In times of constant innovation, cryptocurrencies and other crypto-assets occupy the center stage of our financial future, bringing promises of great investment opportunities with the use of blockchain technology. As with any new frontier, however, these opportunities also bring new challenges – in this case, regulatory challenges.

This is where the International Securities Organization (IOSCO) comes into play. This international body, responsible for ensuring the integrity of the securities market at a global level, will serve as a compass in the exploration of this new financial territory.

In May, IOSCO published a series of recommendations on the regulation of crypto-assets. We take the opportunity to address the institution´s role and the importance of its recommendations for regulating crypto-assets, both in the Brazilian context and in the global scenario.

What is IOSCO?

IOSCO is an institution that brings together  regulators of securities from around the globe. Recognized as the global standard-setting body for the securities industry, it was founded in April 1983 with the mission to develop, implement, and promote adherence to internationally recognized standards of regulation of securities.

This commitment translates into efforts to protect investors and sustain fair, efficient, and transparent markets while addressing systemic security risks.

The organization also carries out crucial actions to improve investor protection and boost confidence in the integrity of these markets. This is done by strengthening the exchange of information, cooperation to monitor misconduct, and supervision of markets and market intermediaries.

Recently, IOSCO opened a consultation on a series of recommendations regarding the regulation of crypto-assets, whose comments should be sent by the beginning of the fourth quarter of this year. Published on May 23, these guidelines address critical issues at the intersection of fintech and securities regulation. They could shape the regulation and oversight of crypto-assets in jurisdictions worldwide..

IOSCO's recommendations

The recommendations addressed  by IOSCO are principle-based, focused on results, and targeted at activities performed by crypto-asset service providers (CASPs).

The document has a total of 18 recommendations, divided into nine chapters. To deal with the main risks identified, the entire lifecycle of crypto assets is considered, analyzing each of its phases or aspects from beginning to end.

These recommendations cover a wide range of activities in capital markets involving CASPs, from crypto-asset offering, admission to trading, continuous trading, settlement, market surveillance, and custody to marketing and distribution – both oriented and not oriented toward retail investors.

The recommendations emphasize the need to intensify cooperation between regulators and propose parameters for cooperation, collaboration, and response to cross-border challenges in the application and supervision of standards to Iosco members.

This includes regulatory arbitrage issues arising from global activities involving crypto-assets and conducted by CASPs offering their services – often remotely – in multiple jurisdictions. It is important to note that the recommendations do not cover activities, products, or services rendered in ​​decentralized finance (DeFi).

Iosco's report also addresses operational and technological risk management, and distribution to the retail public. It also includes comments on stablecoins, crypto-assets designed to maintain a stable value.

The document contains three annexes that further clarify the subject. Annex A presents issues for consultation and encourages an open and collaborative dialog on cryptocurrency regulation. Annex B surveys recent events in the crypto market and provides a current and relevant overview of the sector. Finally, Annex C details IOSCO's objectives and principles in securities regulation and serves as the basis for the proposed recommendations.

Importantly, IOSCO plans to publish a consultation report with proposed recommendations on the DeFi space by September of this year.

The perspective of Brazilian regulators

In Brazil, the Law 14,478/22, known as Legal Framework of Crypto-assets, already offered basic guidelines for the regulation of virtual asset service providers. This statutewas regulated on June 13, 2023 by the Decree 11,563/23, which established the competence of the Central Bank of Brazil (Bacen) to, among other attributions, regulate the provision of virtual asset services in Brazil

The provisions of the statute do not, however, apply to assets representing securities. The competence to absorb the recommendations made by IOSCO and establish the regulation of crypto-asset service providers that are considered securities, in this case, will be up to the Brazilian Securities and Exchange Commission (CVM).

  • The CVM already has some regulations on the subject, such as: CVM Guidance Opinion 40, which consolidates the agency's understanding of the rules applicable to crypto-assets that are securities, with the aim of ensuring greater predictability and security and fostering a favorable environment for the development of crypto-assets, with integrity and adherence to relevant constitutional and legal principles;
  • Circular Letter 4/2023/CVM/SSE, which deals with the characterization of “receivables tokens” or “fixed income tokens” as securities;
  • the sparse legislation regarding the implementation of the Regulatory Sandbox.

IOSCO's recommendations will certainly serve to guide the CVM's specific regulation on the subject, enriching the discussion on the nature and classification of crypto-assets, in addition to helping to establish guidelines for adequate investor protection.

These new parameters proposed by the institution should encourage the creation of efficient and responsive regulation, which stimulates innovation and market integrity, without losing sight of preventing illegal activities and maintaining the stability of the financial system.

The consolidation of these rules can therefore not only bring more legal certainty to investors and companies operating in the sector, but also encourage the growth and internationalization of the crypto-assets market in Brazil.

Importance of Iosco recommendations for the regulation of crypto assets

The importance of these recommendations for the regulation of crypto-assets in Brazil and around the world is immense. The growing popularity of crypto-assets has brought major challenges for regulators. The need for a global and coordinated regulatory approach has never been greater.

IOSCO's recommendations can serve as an important roadmap for regulators around the world – including Brazil – to develop and adapt their regulatory frameworks to deal with the evolving crypto-assets market.

In addition, the initiative seeks to limit the risk of regulatory arbitrage, which occurs when market participants take advantage of differences between regulations in different jurisdictions.

This is particularly important in the crypto-assets market, which is global in nature. In sectors like this, regulatory differences can lead to serious risks, including systemic ones.

IOSCOS's actions point to a future in which the regulation of crypto-assets will become increasingly homogeneous and consistent globally, with a unified approach on the subject, more protection for investors and the safe and sustainable growth of this important segment of the financial capital market.

Reading the recommendations is therefore essential for regulators, private investors, and other participants in the crypto-asset market, as they are a compilation of what to expect in the future in the regulatory environment in Brazil and around the world.