever-evolving nature of Defi, the roadmap entails the mission to “examine how IOSCO principles and standards could apply to common activities, products, and services in Defi”, further considering “potential areas in which regulation could play a role in supporting innovation”. But it will also continue to explore and highlight the links between “Defi, stablecoins, and crypto-asset trading, lending, and borrowing platforms, as well as the interactions of Defi with broader financial markets”.

De-anonymization on the cards?

The crypto industry is battling a bitter-cold winter which was recently worsened by large-scale industry crashes. From the Terra/Luna fiasco to the overall bearish pressure, crypto businesses like trading, lending, and borrowing platforms along with other market participants tumbled into a series of significant losses and risks to investors due to “inadequate protections and safeguards” were significant. Therefore, IOSCO’s upcoming policy requirements that seek a centralized regulatory approach may appear as the only secure option.

However, historically, whenever regulators sought to de-anonymize crypto, it was because they viewed it as a tool for illicit financial activities.

South Korean crypto jurisdiction gravitated toward a pro-crypto stance after the crypto-positive Yoon Suk-Yeol won the Presidential Elections. However, the country traveled back in time to its crypto crackdown days after the Terra Luna incident. According to local news, “About 200,000 investors in South Korea are presumed to have invested in TerraUSD and Luna”.

Subsequently, the country’s crypto regulatory watchdogs — the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) now seek de-anonymization of “information on transactions linked to TerraUSD and Luna, including the volumes of their trading, their closing prices, and the number of relevant investors” from local cryptocurrency exchange operators.

This is similar to last year’s updated anti-money laundering regulations in the country. The former government imposed a stricter verification process for exchanges to acquire registration certification from the Financial Intelligence Unit (FIU) that came under the Financial Services Commission (FSC).