A founder can create a financial product for use by an international audience even if the company has not yet reached the stage of operating internationally. Although the technology functions across different borders, permission to offer it hardly does.
For businesses that are operating in the field of digital finance, this involves a tough decision to make. Getting into a new market may call for new legal analysis, different permissions and modifications to the way the product functions, even if the basic service stays the same.
The industry usually refers to this as a problem relating to regulation. In my view, the more helpful distinction is one between the cost of complying with clear standards and the cost of dealing with standards that vary from one market to another.
Businesses that are responsible should anticipate having to be examined regarding the way in which they guard their assets, communicate risks, and protect their customers. The problem is ensuring that these obligations are predictable so that founders can build their businesses around them.
Progress at different speeds
Europe, along with the UK and the US, is making progress in regard to clearer oversight, but the methods they are using and the timelines for implementation are still different.
MiCA, which is the EU’s Markets in Crypto-Assets Regulation, came into broad application in December 2024 after its rules concerning stablecoins had been applied earlier. It sets up a common framework for covered crypto assets and services, although those assets which are already regulated by other financial legislation will continue to be governed by those rules. This distinction is important in that tokenising a financial instrument does not automatically mean it falls within the scope of MiCA.
The country has now gone beyond the first stage of consultation. The FCA has issued its final rules and guidance, and the wider regulatory framework is set to come into force in October 2027. Businesses thus have the practical job of getting ready for the future requirements while at the same time fulfilling the obligations which are already in place.
In the United States, the SEC and CFTC’s harmonisation programme aims to reduce conflicting requirements and clarify jurisdictional boundaries. As I previously discussed with crypto.news, delays to market structure legislation have placed greater responsibility on regulators to provide clarity for businesses. The fact that the various agencies are coordinating is a significant step forward, but this does not mean that U.S. requirements will be brought into line with those in Europe or the UK.
For founders, these differences lead to decisions regarding which customers to target, which features to launch and how much capital to keep back before expanding.
The cost appears before the revenue
Imagine a small company which is creating a service to help businesses with the management of their digital assets. Before it decides to enter a second market it should consider whether its activities are classified, if the permissions it currently has are adequate and whether changes need to be made to its custody arrangements or to its communications with customers.
The outcome varies according to the service and the jurisdiction in question, since the commercial result is that if the company wishes to expand it will have to put in a lot of effort before it finds out whether customers in that market will pay for its product.
A bigger company can distribute that work among its existing legal, compliance and operational teams, while for a startup it might end up competing with product development, recruitment and customer acquisition.
The costs go beyond those involving professional fees. If the launch is delayed then there will be a longer period during which no revenue is generated. If a feature is only available in certain markets this can make customer support more difficult. The uncertainty regarding future requirements can also cause potential banking or distribution partners to become more cautious.
I regard fragmentation as a kind of tax on both the founder’s time and on the capital at their disposal, since it can cause a young company to have fewer opportunities which it can realistically take on.
An unintended advantage for incumbents
Strict regulation can help to build up confidence in a market, since customers and institutional partners will only place their trust in a business when it has reliable protections.
Policymakers should also think about whether the process of meeting those standards tends to benefit companies that already have a large scale.
The advantage that larger firms obtain goes beyond the quality of their products since entering each new market involves a great deal of work which cannot be reused. They are able to keep more separate units, hire more advisers and take longer to break even on an investment.
Small companies might react by sticking to a single market, by limiting the range of their services or by forming partnerships with an existing provider. Each of these courses of action might be a reasonable business choice, but taken together they could result in reduced competition.
In the article I wrote for CoinDesk about venture capital pulling back towards established companies, I stated that investors run the risk of missing out on the early stage when the necessary infrastructure is set up. The issue of regulatory complexity introduces another factor: promising teams need enough support in order to become credible market participants before they can show scale.
Compliance becomes a founding decision
The founders will not wait until there is international agreement before making their commercial decisions.
From an investment point of view, I would like to know if the company has selected a realistic first market, identified the activities which require authorization and allocated a budget for the operational responsibilities that result from those activities.
I should also find out what occurs when the business grows. Will it be able to adjust customer eligibility, the disclosures, and access to certain services without having to rebuild its whole product? Is it clear who is responsible between the company and its regulated partners? Will its revenue model still be viable when the compliance costs are taken into account?
As I previously told Decrypt, from the very beginning, product design and distribution strategy should be considered together with these questions.
The fact is that a young company need not have an elaborate international structure before it has obtained its first customer. Introducing unnecessary complexity also ties up capital. What it does mean is that the founders should realise which of their early decisions could later become costly constraints.
In the article I wrote earlier about the adoption of stablecoins, I looked at the operational obstacles involved in achieving fast settlement and having the service used in ordinary business situations. Regulatory fragmentation presents another difficulty in that a company might overcome those operational problems in one market but would still have to do a great deal of extra work before it could offer the same service in another.
A more practical ambition for regulation
It is unlikely that the same rules will apply around the world, and various markets are likely to make different decisions regarding consumer protection and financial risk.
A more realistic goal is to achieve greater compatibility by providing clearer definitions, making their information requirements more consistent, and improving coordination in those cases where companies are dealing with similar risks.
Regulators ought to keep the ability to examine companies that operate in their markets and they should also inquire as to where repeated procedures provide extra protection and where they merely involve carrying out the same work once again.
For founders regulatory flexibility is now an important element in creating a resilient business, while for policymakers the chance to reduce unnecessary duplication is one way of supporting competition without damaging the standards.
Progress should be judged by the extent to which a responsible company is able to understand what is needed, to plan its investments, and to expand with confidence. So long as this situation remains difficult, fragmentation will keep affecting the kinds of businesses that are established and those that can afford to grow.
