When rules collide: how regulatory divergence fuels crypto disputes

The crypto industry has moved past the stage where legal uncertainty was an excuse for inaction. Courts are treating crypto assets as property. Regulators in major jurisdictions are writing rules. Institutional money is involved. The question for businesses operating in this space is no longer whether regulation will come, but what the economic consequences of fragmented and competing regulatory frameworks will be, and where the disputes will follow.

 

Why regulation is diverging, not converging

Hopes for global regulatory convergence in crypto have not materialised. The UK, EU, US and major Asian jurisdictions are each developing their own frameworks, shaped by different political priorities, institutional structures and competitive incentives. This is not accidental. Jurisdictions are competing for crypto business, and the terms on which they compete include the relative strictness of their rules.

The EU’s MiCA regulation represents the most comprehensive attempt to date to create a unified framework, but it applies only within the EU. The UK is developing its own separate regime. The US remains divided between agencies, with ongoing disagreement about whether crypto assets are securities or commodities. Asian jurisdictions range from permissive to highly restrictive. The result is not a patchwork so much as a set of genuinely competing systems, each with its own internal logic.

I led a crypto exchange for eight years, including licensing in an EU member state, and subsequently led that exchange to obtain a MICA license. One of the objectives underlying the MICA license was to passport across the EU member states, but i now realise that not all the EU member states are enthusiastic about passporting. This led me to appreciate that regulatory regimes are messy. The economics of that messiness is where disputes are born.

The primary economic consequence of this divergence is regulatory arbitrage. Firms can choose where to incorporate, where to hold assets and where to seek licences based partly on which framework suits their business model. This creates competitive distortions: firms operating under stricter regimes face higher compliance costs than those in looser jurisdictions, even when serving identical customers. It also means that the protections available to a customer depend not on where they live but on where the firm they deal with is regulated.

These distortions generate disputes in several ways. First, where firms have structured themselves to take advantage of a more permissive regime, regulators in stricter jurisdictions may challenge whether that structure is genuine or whether the firm is effectively operating locally without authorisation. Determining whether a firm is truly offshore or is substantively serving a domestic market is an economic question: it turns on where revenue is generated, where customers are located and how the commercial relationship is structured. Second, firms competing in the same market but regulated under different frameworks may dispute whether a competitor is operating on genuinely equivalent terms, raising competition law questions that require economic analysis of market definition, cost differentials and the degree of substitutability between the services on offer.

Third, cross-border mergers and acquisitions in the crypto sector have created a distinct category of post-transaction disputes. Where a buyer acquires a firm that turns out to carry regulatory liabilities in jurisdictions the buyer had not fully assessed, the resulting claims about what was warranted, what was disclosed and what the compliance exposure is worth all require economic quantification. The divergence of rules across jurisdictions makes these assessments harder, since the same underlying activity may be compliant in one place and actionable in another.

For businesses, unintended regulatory exposure is also a real risk. A firm regulated in one jurisdiction may find that its activities elsewhere breach local rules without any physical presence there. The FCA has issued warnings to foreign crypto firms that sponsor UK sporting venues or events: a firm sponsoring a Formula 1 team may inadvertently advertise to UK consumers simply because a race takes place at Silverstone. If that firm holds no UK licence, it may breach financial promotion rules. The commercial decision to sponsor had nothing to do with regulatory strategy, but the financial consequences may be substantial.

Convergence remains unlikely in the near term. Each jurisdiction has invested politically and institutionally in its own approach. The EU has positioned MiCA as a model for others, but neither the UK nor the US has shown much appetite to follow it directly. The incentive to maintain a distinct and arguably more attractive framework is, for many jurisdictions, stronger than the incentive to harmonise. For firms and their advisers, this means that cross-border operations will continue to require jurisdiction-by-jurisdiction analysis, and that the disputes arising from regulatory gaps and inconsistencies will continue to grow.

Stablecoins: where the economics becomes most acute

Stablecoins sit at the point where regulatory tensions are sharpest and where the economic stakes are highest. A stablecoin is a crypto asset designed to maintain a fixed value, typically by holding a reserve of backing assets. The quality of those assets matters enormously. A stablecoin backed by short-term government securities is economically very different from one backed by commercial paper, other crypto assets or algorithmic mechanisms. Yet from the outside, both may present as equally stable.

The economic questions that arise in a stablecoin dispute are therefore not primarily legal. They are questions about asset valuation, liquidity and market structure. Was the backing portfolio sufficiently liquid to meet redemption demand under stress? Were assets accurately valued at the time? Was there a mismatch between the maturity of backing assets and the immediacy of redemption rights? These are questions that require economic and financial analysis to answer, and they arise directly from decisions that issuers make about how to construct and present their reserves.

Jurisdictions are treating stablecoins differently. Under MiCA, stablecoins are classified either as e-money tokens or asset-referenced tokens, each subject to distinct rules on reserve composition and redemption. The UK is developing its own stablecoin framework with a particular focus on systemic risk for the largest issuers. The US has proposed legislation but not yet enacted it. This divergence means that the same stablecoin may be treated as a payment instrument in one jurisdiction and a regulated financial product in another, with different rights for holders in each case. A firm issuing a stablecoin that circulates across borders faces the prospect of simultaneously complying with multiple and potentially inconsistent sets of rules.

The legal status of crypto assets in English law adds a further dimension. English courts have recognised crypto as property, which raises the question of whether exchanges and issuers hold customer assets on a constructive trust. If they do, then in an insolvency, customers may have a property claim rather than an unsecured creditor claim. The practical difference is significant: a property claim ranks above unsecured creditors and may allow recovery even where the estate is deeply insolvent. Resolving that question requires not just legal analysis but economic analysis of how assets were actually held, what the backing consisted of and what customers could reasonably have understood they owned.

Where the disputes will come from

Regulatory divergence generates disputes in a predictable way. As rules become clearer, so does the scope for arguing that they have been breached. The period immediately after new regulation comes into force typically produces more disputes, not fewer, because firms and regulators are testing boundaries and the meaning of new rules is genuinely uncertain.

For stablecoins specifically, the most likely sources of dispute are failures or near-failures that raise questions about backing asset quality; redemption disputes where holders claim entitlement to redeem at par but could not do so; and misrepresentation claims where the marketed characteristics of a stablecoin differed from its actual structure. Cross-border disputes will be complicated by different legal treatments across jurisdictions, affecting both which law applies and what remedies are available.

Business-to-consumer disputes, particularly involving retail customers who entered the market without full understanding of the risks, are already a growing category. As stablecoin use expands beyond sophisticated investors to everyday payment uses, the volume of consumer disputes is likely to increase. The economics of many of these disputes will focus on loss quantification: what did the customer expect, what did they receive, and what is the difference worth? Importantly, when a stablecoin transaction fails, whose problem is it? These are economic questions as much as legal ones.

At a broader level, regulatory divergence across the UK, EU, US and Asia will drive a growing share of disputes that turn on which jurisdiction’s rules apply and whether a firm met the standard required in each market it serves. The ecosystem is still evolving: the disputes landscape in crypto is maturing fast but the most commercially significant questions have barely been tested. These disputes require analysis that bridges economics, law and market practice. For firms operating across borders, understanding how regulatory differences translate into legal and financial exposure is no longer optional. It is a core part of managing risk in a market that regulators are still actively shaping.

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Dr Mark Bamber is a Senior Consultant at DT Economics and specialises in economic analysis. DT Economics is a boutique economics consultancy specialising in expert witness, competition economics and regulatory advice.