Regulatory arbitrage is defined as the practice wherein firms make money by tapping loopholes and technical escapes in regulatory systems. The modus operandi behind doing so is to rescue the firm from unfavorable regulations. And this practice is not just limited to firms or for traditional markets; even individual investors are twisting and turning in the best ways possible, in the cryptocurrency niche so as to gain from regulatory arbitrage in cryptocurrency.
Impact of Regulatory Arbitrage in the Crypto World
It has been estimated that in the coming years, regulatory arbitrage will have a lead role to play in the cryptocurrency market and how traders trade on this platform. There are rules and regulations well in place in the cryptocurrency space to prevent investors from entering into both fraudulent activities as well as totally uncontrolled activities. Although this worked well in the first stage of the crypto market growth, but now is the second stage, where investors reach saturation easily with the traditional mechanisms of trading, and then they look for some vulnerabilities where they can attack the system to gain more profits. And no matter how much the government tries, it is difficult to devise a fool proof boundary, especially if the crypto in question is Bitcoin.
Ways to Prevent Side-Stepping in Regulatory Arbitrage
Although this can be tough to estimate, not the least, the government can try and put some good practices in place, so as to prevent the circumvent that happens in regulatory arbitrage. For example, strict limits can be placed on the maximum amount of transactions by a person in a given time. Or say, very stringent verification and documentation must be required before authorizing a person to be able to indulge in crypto trading. The costs of regulatory arbitrage can be made to go so high, that the opportunity cost of money as compared to that, seems to be much higher. Also strict and precise IT policies need to be in place to prevent the regulatory arbitrage as much as possible.
Why is Regulatory Arbitrage so Vulnerable?
Regulatory arbitrage is a common practice in cryptocurrency due to many reasons. We know that cryptocurrency trading is not bounded by geographic boundaries, so this makes it easier for traders to discover new loopholes all the time. Second, the concept is still new to crypto, and thus there is a need for many good practices to be deployed well in place to avoid any kind of regulatory arbitrage. It is often said, 2 heads make 11, and in case of regulatory arbitrage, we can’t even count the number of heads who continuously work towards experimenting new and new tricks so as to escape from the unfavorable rules and regulations.
In a Nutshell
Whereas the government must make its best effort to get rid of regulatory arbitrage in cryptocurrency, investors can look for companies like executium.com, which can come out with legal ways for them, just turning and twisting the law, so as to indulge in regulatory arbitrage.