Digital asset regulatory fragmentation undermines global financial interconnectedness

Global approaches to digital assets reveal a paradox: while nations increasingly recognise the strategic importance of digital assets for financial sovereignty and technological leadership, their divergent domestic regulatory frameworks risk fragmenting the financial system that they seek to strengthen. This fragmentation, which is driven by competing national priorities for central bank digital currencies (CBDCs), stablecoins and crypto-asset regulations, threatens to undermine the efficiency and stability that coordinated digital asset innovation could deliver.

G20 countries have taken divergent approaches to digital assets, some implementing comprehensive crypto-asset regulations, others advancing national CBDC projects and some promoting fewer regulations on digital assets such as stablecoins.

For instance, the United States aims to foster global proliferation of dollar-backed stablecoins while simultaneously prohibiting the establishment of a CBDC in the country, citing significant concerns regarding financial system stability, personal privacy protection and preservation of national sovereignty.

China for its part prohibited cryptocurrency trading activities in 2021, citing concerns regarding illegal financial operations and potential threats to national financial security and stability.² Concurrently, China launched its CBDC, the e-CNY, with large pilot programmes in several cities, and has engaged in cross-border payment experiments utilising CBDC pairs through initiatives such as m-Bridge, which establishes connectivity between the central banking institutions of Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia.³

In the European Union (EU), a mixed strategy merges strong crypto-asset regulation with a domestic CBDC project, the digital euro project. Its markets in crypto-assets regulation (MICAR) imposes comprehensive requirements on token issuers and crypto-asset service providers. The EU is progressing with technical experimentation on CBDCs to develop its digital euro project, which aims to modernise the fragmented European retail payment system and strengthen Europe’s strategic autonomy.

This fragmentation is further exacerbated by a lack of a coordinated approach at the multilateral level. Instead of addressing digital assets and CBDCs as interconnected elements in the global financial system, international policy efforts have largely treated them in isolation. For instance, a paper requested by the G20 from the International Monetary Fund and the Financial Stability Board on Policies on Crypto-Assets explicitly excludes CBDCs from its scope, and the subsequent G20 Crypto-asset Policy Implementation Roadmap only devotes limited attention to CBDCs. Simultaneously, most CBDC initiatives focus on technical and interoperability issues without addressing regulatory divergence on privately issued crypto assets.

These examples show that the G20 economies have adopted significantly different policies and regulations regarding public and private digital assets. The divergence may result in incompatible financial infrastructure, increased transaction costs, regulatory arbitrage and regulatory inconsistencies that hinder cross-border interoperability. In practice, divergent regulatory frameworks have already impacted the digital asset ecosystem, with major stablecoins facing delisting from European exchanges due to MiCAR compliance requirements, which underscores the stark regulatory divide between US and EU approaches and their conflicting visions of digital asset governance.

The pursuit of unilateral initiatives, combined with national and global regulatory approaches that treat crypto-assets and CBDCs as separate issues, risks undermining a central promise of digital assets: to create a more interconnected financial system. Acknowledging the current fragmentation of finance and growing miscoordination is crucial to create unified governance principles that balance flexibility with standards to maintain an inclusive and financially stable approach.

In a forthcoming T20 policy brief, FBF authors and co-authors further examine these regulatory divergences and offer recommendations to mitigate the costs deriving from fragmented digital asset policies. Stay tuned!