Crypto firms are exploiting loopholes in fragmented global regulations, threatening financial stability as countries adopt wildly different approaches to policing the $4 trillion digital asset market, the Financial Stability Board warned Thursday.
The FSB’s review of crypto regulations across nearly 40 jurisdictions revealed “significant gaps and inconsistencies that could pose risks to financial stability and to the development of a resilient digital asset ecosystem,” according to the report published Thursday.
Regulatory arbitrage
The watchdog found uneven rules are enabling regulatory arbitrage, where crypto providers and stablecoin issuers shop around for the most lenient jurisdictions to establish operations before expanding globally.
Cross-border oversight remains “fragmented, inconsistent, and insufficient,” the report said, noting while enforcement tools exist, the mechanisms “rarely extend to broader supervisory objectives or financial stability monitoring.”
A European Banking Authority report published Sunday also revealed crypto firms engaging in “forum shopping,” with entities selecting “jurisdictions with lighter supervisory practices or previously lower market entry requirements” to enter the EU market with weak anti-money laundering controls.
European Banking Authority Warns of Risks During Transitional Period
“Different rules could lead to dynamics which could exacerbate shocks,” John Schindler, the FSB’s secretary-general, told the Financial Times. “These are things we wanted to avoid, and now we are seeing them appear.”
“Linkages between crypto-assets and the traditional financial system are growing,” with large global banks significantly increasing their prudential exposures to and custody of crypto-assets, albeit from a low base, the FSB report said.
Kevin Lee, chief business officer at Gate, told Decrypt the FSB’s warning is “well-founded.” He added that, “when rules are patchy, leverage and liquidity migrate to the thinnest-oversight venues,” turning local shocks into cross-border risks, and that stronger data, asset segregation, and margin standards could “materially reduce cascade risk.”
The report says stablecoin issuers now hold reserves comparable to foreign governments or large money-market funds, raising concerns of market disruption if rapid liquidations occur during stress.
Financial institutions and crypto exposure
The FSB found more major financial institutions are integrating stablecoins into payment and settlement services, increasing their exposure to the crypto ecosystem, even as the regulatory divide widens, with the United States adopting a crypto-friendly stance under President Donald Trump and Europe maintaining a more cautious approach.
