How and when should Bitcoin and other digital currencies be regulated? The 2016 documentary “Banking on Bitcoin” looks at this debate and takes the viewer inside the New York State Department of Financial Services hearings that resulted in the BitLicense rules in 2015. Those rules require firms providing cryptocurrency services in New York State to collect significant information about their customers to prevent money laundering.
On one side of the debate are those who see digital currencies and the underlying blockchain technology as a benign means for individuals to bypass governments and large financial intermediaries in their economic lives. In this view, digital currencies should ideally not be regulated at all. On the other side are those who see the technology as a means for governments and financial firms to operate with more efficiency and flexibility. According to this view, regulating digital currencies now will make them more credible to a wider array of people and institutions, further encouraging their adoption.
Putting aside the philosophical component of this debate, we have practical reasons to avoid regulating digital currencies at this stage of their development. Bitcoin and other cryptocurrencies are currently small and evolving. The value of all bitcoins in circulation, even at record prices, is no greater than the GDP of small country. An unforeseen “Bitcoin crisis” would not pose a threat to the wider economy. Existing laws can and have been used to prosecute money laundering with Bitcoin, as in the case of Silk Road founder Ross Ulbricht. The currently small role of Bitcoin and other digital currencies in our economy means we face little risk in waiting to regulate them.
Based on media coverage, one might believe Bitcoin is a mature technology, but cryptocurrencies are still in a very early period of innovation and adoption. It would be a shame for a disproportionate amount of that innovative effort to go toward satisfying regulators’ demands rather than users’ wants and needs. The true risk lies in overregulating crypotocurrencies now.
Benjamin Lawsky, who led New York State’s digital-currency regulatory efforts, ended up leaving the public sector and starting the Lawsky Group, which provides clients with “in-depth counsel and strategic advice on financial services regulation.” This example of the familiar revolving door between big government and big business should be a lesson that people on both sides of the cryptocurrency-regulation debate take to heart. Those who believe in the benevolent power of such regulation should remember the inevitable rent-seeking behavior to which it leads, where businesses lobby government for favorable regulation. So it might be best for regulators to take a wait-and-see approach.
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