A Hit of Regulatory Arbitrage, My Dear?

Regulatory arbitrage is one of those phrases that sounds very sexy. The type of thing that geniuses attempt through impossibly complex transactions  in smokey back rooms.  And the definition seems to confirm this idea. From Investopedia

Regulatory arbitrage is a practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation. Arbitrage opportunities may be accomplished by a variety of tactics, including restructuring transactions, financial engineering and geographic relocation. Regulatory arbitrage is difficult to prevent entirely, but its prevalence can be limited by closing the most obvious loopholes and thus increasing the costs associated of circumventing the regulation.

In fact, this boils down to “playing with the rules”, something that folks who can afford high priced lawyers do more than the rest of us. At the same time, all of us do this on more simple levels. We may go across the border to buy something that is not allowed on the market where we live, or where taxes are high. We decide to play with the rules.

In other words, we should expect a certain amount of regulatory arbitrage whenever rules are inconvenient. And rules are especially inconvenient when the rule makers are dealing with something that they do not fully understand. So it is with many new “disruptive” technologies – one of them being crypto-currencies.

Fred Wilson has a wise comment about this. At the end of the day, users decide what to do with your product – not the maker.  This is why getting close to users makes sense if you want to reduce risk. That is whta Steve Blank has been going on about for years. But we don’t just need to see whta they do. We need to understand how they talk about what they do. Then you can begin to understand what they value in what they do.

Only then can you do, do do, what you done before!


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