Let’s Play Regulatory Arbitrage!
It’s been an exciting week for the world of cryptocurrencies and cryptocurrency exchanges!
If you haven’t been following along: BitMEX’s CTO was arrested in the US and the CFTC/SDNY are bringing charges against the company, courts have ruled on the Kin vs SEC case and — shocking, I know — Kin lost, and last, but certainly not least, John McAfee has been detained for promising to eat his dick as a price target guarantee (okay, not really, but he is being detained in Spain for a slew of charges).
So yeah, as a so-called nocoiner in this space, I might feel a little gloat-y right now. But I digress.
What Is Regulatory Arbitrage?
Well, it’s all pretty much there in black-and-white, but to simplify it a bit more: a company finds a sector, industry, or poorly defined ruleset that can be taken advantage of and makes money in this niche until regulators tell them to stop.
A great example of a previous regulatory arbitrage was the sale of pharmaceuticals online in the late ’90s and early ’00s. There were a lot of different ways to interpret medical rules and regulations in regard to international sales, so grey market entrepreneurs set up companies to navigate this unregulated industry.
In 2004, Paul Le Roux, a Rhodesian privacy advocate and programmer, set up RX Limited to take advantage of exactly that — and from what most doctors and pharmacists saw, everything appeared above board at the time:
This is to say that there was nothing wrong with Le Roux’s initial idea. The problems began when he started making money hand-over-fist and decided that wasn’t enough. The rules Le Roux began to skirt were no longer in the realm of regulatory arbitrage, but black market industries and full-on tax evasion, money laundering, and other criminal acts. This tends to be the case with grey market leaders: they’re overzealous and greedy.
Since 2017, it’s been clear many actors in the cryptocurrency space believe that no rules or regulations apply to them. I mean, how could regulators try to contain an industry that’s “decentralized” or use US laws in foreign countries or stop “anonymous developers”? The answer may surprise some: easily.
Few concepts in the cryptocurrency space are legitimately decentralized, jurisdiction is hardly a reality for US regulators, and most anonymous developers aren’t nearly as anonymized as they believe. Stopping a lot of cryptocurrency projects and exchanges won’t be the hurdle for regulators that many, including myself, once thought it would be.
The truth is that US regulators try to stay on the sideline as referees most of the time — throwing a yellow flag here and calling offsides there. They aren’t attempting to stifle industries, they aren’t hoping to saddle good actors with undue burdens. Essentially, they only really come after you if you make it obvious that you don’t give a damn what they say or want.
And that’s exactly how the cryptocurrency space has behaved for three years now.
This Is My Main Offender
Whether John McAfee has very much money left or made very much at all isn’t why he’s been an obvious and persistent thorn in the side of US regulators for years and years.
John flaunts his breaking of US laws and consistently states he’s one step ahead of US authorities — whether he actually is or not. This has won him a lot of admirers and fans, but the truth is there’s nothing intelligent about telling the US government you’re breaking their rules and regulations and urging them to try and catch you. It almost always ends with the person flaunting their abilities to deceive getting apprehended by the US government and thrown into prison.
Everyone thought it was incredibly funny when John said he’d eat his penis if Bitcoin didn’t hit his specific price target:
I mean, everyone thought it was funny except the SEC:
This means a lot of the behavior from a lot of the thot leaders in cryptocurrency — from insane price predictions, to shilling tokens, to ref link abuse — is prosecutable in some way, shape, or form. Even more so if you’re very loud and don’t care if the US government knows what laws you’re breaking and who you are. This applies to so, so many individuals in cryptocurrency.
Regulatory Arbitrage and ““Regulatory Arbitrage””
There are a lot of yet-defined points within not only the cryptocurrency space, but the finance industry in general. This doesn’t mean there are no rules at all and it certainly doesn’t mean that previously defined rules and regulations don’t apply to these new concepts.
If you launder money in crypto, you’re still money laundering. If you pump and dump publicly, normal rules still apply. No KYC/AML? You should probably rethink that.
Real regulatory arbitrage requires the help of a team of lawyers, brilliance on the part of the founder, and the ability to pivot as soon as regulators step in. Most don’t have these traits.
Stay skeptical, friends.