Cryptocurrency regulation: unnecessary new rules
It’s time to let go of the pretense that crypto transactions require substantially new rules.
The The recent conflict between Coinbase and the Securities and Exchange Commission has exposed to the public the attitude of the cryptocurrency industry towards regulation, as well as the inconsistent efforts to regulate crypto in the United States. United. Consider a few details. Coinbase, perhaps the most important player in the crypto world, highlighted its willingness to play ball with regulators. SEC Chairman Gary Gensler has denounced the lack of protections in the crypto world, and his agency has stated that the interest loan product offered by Coinbase was a security so that the SEC can assert its jurisdiction.
Indeed, all parties seem to want crypto regulation – but an apparent dead end remains due to the mistaken belief that crypto exists in a legal white space. In truth, cryptocurrency is already subject to existing financial laws and regulations; it would be an affront to the rule of law for regulators to behave otherwise. It’s time for everyone involved to give up pretending that crypto transactions require substantially new rules.
In many places, the field of cryptography produces objects for use like money; it also acts as an intermediary for interest-bearing transactions between borrowers and lenders, presents objects as financial investment opportunities and organizes the trading of these objects on stock exchange-type platforms. We tend to call these media money, loans, deposits, and securities, and the entities that do business in them, banks, brokers, and exchanges. There are significant regulatory expectations attached to all of these entities, and for good reason: huge sums of money are at stake. Whether the current body of financial regulation is optimally drafted and administered is a separate issue.
Although they walk and gossip like ducks, players in the crypto field insist that they are birds of a different feather. We’ve heard this story before: Uber is neither a taxi dispatcher nor an employer, and Airbnb is not a hotelier, although both can appear to be such to the untrained eye. Indeed, rapidly evolving tech companies wield the letter of the law against the spirit of the law with a skill and eagerness that would make Montesquieu’s head explode. This disregard for the law reaches its apotheosis in the crypto world. When Coinbase calls for clear regulations, it calls for special new regulations that apply only to its no-money no-lending and non-securities transactions on its no-trade.
For nearly a decade, US regulators have been unable to cut through this Gordian knot of obscuration, forcing them to catch up with the accelerating crypto ecosystem. Why? In general terms, the SEC has jurisdiction over securities and exchanges, the Commodity Futures Trading Commission covers commodities and commodity trading platforms, and the Federal Reserve and the Office of the Comptroller of the Treasury. Americans are responsible for money and banking matters. Before any of these agencies can deal with what crypto Is, they must assert what crypto is. By focusing its anger on the SEC’s decision to classify the loan as a stock, Coinbase stokes those endless turf battles that often open the doors to regulatory arbitration, while diverting attention from the topic: Coinbase users lend at interest without a clear understanding of their rights in the event that neither the borrower nor Coinbase can guarantee repayment of their principal.
Efforts to eliminate overlap and competing jurisdictions in the U.S. financial regulatory structure have distracted lawmakers and regulators from careful thought on two other critical issues. First, what interest does the United States have in fostering a shadow financial system that directly competes with its successfully regulated dollar-based system? And second, why would regulators “reward” the costly and generally sincere compliance efforts of players in the regulated financial system by ratifying the practices of an industry specifically designed to evade these requirements?
In recent years, a high regard for the rule of law has slipped – even in some conservative and libertarian circles – on the belief that only free markets and freedom of choice can produce prosperity. But scholars of the classical-liberal canon are clear that free markets depend on the rule of law, as well as the human institutions that support it. Nobel laureate Friedrich Hayek, for example, observed that freedom does not exist as such; rather, it must be constituted by law. In addition, the laws that support freedom and competitive markets are, among other things, universal in their application and applied equally.
With its contempt for law and human institutions, crypto strikes at the heart of market order. In a world where the only governing institutions are coded protocols with ambiguous authorship, there would really be no safety net for commercial exchanges, either in law or in the more diffuse and human “bourgeois virtues”.
Crypto proponents will say that is precisely the point, and that their system is needed because the human institutions of government and the financial system are untrustworthy. Whatever the merits of such a perspective in the abstract, such reasoning should fall on deaf ears in government. The government itself must be fully invested in the sustainability and improvement of its institutions. The government must therefore force crypto into existing sections of its laws and regulations, depending on the functions for which the crypto is clearly used. Anything less would give the crypto industry a huge privilege in the truest sense of the word and to make the rule of law a sham.
Likewise, “rewarding” the highly regulated financial system by granting its imprimatur to a poorly regulated parallel system would be a performative contradiction for the government. If protection is needed, then everyone should comply. The substance must prevail over the form.
In American tax law, the formal doctrine established in Gregory vs. Helvering argues that when a “prima facie transaction is outside the clear intention of the law”, to respect the form of the transaction rather than its obvious economic substance “would be to exalt artifice above reality and deprive the legislative provision in question of any serious purpose. “
Will the United States deprive its own laws of any serious purpose by allowing the crypto industry to assert that its activities do not involve the production and lending of money and the trading of financial instruments? Are we going to ridicule all those who abide by the law in order to build a new financial system around some form of money and property without law?
Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is Principal Investigator and Director of the Troubled Currencies Project at the Cato Institute in Washington, DC Matt Sekerke is a fellow of the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.