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