- The FSB highlighted the regulatory gaps and inconsistencies in implementing crypto and stablecoin rules across jurisdictions.
- It said these issues create systemic risks, oversight challenges, regulatory uncertainty, loss of consumer confidence, and more.
The Financial Stability Board (FSB) recently conducted a peer review on the regulation of crypto assets and global stablecoins across 29 jurisdictions. The international body found several gaps and inconsistencies in their enforcement and has proposed several recommendations to address them.
FSB’s Crypto Asset and Stablecoin Review
FSB’s paper, titled Thematic Review on FSB Global Regulatory Framework for Crypto-asset Activities, embodied its evaluation and recommendations. It focused on its 2023 global framework covering crypto asset service providers, stablecoin arrangements, data reporting and collection, and cross-border cooperation and coordination.
Along the way, the review identified significant gaps and inconsistencies. It explained that these create risks of regulatory arbitrage and complicate the oversight of the global crypto market. The slow regulatory finalization for Global Stablecoin Arrangements (GSCs) primarily contributes to the complexity in various stablecoin regimes.
Additionally, the organization found incomplete regulation of high-risk activities, causing elevated user risks, such as when lending, borrowing, and margin trading. The FASB highlighted that their frameworks are often missing or are insufficient in responding to liquidity stress and contagion.
FSB claimed that jurisdictions have varying requirements for stablecoin backing. Their divergence on composition, custody, and collateralization of reserves typically poses challenges, which could affect the fungibility and stability of the assets during cross-border transactions.
Another key concern in this area is the inconsistency in redemption rights. Together with the differing custody mechanics, these introduce legal and operational uncertainty. These could trigger loss of consumer confidence and runs on stablecoin issuers at critical situations.
Moreover, the gaps in crisis management frameworks, including capital buffers as well as recovery and resolution planning—especially during insolvency cases—expose issuers to failure of operations, which could lead to market contagion.
Fragmentation in Cross-Border Oversight
The inconsistent crypto and stablecoin rules usually result in regulatory arbitrage for firms. Eventually, it forces them to shop around for jurisdictions with more permissive or favorable frameworks. Thus, the process undermines the FSB’s “same activity, same risk, same regulation” vision across borders.
Furthermore, the FSB argued that the fragmentation, inconsistency, and gaps are indications of weak international cooperation. It noted that authorities often leverage existing mechanisms originally tailored for traditional finance (TradFi) for enforcement and licensing. However, these rarely extend to the broader, proactive supervisory objectives and financial stability monitoring required for a real-time, decentralized asset class.
The FSB’s Recommendation
In conclusion, the FSB urged jurisdictions to prioritize consistent implementation of the agreed global framework to enhance their capabilities in risk monitoring, ensure a level playing field, and prevent systemic risks from migrating to areas with the weakest market linkages.
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