Re: Regulatory Arbitrage

Excuse me while gush...

As usual, Eric is right.

[great discussion about how regulation only creates markets elsewhere...]

Arguably (only arguably...) some economic regulation is good for us: like a
*few* pharmaceutical and food regulations, maybe.

Eric points out that internet commerce and e-money, e$ for short, reminds
one of something that has been going on for a long time with another E$,
this time Eurodollars. (Kind of like AOL, eh?)  Eurodollars were invented
to get around American tax and currency regulations, and those of other
countries. You had all these American corporations funding themselves
through subsidiaries in Carribbean countries like the Netherlands Antilles.
(Any time you see "Companyname, N.V.", the "NV" is Dutch for "we funded
this with offshore dollars" ;-).

George Soros, who founded Quantum Fund, N.V., is evidently happy with the
results of this knowlege.  He recently made the fastest billion dollars in
history pointing out the folly of the European currency exchange rate
mechanism, much to the chagrin of the Bank of England and other central
banks whose money he pocketed.

I remember a Milton Friedman quote, something to the effect that
regulations only benefit a market's producers, not its consumers.  Current
day Japan, states with barber and bartender "licences", and Smoot/Hawley
America in the 1930's might be good examples of that.  If there's a market
for those goods/services elsewhere, people *will* buy there.

With internet commerce and e$ ,"elsewhere" is everywhere... But we know
that already, don't we?  I can't wait until the rest of the information, or
the software, or the intellectual services buying public figure that out.

The only way to prevent that is to regulate economic commerce on the
internet, which makes me shudder to think about.  Although, if the paradigm
holds, it won't make much difference.  It'll be like stopping capitalism
itself.

Cheers,
Bob Hettinga

-----------------
Robert Hettinga  (rah@shipwright.com) "There is no difference between someone
Shipwright Development Corporation     who eats too little and sees Heaven and
44 Farquhar Street                       someone who drinks too much and sees
Boston, MA 02331 USA                       snakes." -- Bertrand Russell
(617) 323-7923

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

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
are."

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
point.

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

Eric

On Fri, 10 Jun 1994, Eric Hughes wrote:

> 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.

Another reason was the tax consequences.  If you were a US bank with 
money to lend and you lent it from the US, you owed taxes on the 
earnings.  If you formed a Netherlands Antilles subsidiary and lent money 
the earnings on those loans could be accumulated tax free "forever."  If 
the parent bank in the US could use some of this dough, no need to 
repatriate it, just lend it to the parent -- then the tax-deductible 
interest payments flow from the high-tax parent to the zero-tax 
subsidiary getting more money forever out of the hands of the tax man.

The next time you go to the cinema, read *all* the credits.  Chances are 
you will see a line towards the end like:  "Financing provided by 
SomeBank, NV" indicating a Netherlands Antilles corporation.

The NA became popular because they were covered by the US-Netherlands Tax 
Treaty and thus no tax withholding applied to payments made to the NA.

DCF