Regulatory arbitrage in European Union digital finance: Development dynamics and implementation risks

Abstract

Regulatory arbitrage remains a recurring concern in the regulation of EU digital finance, particularly as crypto-asset markets develop within the MiCA framework. This article asks why such arbitrage persists and what risks it creates for regulators and supervisors. It argues that regulatory arbitrage cannot be reduced to opportunistic behaviour by individual market participants. Instead, it emerges from gaps in the EU digital-finance framework itself, where legal categories often struggle to keep pace with evolving technological and business models. Based on doctrinal legal research and qualitative functional analysis of European Union legislative, regulatory and supervisory materials, the article develops a working definition of regulatory arbitrage tailored to digital finance. It identifies the main drivers of arbitrage, including overlaps between legal regimes, difficulties in classifying digital products, the strategic use of token design and platform architecture, supervisory divergence within the EU and regulatory lag. The article also analyses the principal risks generated by arbitrage, including weaker investor and consumer protection, reduced market integrity, operational and cyber vulnerabilities, financial-stability concerns, competitive distortions and supervisory blind spots. It concludes that an effective response requires not only more detailed rules, but a coherent, function-oriented approach to legal qualification, stronger supervisory convergence and a regulatory framework capable of adapting to technological and business-model innovation.