Jurisdictional arbitrage: combatting an inevitable by-product of cryptoasset regulation
| DOI | https://doi.org/10.1108/JFRC-02-2022-0013 |
| Published date | 13 July 2022 |
| Date | 13 July 2022 |
| Pages | 170-185 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Sideris Draganidis |
Jurisdictional arbitrage: combatting
an inevitable by-product of
cryptoasset regulation
Sideris Draganidis
Law School, University of Strathclyde, Glasgow, UK
Abstract
Purpose –This paper aims to provide an overview of different issues related to jurisdictional arbitrage found
in general regulatory arbitrage literature and their projection to the specific area of cryptoasset regulation.
Design/methodology/approach –By distinguishing any parallel, analogous and neighbouring
concepts, this paper attempts to clarify the notionof jurisdictional arbitrage. By discussing certain aspects
and effects of three regulatory regimes, BitLicense,5th Anti-Money Laundering Directive (AMLD5) and the
European Commission’s Proposal for a Regulation on Markets in Crypto-assets (MiCa), it makes clear that
national/State/regionalpolicymakers have already failed to create arbitrage-proof regulatory frameworksby
acting exclusively within their jurisdictional limits. Against this background, this paper discusses briefly
regulatory competition and international harmonisation as alternative solutions to inappropriate and
ineffectivenational/regional legislative approaches.
Findings –Based on a structured theoretical analysis, this paper reaches three important findings.First,
academics, internationalbodies and other commentators use inaccurately the general concept of “regulatory
arbitrage”to refer to the specific problem of jurisdictional arbitrage creating in this way an interpretative
confusion; second, commentators confuse jurisdictional conflicts with jurisdictional arbitrage; third, the
solutionsto this regulatory problem can actually be found in its underlying causes.
Originality/value –To the best of the author’s knowledge, this is the first specific-issue paper on
jurisdictional arbitrage in the context of cryptoasset regulation and aims to trigger further academic
discussion on this evolving phenomenon and inform the development of future cryptoasset regulation
combattingthis problem.
Keywords Cryptoasset regulation, International harmonisation, Regulatory arbitrage,
Regulatory competition, Regulatory regimes
Paper type Literature review
1. Introduction
Since the advent of the archetype cryptoasset, Bitcoin, in 2009, there have been many
developments in the relatedtechnological, financial and legal/regulatory areas.A plethora of
new cryptocurrencies, exceeding 7.580 in number (https://coinmarketcap.com, 2021), and
other types of cryptoassets have emerged, changingthe applicable regulatory nomenclature
from the narrow market-based term of “Bitcoin”[1] to broader terms, such as “virtual
currencies”[2]or“cryptoassets”[3](Blandin et al., 2019). New market practices, such as
Initial Coin Offerings, have been introduced and used successfully to raise capital for the
crypto-industry and the crypto-market itself has created new intermediaries as an integral
part of its ecosystem to facilitatetransactions. Finally, there have been new challenges to be
addressed by policymakersand regulators.
The author would like to thank their supervisor, Oles Andriychuk, for his helpful comments on
earlier drafts of this article.
JFRC
31,2
170
Received8 February 2022
Revised20 April 2022
14June 2022
Accepted17 June 2022
Journalof Financial Regulation
andCompliance
Vol.31 No. 2, 2023
pp. 170-185
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2022-0013
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
These challenges involve any possible ways of regulating the relatively new financial
and technological cryptoasset phenomenon. Indeed, this question of how to regulate
cryptoassets has beena pressing problem worldwide. Gradually, a swift towardssome form
of regulation of this phenomenon, with a number of national, and more recently, regional
policymakers taking the lead, has beenobserved. In 2014, Canada became the first country
in the world to enact specific domestic law on digital currencies and bring related financial
transactions within the ambit of national anti-money laundering(AML)/combatting the
financing of terrorism law (Duhaime, 2014). Shortly afterwards, BitLicense was adopted by
not only the New York State in 2015, paving the way globally, as the first comprehensive
regulatory attempt not only on US Federal (Callen-Naviglia and James, 2018) but also on
international level (Syska, 2016), to regulate crypto-businesses. Though this scheme
contains certain provisions related to AML/CTF and financial stability imposing,
respectively, an obligation of adopting a robust AML Program and capital requirements, it
clearly focuses on consumer protection by introducing certain disclosure and other
protection requirements(Official Compilation of Codes, Rules and Regulationsof the State of
New York, 2020), disregarding, according to some market participants, other important
aspects such as technological development and innovation (Syska, 2016). Since these early
regulatory developments, some jurisdictions around the world have prohibited
cryptoactivities, others have provided some kind of regulatory guidance, others have
adopted bespoke regulatory frameworks, others have extended or amended their current
financial legislation to fill the emergingregulatory gap and cover explicitly cryptoassets or,
simply, they have donenothing (Cuervo et al., 2019;Blandin et al., 2019).
Unfortunately, alongside the occurrence of such diverse national regulatory treatment
and the subsequent creation of a globally fragmented regulatory landscape, jurisdictional
arbitrage, a phenomenon familiar to legal academics, policymakers and regulators, has
found fertile ground to flourish. 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. It is
further perceived as beingclosely interrelated to other negative regulatory concepts,such as
the co-called “race to the bottom”. For instance,Frantz and Instefjord (2018, p. 819) note that
“regulatory competition leads to a race-to-the bottom effect because of the threat of
regulatory arbitrage [my emphasis added]”. Apart from academic attention drawn to this
“danger”in general, the sameissue has been acknowledged and addressed by policymakers
and regulators across the globe, specificallyin the field of cryptoasset regulation. One of the
most recent regulatory developments in the field has been European Commission’sMiCa
aiming, inter alia,to apply uniform rules across the EU and minimise regulatory arbitragein
that particular area(European Commission, 2020b).
The so-called “danger”of regulatory arbitrage has not been left unnoticed by FinTech
journalists (Poster, 2019) but despite its explicit importance for both theory and practice,
there is limited academic literature,generally, on regulatory arbitrage (Willesson, 2017) and
particularly, due to the subject’s novelty,on jurisdictional arbitrage relating to cryptoassets.
This article aims to fill this gap by exploring, from a legal perspective, the concept and
taxonomy of regulatory arbitrage, focusing on jurisdictional arbitrage in the context of
cryptoasset regulation, its cause(s), ways of occurrence in practice and consequences and
suggesting two alternative solutions to this problem. Jurisdictional arbitrage, a market
participants’strategy, should not be confused with jurisdictional conflicts. Although this
Cryptoasset
regulation
171
To continue reading
Request your trial