Crypto Needs Less Government Regulation – Not More
A recent opinion article by Peter Lin, “Why Regulation Is The Best Thing For Crypto,” presents common arguments on why the state and state-affiliated institutions should administer cryptocurrency. Underlying the arguments is an assumption: the free market cannot provide necessary standards for crypto and the state must step into the void.
The Case Against Greater Crypto Regulation
The arguments and the assumption in Lin’s article are the opposite of what is true. The assumption is the more important aspect of Lin’s article, however, because the arguments rest so heavily upon it that they are almost offered as self-evident assertions. If you buy the presumption, you’ve bought the conclusions.
Lin opens with a nod to the “disconcerting image of what regulation might entail,” such as “being tracked down [by] the Internal Revenue Service” or being imprisoned for “using crypto in India.” Another nod goes to advocates who believe financial freedom is “part of crypto’s DNA”—a freedom for which Bitcoin was created. The acknowledgements are cursory and dismissive, however.
Lin moves on quickly. “If crypto is the future and there are valid concerns,” then “we need to engage in the debate and embrace reasonable and responsible regulation.” The conclusion of this debate between financial freedom and state control is apparently foregone—namely, that “reasonable” and “responsible” regulation is required. This means the debate will be limited to what type of regulation should be imposed. Given that Lin is the founder and CEO of a digital asset exchange that is part of London Stock Exchange Group, his default position of “there oughta be a law” is understandable.
‘I’m From the Government – I’m Here to Help You With Crypto’
Lin simply assumes that only the state can resolve “valid concerns” regarding the future of crypto. He offers a common explanation as to “why.” Because “even the most devout supporters … could agree that the growth of this industry depends, in part, on the establishment of safe, fair and reliable market conditions.” Many, if not most, devout supporters do not agree. Moreover, his statement contains an odd leap of logic: it equates “market conditions” with the condition of being regulated by a central authority, when they are actually antagonistic states. Market conditions, good or bad, are not “established” by authority; they are a natural result of the cumulative choices and exchanges of individuals.
Lin continues. “Presently, the regulatory climate is still uncertain and fragmented across jurisdictions.” He seems to believe this is a problem. To “devout supporters” who think there should be no regulation, however, this presents no difficulty. The marketplace is always “uncertain” in the sense that individual preferences are unpredictable and market circumstances change. Nor does things being “fragmented across jurisdictions” pose a problem for the free market; indeed, the word “fragmented” can be replaced by the words “diverse and decentralized.” Only if crypto serves jurisdictions—that is, centralized authorities—is homogeneity desirable. If crypto serves individuals, then diversity should reign.
Would You Trust the IMF?
The conclusion toward which Lin has been driving now arrives. “The contours of a global regulatory framework are coming into focus, and we should welcome it.” The contours prominently include the International Monetary Fund (IMF), which has published what Lin calls a “compelling document.” It cites the alleged liquidity risk, default risk, market risk and foreign exchange risk” posed by private coins.
To pause for a second: the IMF is the type of trusted third party problem against which Satoshi Nakamoto and the cypherpunks rebelled—the central banking system writ large. Central banking, not private money, is the overwhelming risk to liquidity, default, and foreign exchange—not to mention inflation, fiat, bail-outs, negative interest rates and the many other money monopoly travesties.
Yet private money is the risk that Lin perceives because “digital assets and cryptocurrencies could be attractive and see capital inflows away from fiat currencies in countries with high inflation rates and weak institutions.” In other words, people move their assets to escape high inflation and collapsing banks rather than have their financial choices dictated by the same elite authorities that caused the high inflation and collapsing banks. Furthermore, Lin notes how difficult it is for “virtual asset service providers (VASPs), such as crypto exchanges [like his own], to comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations.” The true solution is to remove those regulations and allow individuals to be financially independent.
Financial independence and personal freedom are not the purpose of Lin’s article, however. His intent is to champion the extreme centralization of crypto into the hands of the same trusted third parties that have ravaged the wealth of society over and over again. This intention is clear from the “reasonable and responsible regulations” that he presents from the IMF.
Central banks could grant licenses — on the condition of supervision — and hold VASPs accountable for customer screening, transaction monitoring and reporting suspicious activity in accordance with Know Your Customer (KYC), AML and CFT regulations.
And: “We can see the first attempts at such cooperation being made with the Financial Action Task Force’s (FATF) recently introduced travel rule, which requires VASPs to collect and transfer customer information when processing transactions.”
As it rolls on, the article sounds like a paean to the destruction of every advantage crypto offers to individuals. Its arguments and conclusions are all based on the assumption that the free market is incapable of evolving standards and techniques to combat the problems that exist—problems that are minor compared to the disastrous solution suggested.
Questioning the Assumption
My book “The Satoshi Revolution” gives economic, social, and moral answers as to why an unfettered free market is infinitely better at serving individuals than the state. But, for many people, nothing is as effective as real-life examples. Of the hundreds that are possible, consider only two, which act to create a proof of principle.
Few historians have examined the origins of free-market standards as closely as the voluntaryist scholar Carl Watner. In his essay “Weights and Measures: State or Market?” he contrasts the evolution of private weights and measures as opposed to state-regulated ones.
One example: the barrel measure of 42 gallons of petroleum, which is used as a standard by most OPEC nations today. Watner explains, “In the early 1860s, a barrel of oil usually meant a cask of oil, regardless of its size, for there were no standard-size casks in use. Variations in the oilman’s barrel persisted until at least 1872, when a producer’s agreement resulted in a fixed price for a 42 gallon barrel of oil.” He notes that oil may not now be shipped in 42 gallon barrels because it started moving by pipeline, oil tankers, and tank trucks. “What is important to us,” Watner observes, “is that the custom still persists of buying and selling oil by the barrel.
The oil pioneers did not (indeed they could not) wait for the government to proclaim a unit by which they should measure and sell the oil they discovered. Rather they adopted measurements from other liquids (the whiskey barrel of western Pennsylvania, where oil was first commercially exploited, was a 42 gallon container). Eventually there arose from the competition of various interests (the producers, transporters, and consumers of oil), the industry standard of a 42 gallon barrel. It did not originate in the halls of any legislature and needed no governmental sanction.” It persists intact to this day.
Watner continues, “The history of the oilmen’s barrel is just one incident in the standardization of weights and measures in modern industrial America (there are many others). For example, the development of the electrical industry explains why product integration and standardization were needed. It also exemplifies the manner in which the free market operates. Light bulbs must screw into household sockets; electrical appliances must be supplied with the proper voltage. The United States electrical industry agreed on standards because it made economic sense, not because they were imposed by Congress.”
Contrast the preceding free-market evolution with state-regulated weights and measures. “Since the mining and use of gold and silver were a jealously guarded prerogative of royalty in the ancient world, the provision of coins became a government monopoly.” To maintain a monopoly, government needed to intervene in the definition, promulgation, and standards for weights and measures. “Governments had to … provide for the prohibition of new standard, which might compete with its existing standards.” This dynamic “is well exemplified by the ordinances found in medieval Germany. The accuracy of early German coinage left much to be desired: many were underweight, others overweight. In an effort to prevent people from discovering and melting down the overweight coins, the government outlawed the private ownership of scales.”
“There were numerous, other ways in which governments tampered with weights and measures. In the history of nearly every national unit of account, there can be found the story of chronic debasement, either in the form of reducing the weight or the purity of the metal in a given coin, without reducing its legal value.” (For a more extensive discussion of how the free market solved the problems of private money—and how government impeded solutions—see How and Why Government Outlawed Private Money Part 1 and Part 2.)
Free Market Versus the State
Watner uses two other examples to contrast the effectiveness of the free market’s development of standards with that of the state: “Chaos in the Air: Voluntaryism or Statism in the Early Radio Industry?” and “Voluntaryism and the Evolution of Industrial Standards.”
Another set of essays in the periodical The Voluntaryist highlights a marked advantage of free-market solutions over statist ones. Watner’s essay “Free Banking and Fractional Reserves” is a sharp counterpoint to that of economic professor Larry White, “Free Banking and Fractional Reserves: A Reply.” The debate hinges on whether fractional reserve would evolve in a free-market banking system. The marked advantage is this: both could exist in competition, allowing customers to decide which best suited their needs. Lin would almost certainly refer to such an arrangement as “uncertain and fragmented across jurisdictions” and would almost certainly call for legislation to create certainty and homogeneity. Watner and White would not, and customers would have choice.
Debate on crypto freedom versus state control is needed and inevitable. But let it be an honest debate. Not one that proceeds from a blatantly false assumption into arguments that are assertions. Not one with sleights of hand that equate good “market conditions” with state regulation or leaps of logic. Let the debate at least mention that state control is an involuntary transfer of financial power from individuals to elite trusted third parties. But, ultimately, there can be no honest debate over how much control to assert over peaceful people and their wealth. There can be no ethical debate about how best or how much to steal.
Publication of Wendy McElroy’s updated book “The Satoshi Revolution” is imminent. The book provides a classical-liberal and individualist-anarchist framework of theory for cryptocurrency.
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