Regulatory Arbitrage: What’s Law Got To Do With It?

Abstract

This paper explores regulatory arbitrage from a legal point of view. I start from the assumption that legislators will sometimes wish to prevent regulatory arbitrage and examine legal tools available to this end. To back up the underlying assumption, I present two perspectives on the phenomenon of regulatory arbitrage. One perspective stresses its competitive element, the other one focuses on instances of arbitrage as unwanted avoidance of a legal regime. It is suggested that from both perspectives we will find that – at least sometimes – regulatory arbitrage is unwanted. I move on to illustrate how EU and U.S. legislators have dealt with an example of unwanted arbitrage. The main part of the paper then deals with legal tools to suppress arbitrage. The main focus is on legislative drafting techniques such as choosing a narrow wording, a broad wording, anti-evasion rules or the concept of abuse. I conclude with a glance at problems of regulatory arbitrage in a corporate setting.

Jurisdictional arbitrage: combatting an inevitable by-product of cryptoasset regulation

“…Although there are various definitions of “regulatory arbitrage” found in academic literature (Willesson, 2017; Pollman, 2019; Langenbucher, 2021) and non-academic sources [5], it would be helpful to describe this concept, generally, as a notion denoting regulated or potentially regulated entities’ engagement in exploiting regulatory and/or legal loopholes or differences (Pollman, 2019) in two distinct levels, namely, either within or across national/regional jurisdictions (Schwarcz, 2012; Nabilou, 2017; Willesson, 2017), and thus, by-passing stringent regulation, comparatively to other intra-state or inter-state regulation(s).…”

“…On the one hand, there is a situation where companies take advantage of different regulatory rules applicable to functionally similar products/activities (Riles, 2014) within the boundaries of the same jurisdiction (Nabilou, 2017). Riles (2014) calls this situation “categorical arbitrage”, Langenbucher (2019, 2021) adopts the term “repackaging-arbitrage” and Nabilou (2017) prefers the term “intra-jurisdictional arbitrage”.…”

“…In addition, regulatory arbitrage must be distinguished from other analogous (Fleischer, 2010; Riles, 2014; Nabilou, 2017) or neighbouring terms, such as “financial arbitrage” and “forum shopping”. Financial arbitrage or simply, arbitrage, refers to the situation where companies, aka “financial arbitrageurs”, take advantage of the different pricing of homogenous services or products in different countries’ markets (Nabilou, 2017) by purchasing the same product or service at a low price in one domestic market and just selling it at a high price in another one (Partnoy, 2019; Langenbucher, 2019; Langenbucher, 2021). Academics suggest that this competing practice may lower globally the price of the product or service in question and ultimately, lead to a more efficient market (Partnoy, 2019; Langenbucher, 2021) where price differences are, basically, eliminated and different national markets are more closely connected (Riles, 2014).…”

“…Financial arbitrage or simply, arbitrage, refers to the situation where companies, aka “financial arbitrageurs”, take advantage of the different pricing of homogenous services or products in different countries’ markets (Nabilou, 2017) by purchasing the same product or service at a low price in one domestic market and just selling it at a high price in another one (Partnoy, 2019; Langenbucher, 2019; Langenbucher, 2021). Academics suggest that this competing practice may lower globally the price of the product or service in question and ultimately, lead to a more efficient market (Partnoy, 2019; Langenbucher, 2021) where price differences are, basically, eliminated and different national markets are more closely connected (Riles, 2014). By analogy, market participants’ employment of the regulatory arbitrage strategy “eventually results in the regulatory costs of a certain transaction to converge at the lowest level” (Langenbucher, 2021, p. 4).…”

“…This regulatory phenomenon is actually a category of the general phenomenon of “regulatory arbitrage”. The latter has been treated, generally, by scholars as having mainly a negative sense (Willesson, 2017; Langenbucher, 2019; Langenbucher, 2021), meaning, in essence, that it “implies an avoidance strategy” (Willesson, 2017, p. 77). As such, it may be seen as a “problem” attached to any adopted or, even, proposed piece of national/regional legislation concerning transnational issues.…”