The standard textbook approach to regulation is that free markets are generally best except in cases of “market failure.” Frequently cited examples of market failure include externalities and monopolies. Now there is one Call to control Crypto Industry:
The White House said Friday it is closely monitoring the collapse of digital-asset empire FTX, citing its bankruptcy filing as evidence the cryptocurrency industry needs stronger regulation.
The White House and other agencies are monitoring the situation, an administration official said, adding that Americans risked being harmed without proper oversight of cryptocurrencies.
I wonder if this is just a knee jerk reaction, or if there is some market failure that I missed. A few comments:
1. It is completely illegal for Americans to invest in all kinds of highly risky ventures like biotech start-ups. Most of these companies fail, while a few achieve great success. To use the terminology of administration officials, “Americans suffer” when risky biotech start-ups fail. Yes, investors understand that biotech is risky, but I would say the same about crypto.
2. It is perfectly legal to lend money to high-risk businesses, where the loan cannot be repaid. Remember junk bonds?
3. Fraud is already illegal.
So what is the rationale for crypto’s new regulation? Surely the price of Bitcoin has not dropped by 75%? Surely it’s not true that FTX’s creditors are going to lose their money? That is certainly not true Allegations of fraud Recent FTX decline? All of these are either a normal part of our financial system, or are already prohibited by regulation So what is the specific argument for additional regulation of crypto? “To protect crypto investors”? Why do we want to do this? To protect the banking system? I have seen no evidence that crypto threatens the banking system.
Do we really want investors in crypto to feel safe about their investments? Wouldn’t that make the “bubble” even more likely? Isn’t it healthy for crypto investors to fear losing their investment? Doesn’t it make them more cautious?
And what is the social value of crypto? Why should social policy encourage investment in that area?
Here I have to walk a fine line between crypto critics and fans, because I am in neither camp. I don’t see where crypto has created much value for society and it’s a fairly expensive industry (if only for energy consumption). So I see no reason to encourage the growth of crypto through government policy. I don’t want to defend crypto investors. At the same time, I see no reason to hinder the growth of crypto. Just because it doesn’t seem very useful to me, doesn’t mean the art has no value. The whole point of the free market is for people to explore new ideas and profit from them if they prove to be effective. Why would we want to hinder a new and innovative industry that could pay great dividends in the future?
Again, the market may have a logic of failure that I am not aware of. But “bankruptcy and fraud” are not textbook examples of market failures that require regulation. One is a part of any well-functioning market, the other is already illegal It may seem obvious to you that “something has to be done”, but it is not at all obvious to me.