Fast, Cheap and Out of Control - Internet/Web/Online Service Information

Industry Standard, The, August 14, 2000 by Stewart Taggart

Bennett says aggressive action by governments against regulatory arbitrage could backfire. Under this scenario, arbitrageurs might simply opt out of traditional currencies and transactions. For instance, surreptitious business and personal debts might be paid by digitally exchanging rights to precious metal. Web companies like E-gold are already making this possible. It offers transaction services between counterparties denominated in gold, silver, platinum or palladium reserves held by a third-party custodian. E-gold transactions merely transfer rights to the physically held, underlying precious-metal reserves -- bypassing currencies like dollars altogether.

Bennett adds that, in any case, OECD member nations have a limited incentive to financially isolate tax havens. Big countries eventually will need these small nations' cooperation in fighting global threats like terrorism, bio-warfare or even computer viruses. The price of this cooperation may well be a willingness to look the other way regarding a few margarita-drinking tax cheats.

Cate, Anguilla-based data merchant and margarita-drinker, agrees. He says small countries will always have strong incentives to profit from rules that differ from norms of larger countries. Indeed, those differences may be just about all they have to sell. Like Bennett, he believes ostracizing arbitrage-friendly minnows may backfire. Bad publicity might even be good. "It could actually bring them business," Cate says.

And he agrees encrypted transfers, virtual private networks and any number of other evasive techniques provide powerful defensive tools.

"On the Internet, money can move between 100 jurisdictions in a morning," he says. "The idea of cutting off tax havens is just not going to work."

While the loss of supervisory control over the movement of online businesses may look threatening, it's unlikely to cause enough regulatory entropy to force the world into chaos, Bennett says. For individuals and businesses, other variables besides regulatory arbitrage rapidly come into play. These are things like credibility and trust, often termed broadly as sovereign risk. Would you want to put your servers and financial assets in Iraq, for example, even if the tax rate was zero?

"We avoid encouraging people to transact business in places where you can't have confidence in the judicial system," Bennett says. "One of the things we look for is the strength of the rule of law."

WHAT'S A NATION TO DO?

Ultimately, the issue boils down to what kind of global regulatory system we want: Should a nation attempt to extend its laws throughout cyberspace, since virtually every place in cyberspace is "local"? Should it yield its sovereignty to a set of international rules that could take years to negotiate? Or should it engage in some kind of selective enforcement?

A legal free-for-all in which every country unilaterally extends its domestic laws into cyberspace is clearly unworkable. With more than 200 global jurisdictions to satisfy, no dot-com could do business through a single Web site. But even building 200 Web sites individually tailored to the requirements of each jurisdiction wouldn't avoid the problem, since there's no way (as of yet) to prevent a particular Web site from being accessed from a particular jurisdiction.