The new chair of the global securities watchdog IOSCO, Jean-Paul Servais, said in a recent interview, the crash of the FTX cryptocurrency exchange had lent a new urgency to the need to regulate the cryptocurrency industry. In an interview with Reuters, he said the focus in 2023 will be creating a new regulatory framework for such “conglomerate” platforms, to protect investors.
He noted regulators would not have to start form scratch in developing regulatory frameworks. Rather they could draw upon principles they use in other sectors in which there can be conflicts of interest, such as credit rating agencies and compilers of market benchmarks.
Servais noted that although regulators were slow to move toward regulating the cryptocurrency space, the implosion of the FTX platform is likely to change that. He added, “The sense of urgency was not the same even two or three years ago. There are some dissenting opinions about whether crypto is a real issue at the international level because some people think that it’s still not a material issue and risk.”
He went on, “Things are changing and due to the interconnectivity between different types of businesses, I think it’s now important that we are able to start a discussion and that’s where we are going.”
The International Organization of Securities Commissions (IOSCO), based in Madrid, is responsible for coordinating financial rules for the G20 countries, as well as some other nations. The commission has already issued a set of principles for governing stablecoins, and now it is prepared to focus on the platforms which trade them.
Servias pointed out that crypto ‘conglomerates’ such as the collapsed FTX platform require regulation due to the multiple functions they perform. These include brokerage services, custody of assets, trading, lending, and issuance of tokens, all offered within the same organization, all of which hold the potential for conflicts of interest.
He pointed out, “For investor protection reasons, there is a need to provide additional clarity to these crypto markets through targeted guidance in applying IOSCO’s principles to crypto assets.” He added that in the first half of 2023, IOSCO will deliver a report on those matters, as well as potential regulatory solutions.
FTX had chosen to base itself in the Bahamas due to the loose tax laws there. On November 11th, the exchange collapsed due to a liquidity crisis, amid a surge in withdrawals on its proprietary FTT token. Rival exchange Binance offered to acquire it, which would have made customers whole, however amid due diligence the rival exchange backed out due to reports of mishandled customer funds, a likelihood of regulator intervention, and perhaps criminal prosecution. So far the collapse has cost crypto-investors over $11 billion.
The crisis has begun to trigger liquidity issues in other crypto platforms, with the Genesis lending platform suspending withdrawals amid rumors of liquidity problems. That has spread to the Gemini exchange, run by the Winklevoss twins, which had used the Genesis service to offer a return-producing investment account at their own exchange. All of this has weighed on the crypto markets in total, driving down the prices of various cryptocurrencies, including Bitcoin.
