From: hughes@ah.com (Eric Hughes)
Date: Thu, 9 Jun 94 09:55:15 PDT
To: cypherpunks@toad.com
Subject: Regulatory Arbitrage
Message-ID: <9406091702.AA18831@ah.com>
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Here a quotation from a book I've been reading:

    "The eurocurrency markets represent a type of regulatory
    arbitrage.  Eurobanking is a managed financial package that
    combines the currency of one country (one regulatory environment)
    with the banking regulations and competitive efficiencies of
    another country.  This repackaging was made possible by
    improvements in worldwide communications links and information
    technology.  If the regulatory burden becomes too high in one area
    of the world, the bundle of eurobanking services can be
    reassembled in another.  Hence, national regulators must compete
    to maintain their respective shares of the eurocurrency business.
    Competition with respect to lending quotas, reserve requirements,
    capital requirements, deposit insurance, the taxing and reporting
    of interest payments, and the taxing of profits, dividends, and
    capital gains, all measured against any perceived positive
    benefits of local regulation, governs the geographical
    distribution of eurocurrency market shares."

From _International Financial Markets_, by J. Orlin Grabbe, formerly
of the Wharton School.  

Regulatory arbitrage is an Important concept, as well as a great phrase.

The writer is square in the middle of the mainstream in the business
world, and note how effortlessly he speaks of avoiding governments and
playing them off against each other.  There is a lesson to be learned
here--that speaking of internationalization as if it were somehow
disapproved of, as if it were not absolutely matter-of-fact, is a
mistake.  If I refer to the internationalization of retail funds
transfer systems, for example, as if someone might not like that, I
also ask the hearer an implicit question: "Might you also disapprove?"

In a similar vein, exhibiting, with repsect to cryptography, the
analogue of teenaged glee in smashing mailboxes, somehow thinking that
you've also struck a blow against authority, is another mistake.  We
need not show up the NSA, we simply want them to lose.

Regarding the subject of the quotation, it is vitally important that
the residents of the USA who are on this list remember that the key to
strategic victory in cryptography lies internationally, not only for
the USA, but for every other country as well.  If remailers are
outlawed or supressed out of one country, the same functionality can
be made in another.  And so forth.

Arbitrage is smuggling, or rather, the transport of one good or
service purchased cheap in one place and sold dear in another.
Arbitrage always has one of two effects, either a transfer of real
wealth to the place more advantageous the buyer (as well as enriching
the middleman), or an equalization of advantage.  For financial
markets, the equalization always happens sooner or later, and the
price may either rise or fall in either the source or destination.

Arbitrage of regulation almost always leads to equalization, although
the time scales are much longer.  When equalization happens, it's
almost never that the advantage decreases for the destination buyer.
Rather, because there are many more than two markets available, any
tighter regulation invariably puts those two markets on an even
footing in disadvantage with respect to the rest of the world.  So the
arbitrage of regulation usually leads to a relaxtion of regulation.

We need to remember to make it possible for regulatory arbitrage to
occur.  If it can happen, it likely will, but only if the choice is
available.

Eric