Entrepreneurial Arbitrage:Part 3 Regulation
By Paul Murphy, published: 2020-06-08
This is the third and final post in Paul Murphy’s series on Entrepreneurial Arbitrage
In February, I wrote about cost of living arbitrage. This was before the Covid madness went down in Europe and the US. If I’d written it more recently, I might have called it working from the most sensible place arbitrage. The idea of hiring a purely distributed team seemed a bit crazy three months ago. In fact, a few people told me I was nuts after reading my post. Amazing what a small pandemic will do to change people’s minds.
In March, I wrote about funding arbitrage. I argued that VCs are smart enough to find the best deals, no matter where they are, so entrepreneurs should take that into account. The Bay Area is the best place to start a software company, until it’s not.
For crypto companies, the Bay Area is definitely not the place to be. The main reason is regulation.
The US’ regulatory approach to crypto has been, to put it nicely, shambolic. Some regulations have killed crypto businesses. Others haven’t been applied uniformly or consistently. Worse, some regulations have been “clarified” retroactively. Crimes were defined after they were committed. Under those circumstances, why would anyone want to establish a crypto business in the US?
With some exceptions, most wouldn’t.
I’ve met more American crypto entrepreneurs in Hong Kong, Tokyo, Singapore, Gibraltar, and Switzerland than in America. Without exception they’ve told me that they did it because of the US regulatory regime. They preferred dealing with the unknown process of establishing a company in a foreign country with either light or clear crypto regulations, than dealing with a slew of very powerful, seemingly arbitrary American regulators.
Crypto businesses are global, so the people building those companies have a tendency to think that way. They don’t weigh the pros and cons of Boulder vs. Denver, or Cambridge vs. Boston, they weigh the pros and cons of Tokyo vs. Denver, or Zug vs. New York. They think about the problem from many different angles including travel convenience, cost of living, culture, schools (if they have kids), and, most of all, regulation. They need to know that their business will be able to operate and grow unencumbered.
It used to be that people considered regulation unescapable, a local problem that had to be managed, not avoided. This is still true for activities that require local presence. You can’t run a Des Moines barbershop from Kyoto, but you can run a crypto exchange from any rock with power and connectivity.
Financial regulators, beware. Today’s world is a balloon. Press too hard on one part, and the air will go somewhere else.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
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READ MORE: Entrepreneurial Arbitrage: Funding
FURTHER READING: Entrepreneurial Arbitrage
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