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World Federation of Exchanges Asks IOSCO to Tackle Conflict of Interest in CeFi

The World Federation of Exchanges (WFE) has asked the International Organization of Securities Commissions (IOSCO) to address the conflict of interest created by centralized finance (CeFi) firms such as crypto exchanges that engage in multiple businesses. The recommendation comes as IOSCO, a global body for securities regulators, plans to finalize its recommendations for the regulation of the global crypto industry by the fourth quarter of this year.

Conflict of Interest in Crypto Market

WFE, the global industry association for operators of regulated exchanges and clearing houses, gave the recommendation in its response to IOSCO’s consultation for its policy guidance on the supervision of the global crypto industry. The consultation ended on July 31, 2023.

The association noted that while exchange groups in the traditional finance (TradFi) industry engage in multiple businesses to diversify their revenue streams, they have “robust conflict of interest management procedures to ensure ethical and fair practices.”

“This [conflict of interest management] involves implementing policies and mechanisms that prevent any undue advantage or bias among the businesses owned by the group,” WFE said in its response document. “Transparent governance structures, independent oversight, disclosure requirements, and compliance frameworks are some of the measures that have been proven to mitigate conflicts of interest effectively.”

The association’s request appears to support the argument by the US Securities and Exchange Commission (SEC) that crypto exchanges in the United States, including Binance and Coinbase, are combining the functions of an exchange, brokerage and clearing agency under one umbrella service. The securities regulator has repeatedly argued that the services are separated under US laws and require distinct registrations.

IOSCO Addresses Multiple Issues

Meanwhile, Finance Magnates reported that IOSCO’s proposed policy guidelines for the global crypto industry cover six key areas such as market manipulation, insider trading and fraud as well as conflict of interest arising from the ‘vertical integration’ of various activities and functions by crypto firms.

The policy also focuses on cross-border risks and regulatory cooperation, custody and client asset protection, operational and technological risk, and retail access, suitability and distribution.

In a related development, OSCO and the Bank for International Settlements (BIS) last year called for the ‘same risk, same rules’ principle to be applied to stablecoins, which are cryptocurrencies pegged to a fiat currency or physical assets such as gold. The principle requires the same rules applied to TradFi companies to be applied to CeFi and DeFi organizations.

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