The G20’s risk watchdog has warned that fragmentation on crypto asset regulation risks regulatory arbitrage and financial stability.
Key takeaways
- The implementation of regulatory frameworks governing crypto asset activities and stablecoin arrangements by major economies has been uneven and not generally aligned to the FSB's international standards
- Cross-border cooperation and information sharing are essential to mitigating crypto asset-related financial stability risks
- With the rapidly growing crypto asset market, which doubled in value in the year to August to $4 trillion, risk management is increasingly important
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Major economies’ uneven implementation of the Financial Stability Board (FSB)’s global crypto regulatory framework has complicated cross-border oversight in an evolving and inherently global market, the international standard-setting body warned in a report today.
The FSB – which includes all G20 major economies – said that diverging international standards have underscored the need for cross-border information sharing and alignment over the regulatory lifecycle, from authorisation to supervision and enforcement.
Crypto asset activities and stablecoin arrangements often have a “global footprint”, it said, being headquartered in one jurisdiction with operations elsewhere.
Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority and chair of the team preparing the report, said: “Implementation progress remains incomplete, uneven and inconsistent. This creates opportunities for regulatory arbitrage and complicates oversight of the inherently global and evolving crypto-asset market.”
To address risks to financial stability, member jurisdictions – alongside the non-members who participated in the FSB’s research and those who did not – must align their current framework plans with the body’s international standards, implement stronger supervisory reporting requirements, improve data capabilities and identify gaps in risk management.
The FSB’s global framework was published in July 2023 and consists of high-level recommendations for the regulation, supervision and oversight of crypto asset markets and activities and global stablecoin arrangements. Today’s report does not assess the effectiveness of the regulatory approaches undertaken by individual jurisdictions.
Regulation for the $4 trillion crypto asset market is more advanced than its $290 billion stablecoin counterpart, the report found, with 11 jurisdictions having finalised a regulatory framework covering crypto asset activities but only five having comprehensive stablecoin arrangements. Where finalised frameworks are in place, the FSB said full alignment with its recommendations remains limited.
While most jurisdictions have made progress on regulating crypto assets and stablecoins, the FSB identified gaps in supervisory reporting frameworks and noted that enforcement efforts lag regulatory development, which has hindered compliance and oversight efforts.
The report found that jurisdictions have generally first applied anti-money laundering and counter financing of terrorism regulation to crypto asset activities, before including consumer protection and market integrity provisions, and ultimately more comprehensive financial stability provisions.
It said this has generally either been achieved by extending existing financial regulations to encompass crypto assets, as in Hong Kong and Japan, or by creating bespoke regulatory frameworks tailored to the crypto asset market’s unique characteristics, as in the EU. The snapshot outlines a fragmented approach among the world’s major economies.
The US did not participate in the research, but its recently passed GENIUS Act has been hailed as a watershed moment for the global stablecoin market.