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FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets

Crypto Regulatory Frameworks and International Coordination

Updated 11 October 2026 · Fact-checked

Crypto regulation sets a perimeter of covered activities, then applies licensing, disclosure, custody, conduct and prudential rules to them. Global standard setters coordinate: the FSB sets high-level recommendations, IOSCO covers markets and investor protection, the BIS and its committees cover bank exposures, and FATF covers AML and the travel rule.

Understand Regulatory Frameworks and International Coordination

Start with the problem. Unbacked crypto assets such as Bitcoin have no issuer and no claim on any asset. Trading platforms, wallets and lenders sit around them. Many firms operate across borders in minutes. A national rule alone is easy to dodge, so you need both a domestic framework and international coordination.

A domestic framework has five building blocks. The regulatory perimeter says which assets, activities and firms are covered. Licensing or registration lets supervisors know who operates. Disclosure gives users information on risks, fees and conflicts. Custody rules protect client assets, for example by segregating them from the firm's own assets. Prudential rules (capital, liquidity, risk management) apply to firms and to banks with crypto exposures. The guiding principle is "same activity, same risk, same regulation".

Four bodies matter. The FSB is the coordinator. It issued high-level recommendations for crypto-asset activities and for global stablecoin arrangements, and it reviews progress and gaps. IOSCO issued policy recommendations on crypto and digital asset markets covering conflicts of interest, market abuse, custody and client asset protection, cross-border cooperation and operational risk. The BIS hosts the Basel Committee, which sets the prudential standard for banks' crypto exposures, including very conservative treatment for unbacked crypto. FATF sets anti-money-laundering and counter-terrorist-financing standards for virtual assets and virtual asset service providers (VASPs).

The travel rule is the FATF requirement that a VASP sending a transfer collects and passes originator and beneficiary information to the receiving VASP, as banks do for wire transfers. It applies to transfers between VASPs and to transfers involving other regulated institutions.

Finally, understand the limits. These bodies issue standards and recommendations. They are not law. Each country must implement them, and uneven implementation creates regulatory arbitrage, where activity moves to the weakest jurisdiction. Coordination aims to reduce that gap through consistent rules, information sharing and peer review.

Key formulas to remember

Guiding principle
Same activity + same risk = same regulation
Technology-neutral. Crypto activity that looks like banking or securities activity should face comparable rules.
Five domestic building blocks
Perimeter → Licensing → Disclosure → Custody → Prudential
Use this checklist to classify any rule in a question.
Who sets what
FSB = coordination; IOSCO = markets and investors; Basel Committee (BIS) = bank capital; FATF = AML/CFT
Most MCQs test matching the body to the task.
Travel rule data flow
Originator VASP → sends originator and beneficiary information → Beneficiary VASP
Same purpose as bank wire transfer information. Aim: traceability and sanctions screening.
Nature of global standards
Standard setter issues recommendation → national authority implements → peer review of gaps
Recommendations are not binding until adopted domestically.

How to solve Regulatory Frameworks and International Coordination questions

Use this routine for any question on crypto regulation or international coordination.

  1. 1Identify the risk in the scenario: investor loss, market abuse, custody failure, bank exposure, money laundering or financial stability.
  2. 2Map the risk to a building block: perimeter, licensing, disclosure, custody or prudential rule.
  3. 3Name the body whose remit fits: FSB, IOSCO, Basel Committee (BIS) or FATF.
  4. 4Check whether the question is about a standard (recommendation) or a binding national law. Standards need domestic implementation.
  5. 5Look for cross-border features such as a platform in one country serving users in another. This points to cooperation and arbitrage.
  6. 6Eliminate options that give a body the wrong job or call a recommendation legally binding.
  7. 7Pick the answer that applies same-activity-same-risk and protects clients or stability most directly.

Quickest way: Match risk to body in 20 seconds

When to use it: Use for definition or matching MCQs when time is short.

  1. Money laundering, VASP, transfers: FATF and the travel rule.
  2. Trading platforms, conflicts, market abuse, client assets: IOSCO.
  3. Bank capital or exposures to crypto: Basel Committee at the BIS.
  4. Overall framework, gaps, stablecoins, coordination: FSB.
  5. Reject any option calling these standards legally binding on all countries.

Common mistakes in Regulatory Frameworks and International Coordination

  • Saying FATF sets capital rules for banks holding crypto.

    All the bodies sound like global regulators.

    Fix: FATF is AML/CFT only. Bank capital belongs to the Basel Committee.

  • Treating FSB or IOSCO recommendations as binding law.

    The word standard suggests enforcement.

    Fix: They are recommendations. Binding force comes only from national implementation.

  • Applying the travel rule only to banks.

    Students link it to bank wires.

    Fix: It applies to VASPs, which must pass originator and beneficiary information with transfers.

  • Confusing licensing with custody rules.

    Both relate to firm authorisation and safety.

    Fix: Licensing decides who may operate. Custody rules govern how client assets are held, such as segregation.

  • Assuming a ban solves cross-border risk.

    A ban looks like the strictest option.

    Fix: Bans can push activity offshore or underground. Coordination and consistent rules are the stated aim.

Worked examples

Example 1

A crypto exchange based in one country serves retail clients worldwide and holds client tokens in the same wallets as its own. Which regulatory element addresses the main client-protection gap, and which standard setter's recommendations focus most on it?

Show the solution
  1. The risk is loss of client assets if the exchange fails, because they are commingled.
  2. This maps to custody rules: segregation of client assets from the firm's own.
  3. Custody, conflicts of interest and client asset protection feature in IOSCO's recommendations for crypto markets.
  4. FATF would address money laundering, and Basel would address bank exposures, so neither fits.

Answer: Custody and segregation of client assets, addressed in IOSCO's crypto policy recommendations.

Example 2

A VASP in country A sends a crypto transfer for a customer to a VASP in country B. Under the FATF travel rule, what must the sending VASP do, and what is the purpose?

Show the solution
  1. The travel rule extends wire-transfer style information requirements to virtual asset transfers.
  2. The sending VASP must collect required originator and beneficiary information.
  3. It must pass that information to the receiving VASP with the transfer.
  4. Purpose: traceability, sanctions screening and detection of suspicious activity.

Answer: Send originator and beneficiary information to the receiving VASP so transfers can be traced and screened for AML/CFT.

Exam tips

  • Most questions test matching: which body or building block fits the scenario. Learn the one-line remit of each.
  • Watch for options that overstate: binding on all countries, bans eliminating risk, or FATF setting capital.
  • Remember unbacked crypto is treated very conservatively for bank capital, but do not quote a specific risk weight unless the question gives it.
  • Expect case-style stems with cross-border platforms. Think regulatory arbitrage and cooperation.

Practice questions from Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets

Regulatory Frameworks and International Coordination: frequently asked questions

What is the FATF travel rule in simple terms?

It requires VASPs to send originator and beneficiary information along with crypto transfers, as banks do for wires. The goal is traceability for AML and counter-terrorist-financing. It applies to transfers between VASPs.

What is the role of the FSB in crypto regulation?

The FSB coordinates international work. It issued high-level recommendations on crypto-asset activities and global stablecoin arrangements and monitors implementation and gaps. It does not make binding law.

What do IOSCO crypto recommendations cover?

They cover investor protection and market integrity: conflicts of interest, market abuse, custody and client asset protection, disclosure, cross-border cooperation and operational risk.

Why does international coordination matter for crypto?

Crypto firms operate across borders easily. If rules differ, activity moves to the weakest jurisdiction, which is regulatory arbitrage. Consistent standards and information sharing reduce that gap.