Definition ∞ Regulatory arbitrage risk arises when market participants exploit differences in legal or supervisory frameworks across various jurisdictions or asset classes to gain an advantage. This typically involves moving activities to less regulated environments to avoid stricter compliance burdens or higher operational costs. It can lead to uneven competition and potential systemic vulnerabilities within the financial system. This behavior undermines regulatory effectiveness.
Context ∞ In the global digital asset market, regulatory arbitrage risk is a prominent concern for policymakers due to the borderless nature of cryptocurrencies. News often highlights instances where firms operate in jurisdictions with minimal oversight, prompting calls for international regulatory cooperation. Efforts by bodies like the Financial Stability Board aim to harmonize rules to mitigate this risk and ensure a level playing field for all market participants.
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