Jurisdictional Arbitrage
How Prototypes Become Public Goods
Don’t like reading? Here’s the summary:
Decentralization accelerates the transition from custom goods to utilities
Jurisdictional arbitrage is a “custom good” by which people improve lifestyle and economics by moving between countries (medical tourism, tax havens, remote work)
Network States are a logical evolution of jurisdictional arbitrage (a productization of sorts)
Network states offer a new model for governance and civic infrastructure; cryptography offers a fast-track for institution building
Institutions and nations are only as powerful as the belief in them; Network States may challenge this power; it remains to be seen if they will be come the public utilities for our super intelligent future or ingested by legacy states, an operating system upgrade for 20th century hegemonic powers
Dining with Dissidents
A couple weeks ago, I co-hosted a dinner on the theme of Privacy. The guest list (confidential, duh) included an impressive roster of encrypted messaging app founders, world-renowned cryptographers, whistleblowers and data privacy advocates. These types of evenings are purpose-built for deep, engaging conversations around a particular subject. Nevertheless, it’s near impossible to avoid the standard, milquetoast pleasantries that accompany most introductions. I often start with the informative, yet friendly: where are you based? It’s an easy way to establish connection through a common place or culture — oh yeah, I lived in Albany for a time, too.
I was thrown off guard when the first response I got to this question was: I don’t share that information. It was only the second time I had been rebuffed for such a banal talking point (the other was from a French creative type, a divorcé who’s ennui wouldn’t permit discussion of such irrelevant details). This time was different. This person doesn’t share specifics on their location because they are a potential target. Years of research and activism that supports dissidents (and pisses off governments) will do that. As a result of flubbing the ice-breaker, we talked about a related subject which is the topic of this essay.
Arb-ing the State
If you aren’t familiar with the term arbitrage, odds are that you have, in fact, had it explained to you. Probably in a venue where the decibel level makes hearing difficult, even in close proximity, and probably by someone who looks like this:
Here’s the textbook definition: the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
In finance, arbitrage opportunities occur when there is a dislocation in markets or information asymmetry. If you’re money-motivated and industrious, you can take advantage of these price discrepancies to make a profit. A solid, recent example is the Yen Carry Trade whose unwinding led to a meltdown in Japan’s primary stock market index, the Nikkei.
Not all arbitrage plays lead to negative consequences. In fact, arbitrage is a sort of self-correction mechanism in markets: something is dysfunctional > someone takes advantage of the dysfunction > followers attempt to exploit said dysfunction which diminishes marginal return (the strategy is no longer economically attractive). The term is commonly used in a non-finance context to describe an advantage you get from seemingly cheating the system (e.g. working remote in South Africa all winter without changing time zones from Paris, total weather arbitrage!).
There’s a reason for this short detour to Wall Street. Remember the dinner guest who snubbed my icebreaker? They wouldn’t tell me where they lived, but they did explain to me how they lived. And it involved something they coined jurisdictional arbitrage. In short, they split their time across continents (Europe, North & South America) and not just for the weather (although that’s probably a plus!). They explained there were advantages across the board, if you know where to look. A few examples:
Taxation: depending on how much time you reside in each location, you may not be subject to local tax (but benefit from lower cost of living)
Healthcare: some regions offer cheaper healthcare or access to novel/cutting-edge medicine that is outlawed or unavailable in your home country
School Systems: cost-quality ratio for your children’s school could be better in certain regions (and perhaps they’ll learn an additional language too!)
Spotting mis-priced assets isn’t just for finance bros. It turns out you can do this for quality of life improvements too. It might sound strange to couch quality of life in the context of financial engineering, but it makes sense. It’s a non-obvious play because prior to the last decade or so, it wasn’t feasible or normalized (credit: pandemic, remote work). Plus the rules are still opaque, making consequences for exploiting these loopholes unclear. But in principle, there’s no reason you can’t model countries and laws as you would a financial market. Enter: the network state.
Balaji, Bitcoin and Big Ideas
With technological transformation comes philosophical revolutions. The dual-track crypto & AI boom is no exception. I like to think of them as two strands, loosely braided, often overlapping and occasionally knotted in such a way that it’s hard to tell where one begins and the other ends. No one embodies the techno-futurist movement more than Balaji Srinivasan, ex-Coinbase CTO and philosopher king. His X feed is enough to fill multiple PhD dissertations, so we’ll stick to the topic at hand, perhaps the subject he is now most famous for: The Network State.
In his book (pragmatically titled, The Network State) he provides a definition of this concept that he believes will lead to a seismic shift in the way we organize and how institutions are built:
A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.
The TL;DR — in the future, countries will look more like startups. We have more in common with people we connect with in the cloud than our own neighbors. National identity is on the decline and organizing around principles, value systems, interests and technology are on the rise. Eventually, these “cloud cities” will come down to Earth, in which case they need land. And as a result, Network States provide an opportunity to re-build civic infrastructure from the ground up. Clean slate. Crypto-first. First principles thinking. A new social contract. You get the point.
Directionally, I think this is pretty accurate. But this is a long and treacherous journey (existing institutions will not like this). I think there are also many possible end states here. Perhaps network states will disrupt the incumbent legacy nations and leapfrog them due to their exceptional new model of governance and liberty. Perhaps governments will acquire network states or license their technology and IP to improve efficiency and retain citizens.
Most people outside my particular bubble will scoff when they hear some founder attempted to buy Greenland or that biotech accelerationists have setup a special economic zone in Honduras to circumvent the FDA. But these are the types of experiments that turn into products and eventually commodities. If you apply a SaaS playbook to nation building you get something like a subscription state. And in many ways, this feels better or at least aligns more closely with 21st century expectations.
Things seem crazy until they aren’t and the next big thing always starts out looking like a toy. To get our heads out of the clouds, let’s overlay the concept of a network state with a useful framework that might ground our ideas in something more tangible.
Product Management for Public Goods
I think the best analogy for framing a nation in the context of a technology company is the world of open source. The United States is effectively open-source: the code base is public (The Constitution), it can be cloned/forked (to various degrees of success), governing decisions and code changes can be audited by third parties to build trust and eliminate corruption. The network state just takes these abstract paper-ideas and codifies them on-chain.
Like a developing nation, product development takes time (although the product cycles are orders of magnitude shorter). There is no “final product” as it’s constantly evolving. And the “market” will change over time as well, introducing competition and alternative value propositions. Usually, a new product category starts as a custom build — a prototype or something hacked together for a specific purpose. If it’s useful and there’s demand, you can productize this into something customers or users will purchase. With enough demand, there will be competitors and as the market grows these products start to become commodities (many offerings, little differentiation). In certain cases, they simply become public goods, maintained by the kind custodians of the internet.
Which brings us back to jurisdictional arbitrage!
Jurisdictional arbitrage is just a custom good, a prototype. You can’t purchase this service anywhere. If you want these advantages, you have to leaf through the Visa documentation, speak to a tax lawyer, review various international health plans and book your flights accordingly. But the fact that people are doing this — whether for ideological, lifestyle or tax reasons — is a demand proof point that a product could be built around this. And guess what: it’s already happening.
Network States are effectively productizing jurisdictional arbitrage. Each will offer it’s own features (digital identity, unique state-sponsored services, cultural touchstones, etc.) and select for certain characteristics (longevity and biotech, techno-optimists etc.). If this category succeeds, the path will be paved for more and more Network States to come online, until they are commoditized and nearly interchange-able (or in crypto-speak: interoperable). The Network State is an opportunity to build a new operating system for governance and statehood.
Network States are eating into the individual arbitrage opportunity by building a full-fledged product (with new laws, systems and services). With multiple players, the marginal benefit of this arbitrage diminishes. The platform becomes the norm, a commodity service. Long-term, it becomes a public good.
The Future of Three Letter Agencies: API
The bottom line: tech is fast and institutions are slow. Institutions are this way by design (I don’t think we want the Supreme Court to move fast and break things). But I think there’s room for improvement on the operational side. This will require building new institutions and revamping old ones that work well, but have developed friction. Near term, this is a messy process. Challenges to government hegemony will not always be well received; likewise, many Network States will falter in their efforts to supersede sacred documents like the Bill of Rights. I tend to be less ideological and more pragmatic on these issues, which is why I would love to see a future state where engaging with The State is the best customer service experience you can get. And if you don’t like it, leave.
Here’s where I hope this movement can take us in the long-run:
If you’re over-paying for a country that is under-delivering, you can just “vote with your feet” and move.
Your identity is provisioned on-chain, government services are tied to your passport
Simplified taxation regimes (both domestic and international) with real-time updates in expected obligations
Live dashboard of where your tax dollars are being spent; auditable by the public
On-chain voting that is cryptographically secured and verifiable
Laws on the books are codified on-chain, up for renewal (fight to keep them instead of leaving legacy code to clutter the system)
Land, car and business registries are all on-chain (eliminate tedious paperwork)
Interoperability between Network States (I benefit from locations in which I pay tax and spend time; this can be monitored/charged automatically)
I will admit, these are idealistic. The biggest constraint is resource scarcity. The physical world plays a key role. The advent of super-intelligence doesn’t negate the need for calories. We are very much in the “custom good” or early “prototype” phase of this emerging market. One in which there are arbitrage opportunities abound. But if I had to make a bet, 50 years hence, the way we organize, govern and build will look more like a Network State than the Congress of George Washington.
Subscribe. Or don’t!