How should we regulate crypto?

Not too much, as I argue in my latest Bloomberg column.  Here is one excerpt:

In September 2020, Kraken, one of the leading crypto exchanges, obtained a banking license from the state of Wyoming, thereby giving it access to the federal payments infrastructure. Part of the deal is that Kraken has to hold 100% reserves for its crypto assets, in essence treating them as a parking garage is supposed to manage cars. It is easy to imagine federal regulators forcing crypto exchanges into the banking system on a larger scale, and perhaps banks buying up or merging with crypto houses, again with stringent reserve requirements.

It is unclear what such regulation would accomplish. Crypto exchanges would become more bureaucratic and less innovative, as they would have a greater stake in the financial status quo. Non-U.S.-based crypto exchanges, and anonymized systems, could still be used to transfer funds secretly or illegally. Still, banks are something the federal government has a lot of experience regulating, and U.S. regulators would achieve a certain illusion of control.


A more general principle is that the platforms easiest to regulate also tend to be the most legitimate and the least likely to engage in or encourage wrongdoing. Again, the net effect will be to make crypto, at the global level, harder to monitor and control.

The better strategy would be to encourage the ascendancy of American-based crypto firms, and slowly allow them to evolve into a more traditional part of financial markets.

There is a plausible argument that, eventually, crypto exchanges should be regulated as financial clearinghouses. But the crypto platforms are currently small and are not sources of systemic macroeconomic risk. It remains to be seen how they ought to evolve or which functions they ought to serve, or indeed if they will succeed at all.

Recommended, I cite Hayek at the very end.


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