Definition ∞ Supervisory arbitrage occurs when financial entities exploit differences in regulatory oversight or enforcement across various jurisdictions to gain a competitive advantage or reduce compliance costs. In the digital asset space, this might involve operating in regions with less stringent rules to avoid more demanding regulatory environments. It can lead to an uneven playing field and potential systemic risks.
Context ∞ Supervisory arbitrage is a significant concern for international regulators seeking to establish a level playing field and prevent regulatory races to the bottom in the digital asset sector. A key debate involves the need for global regulatory coordination to close gaps that enable such arbitrage. Future developments will likely include increased cross-border cooperation and the establishment of common regulatory principles to reduce opportunities for entities to exploit jurisdictional differences.
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