I think this is already more or less the case. The SEC recently updated the accredited investor standard to include not just means testing, but alternate sophistication tests like Series 7/63/etc, CFA iirc. I’m not sure how/if they fully enforce it or not, but they do to at least some extent, which is why FTX, Binance and others run two versions of their services, a US-based one and an international one.
There is a reason why the terms “sophisticated investors” and “high net worth investors” are defined and regulated in most if not all jurisdictions, it’s to protect people from being overly exposed to high risk and being preyed upon and prevent society form picking up the bill.
This isn’t about someone buying stocks more easily and cheaply this is about opening a complex leveraged position on some esoteric derivative that the 500 layers turned traders who came up with don’t even understand that can put you in the red for sums orders of magnitude larger than what you are investing in the first place.
We’ve learned the hard way that we need to limit the risk exposure of traders by both their experience and ability to take on losses and yes Robinhood cuts through that wall quite effectively.
Regarding what you wrote above:
I don’t really know what you mean by esoteric derivatives? Are you talking about single-stock options or various futures or ETNs or maybe VIX derivatives? FWIW, I think retail options trading isn’t great for almost anyone doing it, and I think people trade single stocks too much too. I think most ETFs/ETNs are ok but others might disagree about e.g. 3xS&P500 or whatever. There are other exceptions.
However these things aren’t new to robinhood. It’s been possible to trade those things (albeit without fireworks, and maybe with some kind of annying approval process) at plenty of discount brokerages for a long time. Crypto is a bit of an exception. Maybe there are other things one can trade at Robinhood and not elsewhere?
What are the rules for accredited investors? Right now it's limited to rich people - they're not going do a subjective test on sophisticated vs unsophisticated. It's all based on wealth right now. What if I'm a comp sci PhD who really studied crypto in-depth... "nope, you're out because you're a poor student".
You also imply that it's a forgone conclusion that crypto is a bad thing. People plowed money into tech stocks in 1999, which crashed in 2000/2001. In the aftermath, what if you banned investing in dotcom tech in 2003 and beyond. Google and Amazon stock is only for "qualified" investors?? Crypto could turn out to be good.
> ...or prove sufficient sophistication that they really know what they're doing."
You could extend the standard by other ways which don't depend on how much one owns - e.g. require people to take a test and make sure they understand the basics of the product/ecosystem they are investing in.
Might also be useful to put up limits how much of your savings can be invested. But in a few $1000 play money is one thing, betting your entire life savings or your children's college fund is something else.
I see it similar to driver's licenses. A driver's license is technically discriminating in the sense that it excludes everyone physically or mentally unfit to drive a car. But it does so with good reason, because attempting to drive when you're really not able to do so can have catastrophic consequences.
Anyone can and has to do it. Bank offers free materials for you to understand what you are doing.
Making sure you don’t commit financial suicide and then turn around crying “banks are bad” is, to me, a positive measure for everyone. And is free to consumers.
This is incorrect. There are now non-wealth ways to become accredited: https://www.sec.gov/education/capitalraising/building-blocks...
> You also imply that it's a forgone conclusion that crypto is a bad thing.
I don't. Based on the trash fire of the last decade that would be a reasonable conclusion. But my point here is just that it's unregulated, and therefore has a much higher level of risk, especially to unsophisticated investors.
The wealth requirements are, roughly, $200k personal income, $300k joint, or $1m net worth. The numbers look big but I think they aren’t really that high. The numbers are nominal and haven’t changed in a long time so the bar has been lowering over time. $200k income used to be a much higher bar (both in general due to inflation and on this site as income for programmers has gone up a lot in the last 20 years). If the $1m includes real estate wealth then the requirement is basically to be old and to have had a high-but-not-crazy income and bought a house somewhere where prices have gone up a lot.
Every now and then there will be some news story about some unfortunate dentist who got tricked into investing into some terrible scheme or who made some other poor decisions (e.g. ‘I wanted maximum safety so I figured I’d buy bonds and I put all my money into buying bonds in this Turkish real estate developer that paid 15% that I found from a Facebook ad and now they’ve gone bust and I’ve lost all my money’) which they were only able to do due to their upper-middle-class income/wealth qualifying them as an accredited investor. So I think the rules aren’t particularly fit for purpose. Having a test is maybe better. Having an annoying process where a bunch of government officials tell you that you’ll lose all your money is a funny idea but presumably scammers are much better at learning how to walk people through that sort of thing than the government is at making it do what is intended. Having some process which takes a while might help a bit but maybe is too annoying.
I think it’s also extremely false that getting rid of accredited investors gets rid of the class system that currently exists. There will still be ISDAs and relationships and so on. Even if you’re an accredited investor, you’re not going to get the opportunity to participate as an angel investor in all the best companies and you can’t phone up Goldman and get them to construct some new derivative for you to buy, so I think there’s a lot of adverse selection for someone who becomes an accredited investor but doesn’t have much to invest or many good connections.
My (poor) understanding is that this is also true in crypto in that the better deals will generally be available to early investors (ie some big fund, not you) who can then dump their positions on everyone else (ie you) after some relatively short lockout.
Finally, I don’t think being a ‘comp sci PhD who really studied crypto in-depth’ is actually a good example of a way to tell if someone is fit to invest in something. The qualifications are generally about understanding the financial product rather than understanding the underlying ‘business’.
We don’t trust our governments.
By we I mean crypto believers (yes me included)
Impossible to fix. The more diverse a society is, the lower the trust it has in its governments. We don’t want to pick up the tabs caused by the problems introduced by “the others” in our diverse society. For example, student loan forgiveness, affirmative action, diversity hiring, stimulus checks, petty theft forgiveness, etc.
If you as a person do not want to trust government regulation, that's great! Please do your own research, test food quality yourself, and inspect the kitchen every time you want to order a burger.
Also, if you don't want "the others" in "our diverse society" to be seen as a dog whistle, you should perhaps choose some different phrasing.
Yes, I want my government to test food quality, to inspect the kitchen. But I don't want my government to bailout petty thefts, to give stimulus checks, to hail criminals as saviors (BLM), to require me to pronounce different genders, etc.
It is a dog whistle. I meant to say that.
Similarly, the reason that the US has one of the most robust financial markets in the world is regulation. That regulation comes from governments and exchanges and it is intense. But that means that investors can generally trust financial statements, etc. Lowering the barrier to investment means more capital invested, making things better for everybody.
Trust is economically valuable and it isn't free.
> It is a dog whistle. I meant to say that.
Ok. I appreciate you admitting that you are choosing to be racist. So few racists do these days.
We don't need diversity to have modern 1st world comfort. See Japan.
I like my homogeneity.
Pure "caveat emptor" works in a low-trust society. But it's wildly inefficient, which is why rich countries are high-trust societies enabled through regulation. E.g., the reason you can safely eat at most restaurants is a web of food safety laws and health department restaurants. People who are used to that are in for stomach-clutching surprises when they travel to low-regulation, low-trust areas.
So for me letting crypto burn includes real barriers to scammers hoovering up the life savings of the naive. The simplest thing would be to extend the "accredited investor" standard, such that anybody who wants to play the digital ponies either needs to be rich enough to afford the losses or prove sufficient sophistication that they really know what they're doing.
(And the answer to "but why" is twofold. One, society has to pick up the tab for people who run out of money. And two, the more money criminals have the more crime they can do, so we all have an interest in keeping the level of scams low.)