March 19, 2018 Reading Time: 5 minutes

In the ideal world, you invent something wonderful, the world celebrates and starts using it. You get rich. We can dream, can’t we?

Alas, we have governments in place to make sure that doesn’t happen. More typically after a great invention, there is a long stage during which governments do everything possible to contain, restrain, squelch, suppress, and even abolish new technologies that are driving changes.

It doesn’t work over the long term because inventions exist within the realm of ideas, and nothing can stop them. But the attempt to control and cajole them can have devastating effects in the short term.

That is precisely what is happening right now in the crypto assets. Quite frankly, panic has broken out within some of the most innovative sectors, because the SEC has served papers to individual managers of many companies that are using crypto technology to raising funding for new services. It’s a huge setback for the industry.

Since 2009, innovation in the crypto space has challenged everything we thought we knew about what was possible in money, law, services, and venture funding for new enterprises. The range of application of this new approach to commoditizing information is astonishing to consider, and this has gradually dawned on people as time has gone on.

The New Thing

Initially, and I’m talking 2009-2013, crypto was amazing because it was able to replicate traditional functions of money and add additional ones: a system of settling payments embedded in the money itself. This had never happened before. It’s a completely new way of thinking about money as an evolving technology.

But it was just the beginning. The Ethereum platform used the technology to create an open terrain for vast experimentation in monetary, financial, and legal services. Here I’m referring to 2014-2016. In 2017, we saw the opening up of a new form of venture funding, with what came to be called Initial Coin Offerings or ICOs. Regulators have begun to look at these markets and wonder how they fit in with existing securities regulation. The short answer is that they do not, but that won’t stop regulators from trying to make them do so.

On March 15, the Securities and Exchange Commission Enforcement Division announced that it had sent subpoenas to possibly dozens of crypto exchanges demanding to know whether they are effectively selling and trading securities without properly registering with the SEC. If the SEC is really prepared to define every utility token as a traditional security, the market in the US could be utterly smashed. The waiting period of 12 months for a new security could lead to what CoinDesk calls a new crypto ice age.

All of this is terrible news for crypto and it largely accounts for the flat and falling price of crypto assets over several weeks in March 2018. The most extensive analysis yet undertaken of crypto price movements, as conducted by AIER, has shown that the single biggest factor is the news. Good news means buy and bad news means sell. It’s pretty simple, and completely expected in a sector that is driven mainly by speculative trading based on perceptions of future possibilities.

On the Plus Side

To be sure, Wyoming has passed a suite of legislation that attempts to anticipate and thus override these random regulatory efforts by Washington, DC, and create a friendly environment in the state. It’s probably the case that federal efforts here will override whatever good the states are doing. It’s one thing for the feds to ignore Colorado on pot or let slide California’s immigration leniency. Financial securities are another matter. And this explains why the markets have responded so negatively to the news from the feds while ignoring the good trends in Wyoming as well as many countries around the world.

Consistent with the tendency of crypto markets to be deeply emotional, consider how the comments of one central banker caused a turnaround in market psychology. The comments were made by Mark Carney, governor of the Bank of England and head of G20’s Financial Stability Board. His statement was prepared for the official meeting of the G20. Read it and consider what in the crypto world is considered to be good news in terms of government regulation.

The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time. This is in part because they are small relative to the financial system. Even at their recent peak, their combined global market value was less than 1% of global GDP. In comparison, just prior to the global financial crisis, the notional value of credit default swaps was 100% of global GDP.

Their small size, and the fact that they are not substitutes for currency and with very limited use for real economy and financial transactions, has meant the linkages to the rest of the financial system are limited. The market continues to evolve rapidly, however, and this initial assessment could change if crypto-assets were to become significantly more widely used or interconnected with the core of the regulated financial system.

For example, wider use and greater interconnectedness could, if it occurred without material improvements in conduct, market integrity and cyber resilience, pose financial stability risks through confidence effects. To support monitoring and timely identification of emerging financial stability risks, the FSB will identify metrics and any data gaps.

Crypto-assets raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing. At the same time, the technologies underlying them have the potential to improve the efficiency and inclusiveness of both the financial system and the economy.

To boil it down, he says that these markets are too small to worry about. But if they get bigger, the weight of governmental power will force them into compliance with existing law. And this is what is considered good news these days.

The risks of regulation are huge but unseen: they consist mostly in improvements we don’t get, self-governing models that do not emerge, better user experiences that consumers do not enjoy, and new applications not seen. Consider the supposed problem of money laundering and terrorist financing. There is no one better to police itself than the industry itself. The blunt instrument of government regulation is too easily wielded as a weapon against industrial disruption. The heck of it is that when such regulation ends up stopping innovation, casual observers are quick to blame the technology and not the overlords.

A great example here is the failure of the Mt. Gox Bitcoin exchange. This company obtained near-monopoly in crypto-to-dollar exchange in 2013 because the regulatory threat prevented competition from emerging within the sector. That left consumers with few choices and subsidized industrial consolidation that ended up in a complete mess for the industry. But who caught the blame? Not the regulators. Everyone said the real problem was Bitcoin itself.

Let it be known what is happening right now. Humanity has been blessed with the discovery of a new way of documenting and sharing ownership rights, a method for commoditizing information flows in a way that could revolutionize economic life around the world and even change the relationship between the individual and the state. And what do we do? We shudder in fear. We try to drive it into compliance with the past.

The phrase that comes to mind: man’s inhumanity to man.

Jeffrey A. Tucker

Jeffrey A. Tucker served as Editorial Director for the American Institute for Economic Research from 2017 to 2021.

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