Crypto companies are exploiting loopholes in fragmented global regulations, threatening financial stability as countries take vastly different approaches to controlling the $4 trillion digital asset market, the Financial Stability Board warned on Thursday.
The FSB’s review of crypto regulations in nearly 40 jurisdictions found “significant gaps and inconsistencies that could pose risks to financial stability and the development of a resilient digital asset ecosystem,” according to the report released Thursday.
The watchdog found that uneven rules enable regulatory arbitrage, where crypto providers and stable coin Issuers seek out the most lenient jurisdictions to establish their operations before expanding globally.
Cross-border supervision remains “fragmented, inconsistent and insufficient,” the report says, highlighting that while supervisory tools exist, the mechanisms “rarely extend to broader supervisory objectives or financial stability monitoring.”
A report from the European Banking Authority released on Sunday also found that crypto companies were engaging in “forum shopping,” with entities selecting “jurisdictions with lighter supervisory practices or previously weaker market entry requirements” to enter the EU market with weak anti-money laundering controls.
European Banking Authority warns of risks during transition period
“Different rules could lead to dynamics that could exacerbate shocks,” John Schindler, secretary general of the FSB, told the press conference. Financial Times. “These are things we wanted to avoid, and now we’re seeing them pop up.”
“Links between cryptoassets and the traditional financial system are growing,” with major global banks significantly increasing their prudential exposures and custody to cryptoassets, albeit from a low level, the FSB report said.
Kevin Lee, Gate’s chief commercial officer, said Decrypt The FSB’s warning is “well-founded”. He added that “when rules are uneven, leverage and liquidity migrate to the tightest monitoring venues”, turning local shocks into cross-border risks, and that stricter data, asset segregation and margin standards could “significantly reduce cascading risk”.
The report said stablecoin issuers now hold reserves comparable to those of foreign governments or large money market funds, raising fears of market disruption in the event of rapid liquidations during times of stress.
The FSB found that more large financial institutions are integrating stablecoins into payment and settlement services, increasing their exposure to the crypto ecosystem, even as the regulatory gap widens, with the United States taking a pro-crypto stance under President Donald Trump and Europe maintaining a more cautious approach.
