Creeping controls on the movement of capital will stunt global growth

For many years, globalization was a clear goal for everyone to achieve. After the Cold War ended, everyone hoped for a bright future without borders. For a while, this belief worked. Even the European Union appeared as a step toward more unification. Trade was liberalized, and capital flowed freely. Financial institutions, like the World Trade Organization, the International Monetary Fund and the Basel Committee, in their turn, were expected to set unified global rules.

But the 2008 financial crisis showed that the system as a whole is very fragile. It made one thing clear: When a system is that interconnected, any shock can make it fall like a house of cards. Although the global financial system did not fragment overnight, the countries started to focus more on their economy rather than achieving a bright future for everyone. Institutions like the Financial Stability Board, or FSB, were created, and stress-testing became the norm. But over time, oversight that initially had good intentions turned into regulatory balkanization and even more fragmentation of the system.

The current reality is that many jurisdictions now want more control, and not just over financial flows, but over who can operate within their borders and how. Local licensing rules have become a powerful tool in this process. Under the guise of compliance, authority bodies require firms to open local offices, hire domestic staff and spend millions just to obtain an operating license; and even in this case, getting permits is often subject to opaque verification processes.

What adds fuel to this issue is that tax regimes around the globe have become more complex. Instead of reforming public spending or simplifying regulation, many governments are only increasing tax rates. As a result, capital naturally flows into jurisdictions with lower taxes and more favorable conditions for innovation. It is not tax avoidance, but a rational decision. Yet, today they are portrayed as threats and betrayers rather than innovators.

Meanwhile, the financial system itself has undergone significant changes. The development of fintech, cryptocurrencies and digital services has changed the perception of what it means to be “present” in the market. For now, companies don’t need a separate office to serve clients all over the world, and you don’t even need to know where your user is.

Nevertheless, regulation is lagging behind and operating with 20th-century assumptions. Much of modern financial supervision has been developed for the analog world of physical branches. Moreover, rules are still very fragmented and not synchronized around the world. A company willing to open a branch, for example, in the European Union has to deal with Markets in Crypto Assets compliance. And the same company expanding in the U.K. has to adapt to British crypto regulation. 

Of course, this disparity is limiting innovation and growth. To expand and work on different markets, companies are forced to duplicate efforts, spending millions on localizing compliance. Product releases are delayed to match every requirement. When considering all this, the costs of expansion simply begin to outweigh the benefits.

Small players suffer the most in this situation. For fintech startups, the obligation of complying with many different licensing regimes can make international expansion almost impossible. Many simply prefer not to go beyond their domestic market, and the barriers, once put in place for reviving pre-2008 stability, are now limiting progress. This tension reflects a deeper global contradiction. Today, the world seems to be torn in two. On the one hand, there are technologies, cryptocurrencies, and the desire to achieve free movement of capital and ideas. On the other hand, we only see the growth of protectionism and the willingness of countries to close themselves off from each other.

Why did this happen? Because globalization has proved to be too difficult a task. Luxembourg and, for example, Nicaragua cannot be compared — they have vastly different levels of education and completely different economies. Making a common market for everyone just didn’t work and turned out to be not very profitable for more developed countries.

In addition, many developing countries have previously used the rules of globalization to their advantage. China, for example, called itself a developing country, receiving preferences, but at the same time, limited access to its market. At some point, this started to annoy developed economies like the United States, and as a response, the current confrontation took place, including efforts at reshoring production and the introduction of tariffs and restrictions.

So, it seems that there will only be more barriers. The dream of free movement of capital and a unified world seems to be dissolving. Countries will become more protectionist, even if it slows down overall progress.