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
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