In praise of regulatory arbitrage

That is the topic of my latest Bloomberg column, here is one excerpt:

So if you issue a crypto token, but don’t have to register it as a security and go through the process of satisfying securities laws, you are engaging in regulatory arbitrage.

It is worth thinking through why some of the regulations ought to change in this new context. In the pre-crypto world, issuing a security involved a host of institutional preparations and investments and legal planning, even apart from whatever regulatory constraints needed to be met. Issuing crypto tokens is usually easier and quicker, and quite immature institutions have done so. Software and blockchains do much of the work that once required offices, personnel and a lot of hands-on management…

Standard US regulatory practice typically focuses on regulating host firms and intermediaries, rather than software. Yet once a blockchain is verifying, storing and communicating information, it is hard for regulators to step in and make a meaningful difference. Thus the old regulatory model no longer applies to a significant part of the crypto experience.

And the lower costs of token issuance mean that the issuing intermediaries can be quite thinly capitalized. Often they are either not able or not incentivized to meet a lot of regulations. In addition, an institution can participate fully in the crypto space without being based in the US or being tied to any specific nation-state.

You can inveigh against those features of the market. Regardless, they are going to mean a radically different set of regulatory constraints. They also mean that some kinds of securities (if it is appropriate to call them that) can be issued far more cheaply than before.

Given this reality, shouldn’t regulations be changed — and substantially? This may include some areas where regulation is even tighter, though overall regulations will likely become looser. The regulators will have to learn to live with a more decentralized market structure that has lower costs and is harder to control. It is common sense that when software can substitute for major capital investments, regulations ought to change, even if observers disagree over how.

Unfortunately, the regulatory process is static and typically slow to change. Regulatory agencies often stick with the status quo until it is no longer tenable. One of the benefits of regulatory arbitrage is that it forces their hand and brings about a new equilibrium.

Recommended, this topic remains underdiscussed.  “Regulatory arbitrage” is in fact one of the more significant potential benefits of crypto, noting that not everyone in the crypto space wants to come out and say that.

Incentives matter, installment #5637

America needs more than 5 million new houses to meet demand, according to a study last year by With sales of existing homes slowing, the need for more new houses is only growing. Florida, my home state, might have found part of the solution: Reform the permitting process so that building houses is easier.

Last year, Gov. Ron DeSantis (R) signed a bill that fundamentally changes the state’s permitting process for home building. It requires local jurisdictions to post online not only their permitting processes but also the status of permit applications. The transparency takes a good amount of mystery out of what can be an inscrutable branch of bureaucracy.

More important, the reforms also created a system that strongly incentivizes cities and counties to approve new home permits in a timely way. When a builder or property owner submits an application to build a new home, cities and counties have 30 business days to process it or request corrections.

If the government offices fail to respond in that time frame, the locality must refund 10 percent of the application fee for every additional business day of silence. Application fees can vary widely by locality, but the average cost in Florida is nearly $1,000, according to If officials request corrections to the application, they have 10 business days to approve or disapprove of the resubmitted application. Blowing past that deadline leads to an automatic 20 percent refund, with a further 10 percent added for each additional missed day, up to a five-day cap.

And this:

A study of housing sales in southwest Florida between 2007 and 2017 by the James Madison Institute found that permitting delays added as much as $6,900 to the cost of a typical house. That’s a de facto tax on Florida families; now the Sunshine State is making cities and towns pay for their own delays.

Here is the full story, via the excellent Kevin Lewis.

China targeted the Fed to build an informant network

Duh, but good to see this coming out in the WSJ.  Excerpt:

China tried to build a network of informants inside the Federal Reserve system, at one point threatening to imprison a Fed economist during a trip to Shanghai unless he agreed to provide nonpublic economic data, a congressional investigation found.

The investigation by Republican staff members of the Senate’s Committee on Homeland Security and Governmental Affairs found that over a decade Fed employees were offered contracts with Chinese talent recruitment programs, which often include cash payments, and asked to provide information on the U.S. economy, interest rate changes and policies, according to a report of the findings released on Tuesday.

If you are surprised by any of this, you have not been paying attention.  Good work by Kate O’Keefe and Nick Timiraos.

What to Watch

The Rehearsal (HBO): The new Nathan Fielder show has a strange premise. Fielder helps a real person rehearse an upcoming event that they are worried about. In the first episode, Kor has told a friend he has a MA when in fact he has a BA. The fib has tormented him for years. For the rehearsal, Fielder builds a life-sized replica of Kor’s favorite bar where the confession will take place and he stocks it with actors. The confession is run through multiple times, ala Groundhog Day. The rehearsal probably cost five hundred thousand or more. The enormous difference between the scale of the rehearsal and the fib is part of the point. Kor is an expert on the trivial. Fielder himself rehearses the rehearsal. It’s ridiculous but why don’t we do this more often? How about rehearsing a pandemic?

I confess that on first watching I missed that the ending was a rehearsal (like missing the gorrilla on the basketball court). Very meta. Strange but recommended. Tyler would like it and I don’t normally say that kind of thing.

The Old Man (HULU/FX): Jeff Bridges seems miscast as an action hero, even an aging action hero. Yet, the writers turn that to their advantage and make the action scenes slower, more realistic, and more brutal than is typical. The Old Man builds as it slows. Excellent performances from Bridges, John Lithgow and especially Amy Brenneman. A reverse Stockholm effect. The underlying story in which an Afghan warlord seems to control the US government at the very highest level is a bit absurd and there is an entirely unnecessary substory with another old man but the ending is superb, logical, meaningful, and deepening and changing everything that came before.

The Alpinist on Netflix. Recommend to me after I recommended 14 Peaks: Nothing is Impossible but I could only handle 10 minutes. Too scary. Too nuts. Like watching Roman gladiators battling to the death, it just felt wrong to watch. When I came to write this review, I was not surprised to find that Leclerc had perished.

Westworld S4 (HBO): Season One was one of the best seasons of television ever. S2-S4 are a waste of time. S4 I found incomprehensible.

From the comments, on Covid

We are just now evaluating vaccines based on the initial Omicron variant, which emerged seven months ago. They are only a moderate improvement on the status quo, in part because we have gone through several iterations of the variant since then. Because they are probably better but might not be that much better, Offit’s advice is even more delay while we study even more.

We have basically enshrined a process that guarantees vaccine development will be far behind the progress of the virus, the bad process itself being its own self fulfilling prophecy because the lag ensures the results will be worse.

The capability of mRNA vaccines to be quickly adapted to the disease is not being leveraged.

That is from Dan1111.  And this is from Naveen K:

The Left in the last two weeks has said they’re for imposing mask mandates (coming soon in LA county) and Fauci restated his support for masks last week. All this while Biden WH saying Biden getting COVID isn’t a big deal.

How costly is trust in the blockchain?

Eric B. Budish has a new paper on this topic:

Satoshi Nakamoto invented a new form of trust. This paper presents a three equation argument that Nakamoto’s new form of trust, while undeniably ingenious, is extremely expensive: the recurring, “flow” payments to the anonymous, decentralized compute power that maintains the trust must be large relative to the one-off, “stock” benefits of attacking the trust. This result also implies that the cost of securing the trust grows linearly with the potential value of attack — e.g., securing against a $1 billion attack is 1000 times more expensive than securing against a $1 million attack. A way out of this flow-stock argument
is if both (i) the compute power used to maintain the trust is non-repurposable, and (ii) a successful attack would cause the economic value of the trust to collapse. However, vulnerability to economic collapse is itself a serious problem, and the model points to specific collapse scenarios. The analysis thus suggests a “pick your poison” economic critique of Bitcoin and its novel form of trust: it is either extremely expensive relative to its economic usefulness or vulnerable to sabotage and collapse.

I enjoyed these sentences:

The intuition for why Nakamoto’s method of creating trust is so expensive, relative to other methods of creating trust, is that Nakamoto’s form of trust is memoryless.  The Bitcoin system is only as secure at a moment in time as the amount of computing power being devoted to maintaining it at that particular moment in time.

Whether or not you agree with the arguments here, or maybe you think proof of stake will render them less relevant, it is nice to see academics (U. Chicago business school) making contributions to crypto debates.

And do you know what is excellent about this paper?  At the end is an appendix “Discussion of Responses to this Paper’s Argument.”  If you can’t write one of those for your own paper, maybe nobody gives a damn!

Via the excellent Kevin Lewis.

Monday assorted links

1. What is up with the Claremont Institute?

2. Perry Bacon Jr. recognizes that progressivism is losing ground.

3. The great Diana Kennedy has passed away.  I recommend her Mexican cookbooks highly, and the documentary about her is excellent as well.

4. In theory the White House will now attempt to develop a new generation of Covid vaccines.  Big if true.

5. New interview with Peter Thiel.

6. Mechanics invent an axle that can achieve steering angles of up to 80 degrees.

The human capital deficit in leadership these days

It is very real, just look around the world.  Even Mario Draghi is on the way out.  Here is one take from Adrian Wooldridge at Bloomberg:

Leadership is most vital during a period of transition from one order to another. We are certainly in such a period now — not only from the neoliberal order to something much darker but also to a new era of smart machines — yet so far leadership is lacking. We call for leaders who are equal to the times, but nobody answers.

Kissinger offers two explanations for this troubling silence. The first lies in the evolution of meritocracy. (Full disclosure: He mentions a book I have written on this subject). The six leaders were all born outside the pale of the aristocratic elite that had hitherto dominated politics, and particularly foreign policy: Adenauer and Sadat were the sons of clerks, Thatcher and Nixon were the children of storekeepers, Lee’s parents were downwardly mobile. But theirs was a meritocracy with an aristocratic flavor. They went to elite schools and universities that provided an education in human excellence rather than just passing tests. In rubbing shoulders with members of the old elite, they absorbed some of its ethic of noblesse oblige (“For unto whomsoever much is given, of him shall be much required”) as well as its distaste for populism. Hence Lee’s recurring references to “Junzi” (Confucian gentlemen) and de Gaulle’s striving to become a “man of character.” They believed in history, tradition and, in most cases, God.

The world has become much more meritocratic since Kissinger’s six made their careers, not least when it comes to women and ethnic minorities. But the dilution of the aristocratic element in the mix may also have removed some of the grit that produced the pearl of leadership: Schools have given up providing an education in human excellence — the very idea would be triggering! — and ambitious young people speak less of obligation than of self-expression or personal advancement. The bonds of character and duty that once bound leaders to their people are dissolving.

There are further arguments — much more in fact — at the link.  And here is an ngram on “leadership.”

Is being bombed bad for your mental health?

We find that cohorts younger than age five at the onset of WWII or those born during the war are in significantly worse mental health later in life when they are between ages late 50s and 70s. Specifically, an increase of one-standard deviation in the bombing intensity experienced during WWII is associated with about a 10 percent decline in an individual’s long–term standardized mental health score. This effect is equivalent to a 16.8 percent increase in the likelihood of being diagnosed with clinical depression. Our analysis also reveals that this impact is most pronounced among the youngest children including those who might have been in-utero at some point during the war.

Here is more from Mevlude Akbulut-Yuksel, Erdal Tekin, and Belgi Turan.

What should I ask Walter Russell Mead?

He is a leading foreign policy expert, and I will be doing a Conversation with him.   Here is from Wikipedia:

Walter Russell Mead (born June 12, 1952) is an American academic. He is the James Clarke Chace Professor of Foreign Affairs and Humanities at Bard College and taught American foreign policy at Yale University. He was also the editor-at-large of The American Interest magazine. Mead is a columnist for The Wall Street Journal, a scholar at the Hudson Institute, and a book reviewer for Foreign Affairs, the quarterly foreign policy journal published by the Council on Foreign Relations.

His new book is The Arc of a Covenant: The United States, Israel, and the Fate of the Jewish People.

So what should I ask him?

Merit, Fairness and Equality

Noted Canadian chemist Patanjali Kambhampati on the DIE movement:

My “lived experiences” as a Third World immigrant to the United States has in fact led me to be a lifelong defender of the practices of merit, fairness and equality — practices derived from classical liberal principles….My father was born Third World poor. [My father’s] only hope was to gain employment as a secretary or to be able to test into the top engineering school in India, the Indian Institute of Science. By gaining admission to this top school, my father was able to bring his family to America, where we received a superb education and tremendous opportunities.

In my father’s world, it was merit that enabled him to advance and his family to flourish. Merit and the practice of meritocracy are also classical liberal values. Merit is also central to the immigrant dream, and the rise of modern society.

…As a recent example of common practices in science funding in North America, I was denied funding opportunities twice by Canada’s federal science foundations, both of which were detailed in these pages, purely because I said I would hire research assistants based on merit, regardless of their gender or ethnic or cultural backgrounds.

Over the past year, the encroachment of the cult of DIE into academia has only grown. There are now many positions that are simply off limits to straight white men who are not handicapped. One must pledge allegiance to these illiberal principles in order to be a practising scientist in 2022.

These are some of the reasons I am writing about DIE in science and in the broader society. As someone who has dealt with the “lived experience” of racism, I am here to make the case that we need to move beyond antiquated intellectual racism and inept modern anti-racism, and move instead toward a more individualistic approach….I hope that my experiences can play a role in enabling others to speak and think freely and add value to the never-ending drive for human progress and freedom.

The robot chess culture that is Russian

According to the organizers of the tournament in the Russian capital, it was an “accidental” attack by the robot. A seven-year-old boy named Christopher, who, by the way, according to them, is among the top 30 chess players in Moscow under the age of nine, moved a piece on the chessboard earlier than he should, which led to the non-standard behavior of the robot.

The AI ​​robotic arm grabbed the young player’s index finger and squeezed his finger firmly. The people around the boy immediately rushed to help, but did not prevent the consequences in the form of a broken finger.

…We have nothing to do with the robot,” commented Moscow Chess Federation President Sergey Lazarev.

Here is the full story, via Austin Vernon.