How Strong Are International Standards in Practice? Evidence from Cryptocurrency Transactions

Abstract

The rise of cryptocurrency (decentralized digital currency) presents challenges for state regulators given its connection to illegal activity and pseudonymous nature, which allows both individuals and businesses to engage in regulatory arbitrage. In this paper, I assess the degree to which states have managed to regulate cryptocurrency exchanges, providing a detailed study of international efforts to impose common regulatory standards for a new technology. To do so, I introduce a dataset of cryptocurrency transactions collected during a two-month period in 2020 from exchanges in countries around the world and employ bunching estimation to compare levels of unusual activity below a threshold at which exchanges must screen customers for money laundering risk. I find that exchanges in some, but not all, countries show substantial unusual activity below the threshold; these findings suggest that while countries have made progress toward regulating cryptocurrency exchanges, gaps in enforcement across countries allow for regulatory arbitrage.

Keywords: regulatory arbitrage, international cooperation, financial regulation, international organizations, cryptocurrency, cryptocurrency exchange