To ensure that cryptocurrency traders do not go overboard in their quest to make a profit, regulations are put in place. Regulatory arbitrage exists, however, as investors search for loopholes in existing regulations and take advantage of them. Try as regulatory authorities may, this practice by traders that deals on bitcoins, among other things, cannot be totally eliminated.

Regulatory authorities put checks in place as a tactic to eliminate cryptocurrency investors from taking advantage of loopholes, and in cases where circumventions apply, the costs associated with completing such transactions are quite high and discouraging. Regardless, they still get involved in this practice using any of the tactics below:

regulatory arbitrage

1. Restructuring Transactions: This tactic avoids going through the process of acquisition which can be monitored by regulatory authorities. Traders adopt this approach of transferring assets, such as bitcoins, and/or liabilities without having to go through a purchase process as required in the case of acquisitions. This means that an exchange of consideration is absent and circumvents regulation.

2. Financial Engineering: What firms have been able to achieve using this tactic is to leverage tools offered by technology to create additional options such as Long Straddle among others that offer arbitrage opportunities of making a profit in the business of trading bitcoins. Despite all the innovations that come with it, financial engineering is considered to be a controversial field that brought about the 2008 global recession.

3. Geographic Relocation: This is self-explanatory. Cryptocurrency investors simply take advantage of locations that offer tax havens or any other regulatory breaks. All they need to do is establish subsidiaries in such locations or incorporate their companies there. In order to attract investors, it is common to have governments offer incentives which these investors are willing to take up.

A few reasons explain why cryptocurrency traders prefer to take this route and they include:

a) Reduced Regulatory Burdens: Traders want to take any advantage available to them and make a profit. So, when regulations become burdensome to them, they simply seek respite where available. For instance, when taxed heavily as a corporation, an organization may elect to become a master limited partnership while continuing in the same business of trading bitcoins. Too much oversight may prove more of a burden to firms and prompt them to adopt ways to reduce regulatory burdens.

b) Increased Privacy: Declaring every financial transaction undertaken may not sound appealing to most traders, in truth. They crave the maintenance of privacy on how much income they make, especially where a huge disparity exists between the profits a bitcoin trader gets and minimum wage. Some declarations of what cryptocurrency investors earn have brought back a backlash from the public at large, for instance. This explains why they prefer to transact from regions that offer them such privacy.

c) Increased Profits: This is attained by escaping heavy tax rates. Such savings are good for savvy investors. Tax advantages explain why many cryptocurrency traders choose to incorporate into the Cayman Islands, for instance.

regulatory arbitrage trading

All upwardly mobile cryptocurrency investors trade in bitcoins with a view to making a profit and will always seek places that favor them. While regulations are good to ensure that traders play by the rules, some are considered to be too unfavorable, prompting investors to take advantage of the tactics listed above.