FSB Warns Crypto Regulatory Gaps Threaten Financial Stability

The Financial Stability Board’s review of crypto regulations across nearly 40 jurisdictions uncovered what it describes as ‘significant gaps and inconsistencies that could pose risks to financial stability.’ The watchdog found that uneven rules are enabling regulatory arbitrage, where crypto providers and stablecoin issuers strategically select the most lenient jurisdictions to establish operations before expanding globally. This practice, commonly known as ‘forum shopping,’ allows firms to bypass stricter regulatory environments and establish footholds in markets with weaker oversight.

A separate European Banking Authority report published Sunday confirmed this trend, revealing that crypto entities are specifically selecting ‘jurisdictions with lighter supervisory practices or previously lower market entry requirements’ to enter the EU market. John Schindler, the FSB’s secretary-general, expressed serious concerns to the Financial Times, stating that ‘different rules could lead to dynamics which could exacerbate shocks. These are things we wanted to avoid, and now we are seeing them appear.’ The regulatory fragmentation creates an environment where leverage and liquidity naturally migrate to venues with the thinnest oversight, according to Kevin Lee, chief business officer at Gate.

The FSB report highlights that ‘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. This increasing integration occurs even as the regulatory divide widens between major economic powers, with the United States adopting a crypto-friendly stance under President Donald Trump while Europe maintains a more cautious approach through legislation like MiCA.

Perhaps most concerning is the revelation that stablecoin issuers now hold reserves comparable to foreign governments or large money-market funds. This concentration of assets raises serious concerns about market disruption if rapid liquidations occur during periods of financial stress. The report notes that more major financial institutions are integrating stablecoins into payment and settlement services, further increasing their exposure to the crypto ecosystem and creating additional channels for systemic risk transmission.

Schindler expressed particular concern about the absence of leverage regulation in many crypto markets, where users can ‘borrow against exposures’ or use debt to amplify trades. The report notes that oversight of such high-risk activities ‘is often lacking’ and weak reporting by Crypto-Asset Service Providers (CASPs) ‘hinder authorities’ ability’ to monitor and address financial stability risks effectively. This regulatory vacuum introduces the prospect of ‘cascading failures during market stress,’ where problems in one part of the crypto ecosystem could rapidly spread throughout the financial system.

Cross-border oversight remains ‘fragmented, inconsistent, and insufficient,’ according to the FSB report. While enforcement tools exist in various jurisdictions, the mechanisms ‘rarely extend to broader supervisory objectives or financial stability monitoring.’ Authorities struggle to share critical information due to legal barriers and divergent definitions of crypto-assets, creating significant obstacles to effective global regulation.

Nikolaos Kostopoulos, Blockchain Senior Consultant at Netcompany SEE & EUI, told Decrypt that while the EU’s MiCA legislation represents ‘a major step toward harmonization,’ uneven implementation still allows firms to ‘exploit regulatory gaps.’ He emphasized that ‘true convergence’ requires consistent cross-border enforcement, not just standardized rules. This sentiment echoes the FSB’s findings that even finalized regulatory frameworks show limited alignment, with ‘uneven implementation’ creating continued ‘opportunities for regulatory arbitrage’ and complicating oversight of the global crypto market.

The FSB has now issued eight recommendations urging jurisdictions to close identified gaps through comprehensive assessments, improve data capabilities to monitor financial stability risks, and develop bilateral and multilateral arrangements to ensure proactive cross-border cooperation. Kevin Lee of Gate suggested that stronger data, asset segregation, and margin standards could ‘materially reduce cascade risk,’ highlighting potential solutions to the regulatory challenges identified in the report. However, with jurisdictions making only limited progress toward implementing the FSB’s July 2023 recommendations, and ‘few having finalized their regulatory frameworks for Global Stablecoins (GSCs),’ the path to comprehensive crypto regulation remains challenging.