1994-06-10 - Regulatory Arbitrage

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From: hughes@ah.com (Eric Hughes)
To: cypherpunks@toad.com
Message Hash: 06ee8010c0af8996e4b07e1f2a118084fff8604aa03c9c27ef6c0fa9d66f2aeb
Message ID: <9406101521.AA20520@ah.com>
Reply To: <199406092217.SAA29718@zork.tiac.net>
UTC Datetime: 1994-06-10 15:10:34 UTC
Raw Date: Fri, 10 Jun 94 08:10:34 PDT

Raw message

From: hughes@ah.com (Eric Hughes)
Date: Fri, 10 Jun 94 08:10:34 PDT
To: cypherpunks@toad.com
Subject: Regulatory Arbitrage
In-Reply-To: <199406092217.SAA29718@zork.tiac.net>
Message-ID: <9406101521.AA20520@ah.com>
MIME-Version: 1.0
Content-Type: text/plain

   Eurodollars were invented
   to get around American tax and currency regulations, and those of other

Eurocurrency and eurobond markets started about thirty years ago, as
the Bretton Woods monetary agreement was breaking down, which
officially happened in 1973.  So for a good clear twenty years there's
been this mediated market which uses regulatory arbitrage to provide
it's services.  It's been there _longer_than_modern_cryptography_.

One of the reasons eurodollars got created was that at that time a
London bank could offer higher interest rates on dollars than an
American bank could.  They offered better service than the
competition.  They could do so, in part, because neither the USA nor
UK governments put reserve requirements on dollar deposits held in
England banks.

There are real strong lessons here about how a private retail money
system will have to operate long term in order to be immune from local
government interference.

Suppose Bank of the X open a deposit account with, say, Barclay's, a
UK bank.  Barclay's can hold dollars at an account at, say, Citibank
in NY.  Citibank holds it's dollars at the Federal Reserve Bank, where
the buck stops (ahem).  The dollar account at Barclay's is a
eurodollar deposit, a deposit denominated in the currency of the USA
but not held in a bank under the regulation of the USA.  This is a
totally standard arrangement.

Now, suppose I tell you that part of that Barclay's deposit is yours,
after, of course, you give me some US dollars in the same amount.
Suppose, further, that the USA gov't decides they disapprove of you,
and want to take your money.  If they order Citibank to freeze the
Barclay's account, they risk international trade retaliation, because
only a small fraction of that money in Citibank is relevant.  And even
this presumes they know that Citibank is the USA depository bank--and
it likely won't even be the only one.

They might ask Barclay's, "pretty please, would you help us with this
bad person?"  And Barclay's will say (should say, if they still want
X's business) "I'm sorry, you'll have to go talk to X."

And X will say "Who's that?  I don't know who any of my customers

The same internationalization that will limit government action with
repsect to remailers _already_ happens with eurodollars.  I'd suggest
that those who want to know more about this hit the library at this

Did I mention that most eurobond issues are still bearer bonds?