Regulatory clarity in the crypto sector is a dynamic process, actively taking shape across jurisdictions. As Part II of Beyond Uncertainty detailed, this development is progressing at various wavelengths, resulting in a mosaic of distinct regulatory approaches. As the regulatory landscape solidifies, stakeholders gain sharper insight into applicable standards, obligations, and guardrails. Ultimately, these evolving frameworks are not only shaping market practices but also decisively influencing the trajectory of technological innovation across the sector.
While the deliberate framework-building, by various jurisdictions have converged around the shared international principles of investor protection, market integrity, and financial stability, the structural expression of these principles remains varied. Definitions diverge, supervisory models differ, and regulatory perimeters continue to reflect national interests[i]. For international operators, this creates a labyrinthine compliance environment, where the absence of consensus on fundamental terminology impedes harmonization and complicates cross-border coordination[ii].
Yet, this period of experimentation is not without value. It offers a rich, real-world dataset of regulatory models, revealing what works, what falters, and what might scale. Building on this foundation, Part III explores the path from diversity to coherence. It respectfully examines the philosophical and practical tensions at the heart of this transition, with the aim of identifying constructive pathways to build interoperability without sacrificing sovereignty. Navigating this transition successfully hinges on addressing key areas of definitional divergence and operational complexity.
Key Areas of Divergence and Operational Challenges
The growing momentum toward regulatory clarity, while encouraging, has revealed several unresolved challenges. Addressing these complexities, which currently impedes the formation of a coherent global framework, complicate cross-border operations, and heighten systemic risk, is the next critical phase for both policymakers and industry.
Lack of Harmonized Taxonomies and Asset Definitions
The absence of a harmonized global taxonomy for crypto assets[iii] is more than a semantic debate; it is a primary source of compliance complexity. Unlike traditional financial products, the inherently borderless nature of crypto assets makes interoperable definitions a functional necessity, not merely a regulatory ideal. The same token may be classified as a “virtual currency”, a “crypto asset”, a “digital asset”, a “security”, or some other regulatory designation, each label often triggering a distinct set of licensing, disclosure, and supervisory requirements[iv].
Proponents argue that this forces firms into a complex, costly, and potentially error-prone exercise in jurisdictional translation, undermining streamlined cross-border operations and potentially enabling regulatory gaps and arbitrage. Such definitional ambiguity may create a landscape of legal uncertainty for asset issuers and service providers, who must navigate how their offering will be classified across multiple markets prior to launch[v].
Critically, classification dictates outcome, it governs disclosure regimes, licensing thresholds and other applicable rules, as well as enforcement reach. As a result, a product deemed compliant in one jurisdiction may face barriers in another, not due to a difference in its inherent risk profile, but purely because of divergent regulatory labels. This may consequently fragment liquidity, reduce market efficiency, and complicate international coordination. Ultimately, bridging this definitional divide is essential to achieving the stability and interoperability of a mature global market[vi].
Divergent Approaches to DeFi and Protocol-Level Compliance
Decentralized finance (DeFi) fundamentally challenges the entity-based logic that underpins traditional regulation. In systems designed to operate without intermediaries, regulators face a structural dilemma, how to impose accountability when no single entity controls the protocol.
In response, some jurisdictions have begun targeting individuals who contribute meaningfully to protocol operations such as core developers, front-end operators, and governance participants as de facto responsible parties. Regulatory conversations are increasingly shifting towards functional control, those who exercise sufficient influence over products, services, or activities may fall within scope. Depending on the facts and circumstances, this could include foundations, holders of governance or voting tokens, individuals with administrative rights to smart contracts, or those responsible for maintaining or updating key aspects of a protocol[vii].
Yet DeFi is not a binary construct. Many protocols intentionally follow a phased decentralization model, where initial control rests with developers or founders but gradually disperses across a broader set of participants[viii]. In such cases, particularly where administrative control has been demonstrably relinquished, it may be both ineffective and unduly burdensome to designate original creators as responsible persons[ix]. This evolving landscape forces a fundamental re-evaluation of regulatory principles; how do we protect consumers and ensure financial integrity without stifling the permissionless innovation at the heart of DeFi? Where does liability reside in a system of composable, open-source code?
DeFi protocols fundamentally blur the long-standing boundaries between software, financial services, and governance systems. In the absence of a shared global framework for protocol-level accountability, a range of jurisdictional responses is emerging[x]. This divergence, while a natural reflection of different legal traditions and risk appetites, creates a complex environment for cross-border operation. As DeFi continues to evolve, the regulatory imperative should be focused on developing oversight that’s agile enough to reflect its diversity yet coordinated enough to support global interoperability.
Navigating a Mosaic of Regulatory Approaches for Stablecoins & Tokenized Assets
Stablecoins have evolved into a foundational component of the DeFi ecosystem, serving as a primary medium for payment, settlement, and a critical bridge between traditional and decentralized finance. They underpin key activities like trading, lending, and liquidity provision. With a collective market capitalization exceeding $300 billion[xi], their systemic importance is arguably no longer theoretical. Their integration into various market functions means that disruptions or failures could arguably have far-reaching implications, not only for participants within the crypto space, but for the stability of financial markets more broadly.
However, their rapid growth has occurred alongside a mosaic of regulatory approaches. As discussed in Part II, various jurisdictions have initially prioritized the regulation of fiat-backed stablecoins, establishing frameworks for licensing, reserve custody, and disclosure. By contrast, algorithmic and crypto-collateralized models remain largely unregulated or explicitly excluded, reflecting ongoing debate about whether on-chain stability mechanisms will ever fit within the regulatory perimeter. Standard-setting bodies have issued recommendations around governance, risk management, and data integrity[xii] but implementation varies widely and remains a work in progress.
The pattern of divergence is mirrored in the realm of tokenized instruments, such as securities and real-world assets. There is no international consensus on their legal nature and categorizations may vary within jurisdictional frameworks or may not be explicitly addressed. Consequently, regulatory requirements for such assets may diverge significantly across jurisdictions, shaped by the relevant jurisdiction's primary focus.
In response, industry participants advocate for regulation that is both practical and adaptable, capable of recognizing the technical diversity of these assets without prematurely limiting their development. The central challenge is that until a greater degree of international convergence emerges on core classifications, the goal of seamless cross-border interoperability will be difficult to achieve.
Technical infrastructure is advancing at a pace that challenges legal frameworks to adapt, creating a gap that carries implications for market efficiency and consumer trust.
A Spectrum of Licensing and Supervisory Models
The global approach to licensing and supervision reflects a wide spectrum of models, as jurisdictions tailor frameworks to their legal traditions, market structures, and risk appetites. This has produced regimes ranging from comprehensive, single-licence systems to more nuanced, tiered, or modular frameworks. Supervisory architectures vary just as widely, from centralized oversight by a single authority to multi-agency models or delegated self-regulatory bodies, each designed to leverage existing institutional strengths.
This regulatory diversity, while a source of valuable experimentation, presents a dual challenge for a sector that is not merely globalized but inherently transnational. The first is a potentially uneven competitive landscape, where a firm's operational burden is shaped by its jurisdictional footprint and which may encourage arbitrage. The second, and more critical for long-term stability, is the strain it places on cross-border supervisory cooperation. Authorities are tasked with reconciling fundamentally different licensing thresholds and risk tolerances, leading to a siloed oversight model that is inherently challenged by the borderless, protocol-driven nature of the crypto ecosystem.
Cross-Border Compliance: Interoperability and Coordination Challenges
Crypto’s borderless nature demands coordinated oversight, yet the tools for such collaboration remain nascent and inconsistently applied[xiii]. This coordination gap creates tangible operational deadlocks for legitimate actors navigating cross-border compliance.
A prime example is the implementation of the Travel Rule[xiv] which remains fragmented. Many blockchain networks and interoperability protocols lack native mechanisms to transmit originator and beneficiary information securely or use incompatible protocols for transmitting this data. This creates interoperability bottlenecks, where compliant VASPs struggle to exchange data with counterparts in less mature regimes, undermining both operational efficiency and systemic safety[xv].
The consequences of this deficit are twofold. For regulators, the absence of legal and technical bridges impedes a consolidated view of cross-border market activity and risks, leaving the system vulnerable to blind spots[xvi]. For the ecosystem, it introduces significant friction for legitimate international expansion while simultaneously enabling bad actors to exploit jurisdictional gaps and enforcement blind spots.
Ultimately, these interoperability challenges are not merely technical hurdles but symptoms of a larger systemic gap. Addressing them requires a fundamental shift from isolated national oversight to proactive international collaboration. The goal is to develop shared standards and trusted channels that secure the entire financial network, ensuring that legitimate activity can flourish while risks are effectively managed across borders.
Encouragingly, many jurisdictions are now actively implementing the Travel Rule, and technological solutions like TRUST[xvii], Signa[xviii] and other interoperability protocols are emerging to facilitate compliance. These are positive steps that demonstrate the ecosystem's capacity for innovation. The task now is to broaden this progress, ensuring these solutions achieve the global scale and adoption necessary to close the remaining coordination gaps.
Pathways to Global Coherence: Achieving Interoperable Regulatory Clarity
The key areas of divergence and operational challenges outlined above reflect the complexity of regulating an ecosystem that operates beyond traditional jurisdictional boundaries. These are not mere operational frictions but symptoms of a fundamental architectural challenge, that is, how to govern a borderless system with bounded tools. It is clear that the path forward lies in constructing frameworks that enable interoperability among diverse regulatory approaches.
Global coherence does not require a single, monolithic rulebook. Instead, it should be meaningfully constructed to facilitate regulatory clarity across jurisdictions (and not just within). Building a cohesive system that enables interoperability among diverse frameworks requires collaboration, communication, and connection. Such an approach ensures that clarity is not confined within the boundaries of a single jurisdiction, but extends outward, supporting seamless engagement and compliance in a global and transnational ecosystem.
Achieving this kind of clarity requires more than just alignment of principles, it requires semantic precision and regulatory adaptability, as discussed earlier, to bridge jurisdictional divides and foster alignment.
Interoperable taxonomies and standardized disclosure requirements are essential for enabling regulators, market participants, and users to speak a common language about products, risks, and obligations[xix]. These efforts are most effective when anchored in harmonization platforms led by international standard-setting bodies, which can facilitate the development of scalable, modular systems that respect local nuances.
Moreover, as finance becomes increasingly decentralized, accountability must evolve beyond reliance on centralized intermediaries to support meaningful supervision without undermining the permissionless nature of decentralized systems[xx].
Effective oversight also requires coordinated supervisory infrastructure, including real-time information-sharing platforms, joint supervisory teams, and harmonized reporting interfaces. Such collaboration streamlines compliance for entities operating across multiple jurisdictions and strengthens collective action against illicit activity and market abuse.
This vision is already emerging in fragments, with international bodies advancing key recommnedations, industry groups piloting open-source compliance frameworks, and regulators experimenting with cross-border sandboxes[xxi]. The challenge ahead is to connect these initiatives, fostering a culture of shared responsibility and adaptive oversight.
Industry participants play a critical role in co-creating clarity by actively engaging in regulatory sandboxes, contributing to consultations, and developing interoperable-by-design products. Collaboration between regulators, protocol developers, auditors, infrastructure providers, and academia will be key to developing standards that are technically grounded and responsive to evolving risks.
Only through this integrated approach can the promise of global interoperability and true regulatory clarity be realized, balancing innovation, stability, and user protection in a rapidly evolving crypto asset ecosystem.
Conclusion
Regulatory clarity in the crypto ecosystem is not a fixed destination, but a dynamic and iterative journey. As national regimes continue to refine their approaches, the borderless nature of crypto assets demands frameworks that transcend isolated rulebooks. The divergence in taxonomy and jurisdictional asymmetries highlight the urgent need for interoperable structures, ones that enable diverse regulatory philosophies to coexist while supporting seamless cross-border engagement.
Achieving true clarity will require more than alignment of principles; it calls for shared definitions, standardized disclosures, and coordinated supervisory protocols. International collaboration through harmonization platforms and experimental regimes must bridge the islands of regulatory certainty, fostering a culture of transparency, accountability, and adaptive oversight.
Ultimately, the goal is not a monolithic global regime, but rather coherent, interoperable frameworks. Such an ecosystem will empower innovators, protect users, and strengthen global resilience. Clarity builds trust, trust drives participation, and participation reinforces legitimacy. By co-constructing adaptive and transparent structures, regulators and industry can realize the promise of a mature, borderless crypto asset market, one that balances innovation, stability, and user protection.
References
[i] “Each jurisdiction is developing regulations based on unique goals and objectives, which risks a lack of coordination globally”: Digital Assets Regulation: Insights from Jurisdictional Approaches (October 2024).
[ii] “The absence of consensus over terminology, definitions, and classification can be a key barrier to the development of a robust regulatory framework and may hamper further regulatory harmonisation across jurisdictions. Given the inherent cross-border nature of crypto asset transactions, diverging interpretations of terms among regulatory bodies may facilitate regulatory arbitrage”: GLOBAL CRYPTOASSET REGULATORY LANDSCAPE STUDY (Cambridge Centre for Alternative Finance).
[iii] “There are yet no globally consistent definitions and classification or taxonomy of crypto assets…….. A key challenge in defining crypto assets is their diverse, complex, and/or novel features.”: IMF Policy Paper Elements Of Effective Policies For Crypto Assets (2023).
[iv] Discussed in Part II. The term “Virtual asset” is often linked to FATF terminology, “Crypto asset” as defined in EU frameworks like MiCA and “Digital asset” broader, sometimes encompassing tokenized securities, etc.
[v] See https://www.weforum.org/publications/pathways-to-crypto-asset-regulation-a-global-approach/. “The crypto-asset ecosystem lacks a consensus on definitions, taxonomies or even classification, and these continue to evolve as the uses for the technology develop. For too long, national regulators have metaphorically spoken different languages when communicating about and defining crypto assets”.
[ix] Blockchain Australia for example notes that certain persons who may have initially qualified as Responsible Persons may, depending on the lifecycle of the relevant offering, no longer have any involvement with the relevant DeFi protocol at later stages of its development and operation.
[x] Ikegwu, Chinonso & Uzougbo, Ngozi & Adewusi, Adefolake. (2024). Regulatory Frameworks for Decentralized Finance (DeFi): Challenges and opportunities. GSC Advanced Research and Reviews. 19. 116-129. 10.30574/gscarr.2024.19.2.0170.
[xii] both on-chain and off-chain.
[xiii] As the IMF notes, “cross-border cooperation is essential to avoid regulatory arbitrage and ensure effective oversight.” Ibid.
[xiv] requires virtual asset service providers (VASPs) to transmit originator and beneficiary information for qualifying transactions.
[xv] See Sumsub’s article “The Travel Rule Is Stuck in Transit—Here’s How to Get It Moving”, which discusses some of these points.
[xvi] Initiatives like TRM’s BLOCK, a multi-stakeholder forum for regulators, investigators, and compliance professionals, are beginning to help in addressing some of these gaps through the fostering of hands-on collaboration across sectors and jurisdictions, building trusted channels for blockchain intelligence, and accelerating the development of shared enforcement standards.
[xix] “Given the diverse actors and roles that comprise the digital assets ecosystem, a general taxonomy is essential for consistent regulation and can assist with clarity and organization, as well as consistent benchmarking across various jurisdictions. The lack of a common taxonomy has been mentioned in the digital asset space and was referenced in the Pathways to Crypto-Asset Regulation report as an important risk. However, there are still many perspectives and a lack of consensus persists on definitions among ecosystem participants”. WEF’s Digital Assets Regulation: Insights from Jurisdictional Approaches (October 2024)
[xx] The goal is not to conquer decentralization, but to establish a perimeter of accountability that protects users while preserving cryptographic freedoms.