Still, the potential risks of cryptocurrency and the fear that it will become increasingly intertwined with the mainstream banking system are factors that keep regulators awake at night. At this point, however, it is unlikely that many banks and private lenders will seek further integration with potentially leveraged cryptocurrency exchanges.
Doing crypto regulation well is not easy. If cryptocurrency institutions are treated like regular depository institutions, requiring large amounts of capital and large legal staff, cryptocurrency innovation may decline. Such innovation has been the realm of genius quirkier than mainstream regulators. It’s hard to imagine Satoshi Nakamoto or Vitalik Buterin at Goldman Sachs.
And what exactly should the goal of crypto regulation be? To make stablecoins truly stable in their nominal value? Is it possible? Or is it to encourage market participants to view those assets as inherently volatile in value?
Neither academic research nor market experience provide a clear answer. With systemic risk currently low, it’s better to wait and see the details before moving forward with regulation. And on a purely practical level, few members of Congress (or their staff) have sufficient working knowledge of cryptocurrencies and all of their current wrinkles and innovations.
Hyun Sung Shin, head of research and Bank for International Settlements, believes that cryptocurrency innovation has not been successful and that there is no need to worry about the loss of value due to stricter cryptocurrency regulations. A major use case for cryptocurrencies is to withdraw capital from China, Russia, Venezuela and other economically repressive countries. This is one of the reasons why the US supports the current crypto ecosystem rather than undermine it.
More generally, it’s hard to argue that cryptocurrency innovation is over. What about crypto as a means of owning and transacting one’s online data, or as a means of verifying one’s online identity? What about low-cost remittances using crypto? Who has the knowledge to conclude that current attempts to build DAOs (Decentralized Autonomous Organizations) are going to fail? We don’t have the knowledge to understand which of these projects will succeed or fail.
Think of quantum mechanics in the early 20th century. At the time, there seemed to be little real-world application. It wasn’t until the middle of the century that it became the essential idea behind computers.
By the way, I am not advocating zero regulation for cryptocurrencies. I am simply saying that the bipartisan rush to move against cryptocurrencies following a highly visible public event featuring an identifiable villain is a mistake.
I remember the Enron bankruptcy passed in 2002 and the resulting Sarbanes-Oxley Act. The bill passed with broad support from both parties, but included too much regulatory burden and higher compliance costs. The number of publicly traded companies has declined, making it difficult for small investors to generate high returns from new ventures. Also, the law did not offer him much protection from the 2008 and 2009 financial crises.
It would be nice if there was an easier way to make the regulation of the cryptocurrency market clearer, as many cryptocurrency participants themselves would like to see. But without further market evolution, it wouldn’t be. The best option for now is to tie your hands to the mast and hold on.
Bloomberg Opinion Details:
• Crypto needs some SEC rules: Matt Levine
• Crypto regulation should be easier thanks to FTX: The Editors
• Cryptocurrency proponents should demand regulation: Bill Dudley
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This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a columnist for Bloomberg Opinion. George is a professor of economics at Mason University and a contributor to his blog Marginal Revolution. He is co-author of Talent: How to Identify Empowerers, Creatives and Winners Around the World.
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