FSB Warns of ‘Regulatory Arbitrage’ By Crypto Firms Due to ‘Inconsistent’ Rules

The warning came in a report titled Thematic Peer Review on the FSB Global Regulatory Framework for Crypto-asset Activities that compared the implementation and adherence with  FSB recommendations for crypto-asset activity across 40 jurisdictions. It found “incomplete, uneven and inconsistent” implementation and enforcement of the recommendations within jurisdictions, and “fragmented, inconsistent, and insufficient” cross-border cooperation among authorities that “complicates oversight of the inherently global and evolving crypto-asset markets.”

A separate report issued Sunday by the European Banking Authority similarly warned of “forum shopping” by crypto firms seeking “jurisdictions with lighter supervisory practices or previously lower market entry requirements” to enter the EU market.

Based in Basel, Switzerland, the FSB was established in 2009 and is comprised of central banks, finance ministries and regulatory authorities among the G20 countries (Russian authorities currently do not participate). Its mandate includes assessing vulnerabilities affecting the global financial system, promoting coordination and information exchange among authorities and monitoring market developments and their implications for regulatory policy.

“For crypto-asset activities, gaps remain in addressing financial stability risks, particularly in the regulation of crypto-asset service providers (CASPs),” the report said. “Comprehensive coverage of potentially higher risk activities, such as borrowing, lending, and margin trading, is often lacking. In addition, gaps or the lack of comprehensive reporting frameworks for CASPs hinder authorities’ ability to monitor and address potential financial stability risks effectively.”

Read more: EU Faces New Calls from France for Unified Crypto Regulation

The report similarly found a “fragmented and inconsistent” regulatory landscape for stablecoin activity. [R]elatively few jurisdictions have established comprehensive regulatory frameworks for [global stablecoin arrangements (GSCs)],” it said. “This is largely because jurisdictions’ existing regulatory mandates and tools are unlikely to comprehensively address the risks of GSCs.”

Critical gaps include “insufficient requirements for robust risk management practices, capital buffers, and recovery and resolution planning (including insolvency frameworks),” the report added. “Variations across jurisdictions in redemption and custody requirements, the timing and details of disclosures, as well as reserve collateralisation frameworks pose particular regulatory and supervisory challenges for stablecoin arrangements that operate across multiple jurisdictions.”

Many of those issues are addressed in the U.S. GENIUS Act, including collateralization and disclosure requirements for stablecoin issuers, and insolvency resolution rules. But the U.S. regulations are not integrated with any broader global framework.

[C]ross-border cooperation and coordination is fragmented, inconsistent, and insufficient to address the global nature of crypto-asset markets, due in part to the fact that implementation efforts are still ongoing,” the report said. “Authorities are leveraging existing mechanisms for enforcement and licensing purposes, but these mechanisms rarely extend to broader supervisory objectives or financial stability monitoring.”

In light of those findings, the report made eight recommendations for further development of jurisdictions’ regulatory frameworks. The include fully implementing the FSB Crypto Framework within domestic regulatory regimes; improving their data capabilities and infrastructure to be able to monitor financial stability risks within the crypto-asset market and between the crypto-asset market and traditional financial markets; and pursuing bilateral and multilateral arrangements to ensure cross-sectoral and cross-border cooperation.