After activation by an agonist, G-protein-coupled receptors (GPCRs) recruit β-arrestin, which desensitizes heterotrimeric G-protein signalling and promotes receptor endocytosis1. Additionally, β-arrestin directly regulates many cell signalling pathways that can induce cellular responses distinct from that of G proteins2. In contrast to G proteins, for which there are many high-resolution structures in complex with GPCRs, the molecular mechanisms underlying the interaction of β-arrestin with GPCRs are much less understood. Here we present a cryo-electron microscopy structure of β-arrestin 1 (βarr1) in complex with M2 muscarinic receptor (M2R) reconstituted in lipid nanodiscs. The M2R-βarr1 complex displays a multimodal network of flexible interactions, including binding of the N domain of βarr1 to phosphorylated receptor residues and insertion of the finger loop of βarr1 into the M2R seven-transmembrane bundle, which adopts a conformation similar to that in the M2R-heterotrimeric Go protein complex3. Moreover, the cryo-electron microscopy map reveals that the C-edge of βarr1 engages the lipid bilayer. Through atomistic simulations and biophysical, biochemical and cellular assays, we show that the C-edge is critical for stable complex formation, βarr1 recruitment, receptor internalization, and desensitization of G-protein activation. Taken together, these data suggest that the cooperative interactions of β-arrestin with both the receptor and the phospholipid bilayer contribute to its functional versatility.