I can't help find it funny as the libertarian cryptocurrency fans slowly realize why we have all these dang laws. There are plenty of financial regulations that could use updates or tweaks, but an overwhelming majority are put in place to protect people and try to ensure transactions are as fair as possible. Cryptocurrencies too often throw the baby out with the bathwater.

The entire Bitcoin saga has been the most shining example of this classic narrative:

1. Technology people are presented with a social/cultural/government situation that seems inelegant, irrational and overly complex.

2. They decide to "solve" that problem using technology.

3. Even with the new technology, it somehow appears everything is not miraculously better.

4. Technology people propose layering a few small social fixes on top of their technology to address the "minor issues" left by their brilliant technology.

5. They fail to realize all of their kludgy human-level patches on top of the technology are merely less-mature forms of the social structure they claimed to have replaced in step 2. Now we have an even less elegant, more irrational, more complex social institution, mixed with non-helpful technology.

6. Now the problem is not fun to work on any more (too much squishy inelegant human stuff), so they wander off to "solve" some other cultural malady.

There's a law of economics that, crashes occur when everyone who can remember the reason we have laws to prevent them is dead.

I think that's the Minsky Moment, basically that long periods of stable investment growth lead to increased risk-taking, inflation of a bubble, and eventually a crash.

I like how you laid that out. We are seeing a very similar process happen with Uber and Airbnb at varying rates.

Maybe i'm dense but where else has this classic narrative unfolded? Social media? What you are describing seems to me more common with bureaucratic solutions than technological ones.

web app tools...

Matt Levine has some amusing commentary about how crypto currency is going to rapidly reenact the entire history of the evolution of the modern financial system.

I can't find the quote now, but in that same line of thought he suggests that at some point in the near future, crypto currency enthusiasts will un-invent fire.

Well, fire is considered harmful.

Only backwards

Meanwhile, the libertarians in the crowd are nodding, having expected this... and protected themselves from the fallout ahead of time.

Could be most did in terms of not having their coins in an exchange, but their coins, wherever they are, just lost value for everyone looking to spend a bit of their money today. Off-exchange storage prevents against exchange-based theft, but not overall loss of value. If that loss of value stems from fraud on a single exchange it still impacts the libertarian crowd.

No true Scotsmen.

The only true Scotsmen are the ones who agree with me :)

Exactly. And not just libertarians, but any bitcoiner who understood that a prime motivation behind bitcoin was not having to rely on centralized financial entities!

Yup. The last few years has basically been a real-time history lesson on how the modern financial and regulatory systems came to be. Must be fairly fascinating for economists and historians.

I can feel it! It's fascinating.

>don't want regulation

No, there are many reasons why I do want regulation. I just try not to get too religious about any of my opinions, and that lets me still see some reasons why regulation can be a bad thing.

I figure regulation should protect against deliberate malice and foreseeable stupidity. Unfortunately that can be very broad, the line isn't always clear, and it can change. I figure good regulation needs to be very agile, and above all skeptical of its own use of power. But again, reasonable people can easily disagree on all of the specifics.

Adding regulation would just increase the complexity. Instead of one curtain, you now have two. For as much as people complain about the US government, they certainly aren't backing down when it comes to having them meddle in private affairs.

Let the market work this out. Coinbase exists to legitimize the industry. If they turn, someone will step in to take their place. Blockchain and crypto aren't going anywhere.

Yeah, maybe the long term is all good either way, but look at it from the view of an individual, or institution, trying to decide an investment strategy. It's like any product or service. Let's finance is like restaurants, and look at the example of a local McDonald's: Food has been fine, and if the manager screws up, there'll be another to step in and fix things, eventually. But lets say the manager really screws up and a bunch of people get sick. That a new manager will fix things isn't much consolation. And after a few days in the toilet, and fines paid for poor sanitation standards, and news plastered around about the issue, it's going to be a while. Now imagine there wasn't even a local health & safety team certifying and inspecting these things to begin with, and a new place opens up: It's exciting, edgy cuisine, equal parts delicious and daring. But there's no health & safety inspection. Heck, that's part of the excitement, they don't have to play by any set rules! So you might get an awesome meal, but its a dice role on which day of the week all customers will spend their time crapping their pants.

Now, in the world of large-scale personal finance and institutional investment, not many are going to risk redecorating the insides of their pants every few days. They're sticking with McDonalds, which may still cause some level of bowel décollage now and again, but in much safer, more predictable ways. I'm not saying that makes crypto a "fail", only that the next few months will really determine if it's going to be a future behemoth or a niche asset class that risk-tolerant portfolios occasionally take a piece of.

I think the issue is about transparency. Most of the economic models us laymen think about and use to rationalize our political beliefs rely on perfect information. There are valid libertarian arguments against regulations which restrict what actions a company can take but I don't think there are very good arguments against regulations which only require companies to publicize their internal workings.

>If they turn, someone will step in to take their place.

There's a lot of stuff going on in that 'someone will step in' though. How many people lose their money when CoinBase turns? Do quick movers get out with all their BTC intact and slow movers go bitcoin-bankrupt? 'Someone will step in' may be an assurance to the long-term future of crypto but it says nothing to the fates of many of the individual investors who currently hold that crypto.

Thats not what bank regulations have achieved.

Are you sure of that? In many ways bank regulation has achieved exactly that. We have an SEC, we have mandatory filings, we have disclosure requirements, conflict of interest requirements, bank capital requirements, stress tests, and many rules about types of financial products which cannot be sold. Those create much more uniformity and trust in the system. (of course this comes with some cost, but, arguably the thing lost in the system is volatility more than anything else).

Yes, it would be extremely useful if some of the ardent voices for unregulated crypto took a bit of time to acquaint themselves with the history of various banking collapses from 1850 to 1930, and subsequent rise of modern financial structures.

We also have immense global money laundering from banks.

And in return, each bank account cost of regulatory compliance is pretty large.

Im not saying all bank regulations are bad, but its not like bank regulation is an example of policy success.

And you think it would be better without regulations?

... and then we had 2008, where you can violate all of that with reckless abandon and still get bailed out.

Had bankers broken regulations with “reckless abandon”, a few more of them might be in jail. And there’s the problem: a lot of the shenanigans might not have been on the up-and-up, but they were not illegal. For example, Moodys rating junk derivatives as AAA isn’t illegal, AFAIK, it’s a trust issue that should have put Moody’s out of business but didn’t.

I'm not sure 2008 was a problem of information transparency. There were people who accurately read the signs and viewed the documentation.

The crash was the result of speculation and improper risk assessment, followed by the inevitable correction.

to say that 2008 happened as proof that these regulations don't work is kind of erroneous, as many of the regulations were revised or implemented as a result of that crash, to avoid it happening again.

2008 was about over leverage and speculation.

It was also about mortgage fraud ... bond rating fraud ... multinational banks selling fraudulent mortgage backed securities based on the previous two frauds. Almost no one went to jail for any of it, the few who did were little fish. The SEC, Fed, Treasury and DOJ were asleep at the wheel before and during the crash and did almost nothing after other than reward the perpetrators: A. threw $700 billion in tax payer funds at them B. forced mergers that made some of them even bigger C. the Fed printed $4 trillion dollars and handed it to them to plow in to the stock market and juiced an 8 year bull market which enriched all of them.

Cryptocurrencies certainly have their problems but the last 10 years have been a case study in how horrible fiat currencies and the current global financial system really is. Japan's central bank has printed so much money they own something like 65% of all the ETF's on the Nikkei.

China, EU, U.S. and Japan have printed something like $16 trillion dollars since the crash. If banks leverage that at a conservative 12X that's $192 trillion. The world is awash in fantasy money.

It is easy to claim that these things were fraud, but courts have not agreed that they were fraud. The dispersion of responsibility in the system made it difficult for any one person to be solely responsible for the actions of the firm. the "fraud" you perceive was an emergent phenomenon resulting from poor oversight. Few people actually committed fraud. The difference in personal responsibility is very important, especially for the people involved.

I agree, however, that our legal system lacks an adequate punishment for companies that allow such poor governance practices. I don't feel it is necessary to throw people in jail for it, though.

In my opinion, we ought to be able to convict a company of "governance failure" which would carry the concomitant punishment of mandatorily ejecting all officers and directors without severance and without the ability to exercise options.

No... large numbers of people committed fraud. Countrywide, and one of its execs, were convicted of fraud in one of the egregious examples of "the hustle". The problem was an appeals court overturned the conviction in an inexplicable decision:

https://www.propublica.org/article/us-attorney-asks-court-to...

There have been many notable failures of enforcement, but as someone who has been in and out of a few banks I can assure they take compliance extremely seriously most of the time. It's enough for people to have faith in the system.

They have achieved trust is system. If my bank stops existing right now, I still have any money.

If <exchange> gets hacked, tough luck.

Thats federally insured. You are paying taxes for your 'still have your money'.

Not as clear cut as you think it is. If the government insured bitcoin 'for free' you would also see a major surge in confidence.

The government insures bank deposits because it, and the vast majority of its citizens, has/have a vested interest in the stability of its currency. That's kind of the point of fiat currency. At the end of the day, there are dudes with guns that will back its value. Not so with Bitcoin. And good luck to any expecting that to change.

It depends on the holdings, not everything you can have in a bank account is FDIC insured.

Update: By "everything" I mean not all kinds of financial instruments are insured by the FDIC. They do not cover mutual funds, annuities, bonds, etc. They cover pretty much just cash and cash equivalents.

True. But for average people at popular banks, it's very sufficient.

It's fairly trivial to make sure everything's FDIC insured, and being wealthy enough to care about the per-account caps should mean you've got someone to advise you on doing so.

It doesn't even require a human advisor. Many banks participate in CDAR, which spreads large deposits across multiple accounts at other banks in the network. Fidelity isn't a bank, but their cash management feature includes checks, an ATM card, bill pay, and can send and receive ACH and wire transfers; they also implement this hack.

None of this applies to securities. Presumably you could insure them. It's not obvious to me from first principles that the cost of insurance would wipe out any incremental appreciation value, but I've never heard of anyone doing this so probably it does.

Securities held at a broker are usually backed by SPIC protection.

Compare and contrast to hypothetical banks with no regulations at all? Maybe they're not perfect right now, but it could be a lot worse, too.

I'd certainly agree that at least in the US, regulation has greatly increased banking transparency.

There are still edge cases, but capital ratio requirements and accounting standards, compared to none? Huge difference.