- The FSB warns of cryptocurrency companies exploiting inconsistencies in international laws to gain an unfair advantage.
- The FSB’s latest report reveals regulatory arbitrage, where crypto firms operate in jurisdictions with lenient oversight, creating fault lines in the $4 trillion global digital asset market.
- The FSB’s comprehensive review of crypto regulations in over 40 countries reveals “big gaps and inconsistencies,” slowing the development of a secure, transparent, and resilient digital asset system and increasing the risk of instability.
The Financial Stability Board (FSB) has raised the alarm over how cryptocurrency companies are exploiting inconsistencies in international laws to gain an unfair advantage — a practice that could, in the FSB’s words, “trigger cascading failures” across the global financial system. The FSB’s latest report, released Thursday, paints a concerning picture of how regulatory arbitrage — where crypto firms set up shop in jurisdictions with lenient oversight — is creating fault lines in the $4 trillion global digital asset market. As crypto continues to weave itself into the fabric of traditional finance, these gaps, the FSB warns, could lead to systemic shocks that spill far beyond digital assets themselves.
Crypto Regulation in Disarray
According to the FSB, its comprehensive review of crypto regulations in more than 40 countries uncovered what it called “big gaps and inconsistencies.” The organization said these differences are slowing the development of a secure, transparent, and resilient digital asset system while increasing the risk of instability. “Countries are taking very different approaches,” the report noted, “and this divergence puts global financial stability at risk.” The uneven adoption of the FSB’s Global Crypto-Asset Framework has effectively allowed crypto companies to play by their own rules. Instead of facing strict scrutiny, many simply move to friendlier jurisdictions — sometimes dubbed “crypto havens” — where compliance requirements are light, and enforcement is weak. This regulatory patchwork makes global oversight nearly impossible, especially in an industry that evolves faster than most governments can legislate.
Regulatory Arbitrage
The FSB’s main concern centers on regulatory arbitrage, a long-standing issue in financial markets that has become even more acute in the age of decentralized finance and global crypto exchanges. By choosing countries with softer regulations, crypto and stablecoin issuers can establish their operations, gain legal footing, and then expand across borders with little to no additional scrutiny. This tactic, while legal, poses serious challenges for regulators. Once a firm is licensed in one jurisdiction, it often gains “passporting rights” that allow it to operate across multiple markets — including those with far stricter oversight. According to the FSB report, cross-border supervision remains fragmented, inconsistent, and insufficient. While international coordination bodies and bilateral agreements exist, they rarely extend to the broader goals of financial stability or systemic risk prevention. This leaves regulators playing catch-up while crypto firms exploit the cracks.
The EU’s “Forum Shopping” Problem
The European Banking Authority (EBA) recently echoed these concerns in its own findings. It warned that “forum shopping” — where crypto companies deliberately select countries with the least supervision — remains a major problem within the European Union. Because the EU’s financial framework allows cross-border market access, firms registered in one lenient country can effectively operate throughout the bloc. Some even use this freedom to bypass strict anti-money laundering (AML) controls, creating vulnerabilities in the financial system. The EBA’s findings complement the FSB’s conclusions: regulatory loopholes are being weaponized. In the EU’s case, some firms gain access to the entire European market under the weakest national oversight available. This not only undermines the goal of uniform crypto regulation but also increases the risk of financial contagion — where a crisis in one region can quickly spread to others.
Global Financial Stability at Stake
John Schindler, the FSB’s Secretary-General, emphasized the severity of the situation in a recent interview with the Financial Times. “Different rules could lead to shocks,” Schindler warned. “These are exactly the problems we wanted to prevent, but we’re starting to see them happen.” Schindler pointed out that links between crypto-assets and traditional finance are growing rapidly. Major financial institutions that once distanced themselves from crypto are now expanding their holdings, custody services, and settlement operations in the digital asset space. That integration brings benefits, such as efficiency and innovation — but it also means crypto volatility can now ripple directly into mainstream markets.
The Risk of “Cascading Failures”
The term “cascading failures” used by the FSB refers to a domino effect, where trouble in one part of the system quickly spreads to others. Kevin Lee, Chief Business Officer at Gate.io, supported the FSB’s warning, calling it “well-founded.” “When rules are patchy,” Lee explained, “leverage and liquidity move to places with the least oversight. That movement can turn small, local shocks into big global risks.” Lee added that improving data collection, asset segregation, and margin standards could reduce these risks significantly. Without these safeguards, a single failure — such as a major stablecoin collapse or an exchange liquidity crisis — could unleash systemic instability worldwide. The FSB’s report also noted that stablecoin issuers now hold reserves comparable in size to those of major governments or money-market funds. If those reserves are suddenly liquidated during market stress, it could rattle global bond markets and disrupt liquidity flows far beyond crypto.
Traditional Finance’s Growing Exposure
The FSB’s findings reveal a startling trend: traditional financial institutions are increasing their exposure to crypto, often through stablecoins used in payment settlements, cross-border transactions, and collateral. While the crypto market’s volatility has historically kept banks cautious, rising demand for digital settlement tools and tokenized assets is changing that. This deeper integration raises the question: What happens when crypto volatility meets traditional finance leverage? Without unified oversight, even a moderate crypto shock could affect banks, hedge funds, and payment systems tied to digital assets. Compounding the issue is the regulatory divergence between the U.S. and Europe. Under the Trump-era policies, the U.S. leaned toward a more crypto-friendly stance, encouraging innovation but often at the cost of consistent supervision. In contrast, Europe has taken a more conservative, risk-based approach, leading to further fragmentation between two of the world’s largest financial markets.
The Oversight Gap
Another major issue highlighted by the FSB is the lack of reliable data from crypto service providers (CASPs). Many firms fail to report key information such as leverage ratios, asset concentration, and liquidity positions. This opacity makes it nearly impossible for regulators to assess systemic risks in real-time. “Users can borrow against their crypto, or use debt to amplify trades,” Schindler explained, “but oversight of these high-risk actions is often missing.” This combination of high leverage and poor transparency could create flash crashes or liquidity spirals — exactly the type of cascading failures the FSB fears. In essence, crypto’s biggest threat isn’t its innovation — it’s its lack of visibility.
MiCA: Europe’s Attempt to Bring Order
Nikolaos Kostopoulos, Senior Blockchain Consultant at Netcompany SEE & EUI, praised the EU’s Markets in Crypto-Assets (MiCA) regulation as “a big step toward harmony.” MiCA, which aims to create a unified regulatory framework for digital assets across the EU, sets out rules for transparency, consumer protection, and capital requirements. However, Kostopoulos warned that uneven implementation of MiCA across member states still allows companies to exploit gaps. “Real alignment,” he said, “requires stronger cross-border enforcement, not just national compliance.” In other words, even a strong law loses effectiveness if enforcement remains localized while the market remains global.
The Global Push for Uniform Regulation
While some countries have made progress implementing the FSB’s July 2023 recommendations, few have fully finalized frameworks for global stablecoins (GSCs). The result is a patchwork of partial regulations — some strict, others nearly nonexistent — that perpetuate regulatory arbitrage. Recognizing this, the FSB’s latest report issued eight new recommendations urging governments to:
- Close regulatory gaps that allow arbitrage.
- Develop better data tools to track emerging risks.
- Enhance international cooperation for enforcement and monitoring.
- Implement clear standards for stablecoins and cross-border payments.
- Ensure consistent licensing and risk reporting.
- Increase transparency for reserve management.
- Establish crisis-response frameworks for digital asset disruptions.
- Encourage public-private data sharing to improve market oversight.
These measures, if adopted globally, could create a cohesive and resilient digital asset ecosystem — one capable of supporting innovation without threatening financial stability.
Disclaimer: CryptopianNews shares this for learning and info only. It’s not meant to be financial or investment advice. Crypto markets change a lot and move quickly. Investing in them can be risky. You should always look into things yourself. Talk to a trained financial advisor before making any choices about investing.
- What Is DeSoc Crypto & Why Vitalik Cares - January 28, 2026
- Why Long-Term Bitcoin Holders Are Not Selling Yet - January 26, 2026
- U.S. Cryptocurrency Oversight Faces a Major Senate Shift - January 25, 2026