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

A national authority is designing rules for unbacked crypto assets such as Bitcoin. Its policy team notes that crypto activity can be moved easily across borders and that service providers can relocate to jurisdictions with lighter rules. Which policy implication does the IMF reading draw most directly from this feature?

Consistent international standards and cooperation are needed to limit regulatory arbitrage. Crypto activity and providers move easily across borders, so fragmented national rules let firms relocate to the weakest regime. Coordinated standards and information sharing among authorities close those gaps and reduce cross-border spillovers.

  1. AEach country should regulate only its own domestic providers, since cross-border coordination adds little
  2. BConsistent international standards and cooperation are needed to limit regulatory arbitrageCorrect
  3. CCross-border risks disappear once exchanges obtain a local licence
  4. DRegulation should be postponed until the market is large enough to threaten global stability

Explanation

Because crypto is borderless and providers can shift to weakly regulated jurisdictions, fragmented national rules create arbitrage opportunities. The IMF framework therefore stresses consistent global standards and cross-border cooperation. National-only approaches leave gaps that firms can exploit.

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