Do We Need to Regulate Bitcoin?

There has been a lot of chatter about regulating cryptocurrency.  In the early days of crypto, it was used for fraud, illegal trade, sex slavery, and other unsavory things that we absolutely need to regulate and stamp out.

However, like gun control, regulation will only affect the people who utilize the networks for actual legal commerce.  The criminals will find another way or continue to use them.

More regulation won’t stop hacking either.  The hackers have an economic incentive to hack, and it will persist as long as the network exists.  The recent supply chain hacks weren’t bitcoin-related, but US Dollar related.

There are people in the venture capital community calling for more regulation.  I mostly disagree with them.  It’s sort of like seeing Facebook ads on television calling for regulation of social media.  The VCs that have made early bets in crypto would love regulation because it would limit competition and make it more expensive to enter the market.

An aside, Congress needs to be VERY careful about regulating Big Tech for the same reason.  Inadvertently, they will entrench the Big Tech monopoly and further empower them, not dissolve it.  Please familiarize yourself with George Stigler for the math and logic behind my statement.

New SEC chair Gary Gensler, a centralized controller and planner if there ever was one, wants to heavily regulate Bitcoin trading to stop front running and other activity in the market that rigs the market.  Maybe he ought to start with stock markets and dark pools.  I agree, stamping out nefarious and illegal activities related to trading are a good idea.  Having a transparent price, transparent fees, and ease of entering and exiting the market are very important to market integrity.  Having a trade register so you can look up trades ex post facto is also a good idea.  Having good margin, the ability to engage in trading strategies that build market confidence and not detract from it are good ideas.  Having timely back offices and clearing is a great idea.  But, that’s not what Gensler is thinking.

Regulators are worried about DeFi and stablecoins.  Why aren’t they worried about unsecured government debt?  Why aren’t they calling out Congress as it proposes and passes trillions of dollars of debt that are totally unsecured?  What secures US debt?  The full faith and credit of the United States and its future ability to tax its citizens? Aren’t individuals smart enough to determine what they want to do with the money they earned and how they want to bank, save, and spend it?

For the last several years I have been told by the chattering class the US is a terrible country and imperfect.  This recent Independence Day, I was reminded several times again how crappy the United States is.  Why does the US have full faith and credit when it’s such a terrible place?  Why is the US dollar the reserve currency of the world?  Because the US has a standing Army?  The US military leadership, with powerful tools at its disposal, has done a pretty poor job in places like Afghanistan.  Its leadership didn’t do a great job in Vietnam if you remember either.  If American taxpayers rebelled and decided not to pay taxes as they did to the British crown, what then?  Paying exorbitant taxes to the US govt is okay, but paying to the British crown is not?

I am being a fair bit tongue and cheek above but I hope you see the point.

We are still very very much in the early days of cryptocurrency.  Let’s see how it innovates.  Regulation will cool innovation and make judgments up to a centralized regulator.  In other markets like education, we know that private/charter school is statistically significantly better than government backed, unionized, and run schools.  We know that private health insurance is much better than Medicaid.  If crypto creates an alternative payment platform that citizens of the world deem better than existing fiat currency, what’s wrong with that?  If government-backed fiat currency has competition, maybe governments get more disciplined.

Let innovation and the market speak.

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