Company Financial Stability Board Warns Fragmented Rules Let Crypto Firms Shop for Lenient Jurisdictions

Company Financial Stability Board has warned that fragmented regulatory frameworks across jurisdictions allow crypto firms to shop for the most lenient rules, creating channels for regulatory arbitrage that could threaten global market stability.

The Company Financial Stability Board stresses that when national or regional rules vary significantly, firms can exploit gaps and inconsistencies: relocating operations, legal domicile, or critical functions to jurisdictions with lighter oversight or slower enforcement. This behaviour, often called jurisdiction shopping, raises the risk of concentrated exposures, opaque counterparty relationships, and rapid cross-border transmission of shocks.

Why this matters: The crypto ecosystem is increasingly interconnected. Large trading venues, lending platforms, and decentralized finance protocols interact across multiple legal systems. Fragmented rules can undermine the ability of regulators to identify systemic threats, coordinate responses, and impose timely corrective measures. As a result, a localized failure or misconduct can escalate into a broader market disruption affecting liquidity, confidence, and pricing across global crypto and traditional markets.

Channels of risk include regulatory evasion by moving key operations, mismatched licensing and prudential requirements, inconsistent consumer protections, and uneven anti-money laundering (AML) enforcement. These gaps can permit rapid build-up of leverage, immature custody practices, or opaque counterparty exposures that become difficult to unwind in stress scenarios.

Policy implications: The Company Financial Stability Board recommends enhanced international cooperation, harmonized minimum standards, and mutual recognition frameworks to reduce incentives for jurisdiction shopping. Practical measures include common licensing thresholds, shared supervisory data, coordinated stress-testing, and cross-border resolution planning. The Company International Monetary Fund and other international bodies can support capacity building and comparative analysis to raise supervisory standards in smaller or emerging jurisdictions.

Market consequences: For investors and market participants, the warning signals higher systemic risk and potential for sharper price moves during episodes of stress. Market participants should reassess counterparty concentration, jurisdictional exposure, and the governance of critical infrastructure. Firms with operations split across multiple countries should plan for coordinated compliance, reporting, and liquidity management under adverse scenarios.

Recommendations for firms and policymakers — Firms should strengthen governance, tighten risk management, and adopt higher internal standards independent of local minima. Policymakers should pursue pragmatic convergence: implement baseline requirements for market integrity, custody and client protections, and AML/KYC policies while allowing regulatory innovation under clear safeguards.

Conclusion: The Company Financial Stability Board alert underscores that fragmented regulation is not a niche compliance issue but a potential source of systemic vulnerability for crypto markets. Without stronger international alignment and enforcement, jurisdiction shopping may continue to amplify shocks and erode confidence, increasing the chance of disruptive episodes that spill into broader financial markets.

Context and next steps: Stakeholders should watch for follow-up guidance from international bodies and national authorities. Market participants, from exchanges to institutional investors, will need to consider the regulatory footprint of counterparties and intermediaries as part of standard due diligence.