State Regulation: That Proverbial Road Is Paved With Good Intentions.
By Reuben Machinga
A few days ago, in a Goldma podcast (link to YouTube video), the team discussed how the EU Parliamentary Committee on Economic and Monetary Affairs suggested ‘direct public participation’ in the cryptocurrency markets. This, they say, is a remedy to address what they effectively call a lack of competition in crypto-markets. The discussion was based on a Cointelegraph article that was published on the 22nd of July 2018, on the matter.
I didn’t sit in on that show but I had some thoughts as well as some questions.
Can it be done properly?
My first remark, perhaps question too, has to do with whether effective regulation can be done without such action contradicting the fundamental intention of our financial technology revolution. We have to take it back to Nakamoto. Bitcoin was created in order to have a means of transferring value independent of trust. By definition, such a system has no central, trusted authorities. The means through which this parliamentary committee suggests this regulatory action takes place is a direct contradiction of the central tenets of cryptocurrency. Their proposed digital assets will be issued by central banks, in their case, one would assume, the European Central Bank. I wonder, then, how different that would be to the Euro. The bulk of Euros in circulation are already in digital form. It begs the question, how different would their new digital asset be to the Euro?I repeat; the proposed regulation cannot be done without undermining the central tenets that draw many to cryptocurrencies.
Should it be done?
Perhaps we ought to have started by asking if it should be done in the first place. The committee makes an argument that there is a lack of competition within what they call the inter-cryptocurrency markets (I suppose they mean exchanges where different cryptocurrencies are exchanged) and intra-cryptocurrency markets (the support services necessary to have cryptocurrencies in the first place, i.e. mining, exchanges etc.).
This brings up a major philosophical question about our financial markets. When is it fortuitous to regulate markets and when is it not? Ostensibly, regulation serves the purpose of limiting the effects of negative externalities. With regulation in place, so the argument goes, part of the cost of producing negative externalities (adverse consequences of producing or consuming a good or service not reflected in its price) is transferred back to the source of them. In extreme cases, they can be stopped altogether by an outright ban on any trade in the said hypothetical good or service.
With respect to cryptocurrency markets, where is the externality? Can we identify a third party harmed by the trade of cryptocurrencies? One would have to clutch at straws, really scrape the bottom of the proverbial barrel to identify him or her.
It’s assumed that direct participants in crypto markets are consenting adults. If two people reach an agreement to trade and it doesn’t hurt anyone else, where does regulation fit in? It is incumbent upon the government to clearly define that necessitate regulation. If it is to deal with externalities, let that be defined. Regulating under the guise of ‘protecting’ private individuals sounds good however it could be a long stride away from free-market economics.
If the EU parliamentary committee has an ideological stance against monopolies, it also begs the question why other markets are not being regulated in the same manner. VISA and Mastercard, for example, dominate credit and debit card payments. Is the state intervening to break up that duopoly?
The answer to the lack of competition in the intra-crypto market may not be state regulation. For the sake of time, let’s assume that that state, as they describe it, exists. Arguably, technological monopolies arise because of technical superiority. They get monopoly power simply because they solve (or appear to do so) a problem better than anyone else in the market. Because of that, people flock to their product or service. The way to break up that monopoly would be to create a better solution and market it to people. In short: creative destruction. State regulation would do nothing to take innovation forward, to improve the lives of everyone in society. It would only increase the cost of extant solutions. To add insult to injury, it would make society less efficient.
This Is Our Revolution; let’s guard it jealously
All those of us who are clued up about money and how it relates to the revolutionary power of cryptocurrency and blockchain technology have to guard our project jealously. The winds of reactionary forces blow against our march to greater liberty and prosperity. If monopolies are so bad, why aren’t we allowed to challenge fiat currencies?
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