Regulatory interpretation risk arises from ambiguous rule language, evolving guidance, or differences between legal advice and enforcement expectations. Organizations may inadvertently violate regulations despite good-faith compliance efforts due to misunderstanding complex or novel requirements. This risk increases with cross-border operations facing multiple jurisdictions and rapidly evolving areas like digital assets or AI governance. A fintech company interpreted data residency rules to permit cloud storage with encryption, but regulators later clarified that physical location within borders was mandatory, requiring costly infrastructure changes.