The standard textbook approach to regulation is that free markets are generally best except for cases of “market failure”. Frequently cited examples of market failure include externalities and monopoly. Now there is a call to regulate the crypto industry:
The White House said Friday it was closely monitoring the collapse of digital-asset empire FTX, citing its bankruptcy filing as proof the cryptocurrency industry required strong regulation.
The White House and other agencies were monitoring the situation, an administration official said, adding that Americans risked getting harmed without proper oversight of cryptocurrencies.
I’m wondering if this is just a knee jerk reaction, or if there is some market failure that I missed. A few comments:
1. It’s perfectly legal for Americans to invest in all sorts of extremely risky ventures, such as biotech start-ups. Most of these firms fail, while a few achieve great success. To use the terminology of administration officials, “Americans get harmed” when risky biotech start-ups fail. Yes, investors understand that biotech is risky, but I’d say the same about crypto.
2. It’s perfectly legal to lend money to high-risk businesses, where the loans may not be repaid. Remember junk bonds?
3. Fraud is already illegal.
So what’s the argument for new regulations of crypto? Surely not the fact that Bitcoin prices have plunged by 75%? Surely not the fact that creditors to FTX are…
