CRYPTO: The Manifest Absurdity and Danger of Proposed "Regulation"

 

Some Problems Can be Avoided at the Outset

This is the follow-on to my previous post today on crypto “assets”.

A look at the second and more absurd manifestation of advocating the wrong sort of regulation.

Why is regulation a “bad” idea?

First, the regulation advocated will give the appearance that “crypto” is an “asset”.

Second, it is major step in entangling our financial system in risks it would be better off avoiding. It may also be the first step on the slippery slope of governmental support/insurance for crypto.

Conveying the Appearance of Approval and thus Value

A very simple analogy.

Crypto is like patent “medicines” or illegal drugs.

Just as these are not medicines, crypto is not an asset.

An asset has inherent value. A medicine generally helps improve health.

No responsible physician nor government agency/regulator would give the appearance that patent “medicines”, miracle cures, or narcotic drugs are “good” for one’s health.

Similarly, no responsible finance professional or government agency/regulator should do the same with crypto.

Regulation can of course be of two types:

• Prohibition 
• Establishing standards

In the case of dangerous substances, only the first type is good.

That is the prohibition of their sale.

This will not eliminate their sale, but will limit the potential damage.

Banks and other financial institutions are not permitted to provide banking services to drug dealers. 

Investment advisors and exchanges do not list or trade in securities for these companies

Similarly, they should not be allowed to do so for crypto.

The second type of regulation advocated by some pundits is not good, because it gives an appearance of official sanction of a product.

“To the best of my understanding” neither HMG or the US Government prescribe purity standards for street heroin, cocaine or crystal meth. Nor do they establish requirements for manufacturing, packaging, etc.

To do so would imply some sort of approval.

So would setting similar regulatory requirements on crypto exchanges and stablecoins.

Entangling the Financial System and Government

This is potentially the most dangerous outcome

If these imaginary assets are “validated” through regulations, then it is highly likely that our and other countries’ banks and investment companies will throw open the doors to crypto intermediaries and transactions. 

Other service providers – audit and accounting firms, law firms-- as well. 

Adding to the appearance of value.

When the gullible who have brought crypto find that their “assets” are worthless or worth less than they paid for them, it’s likely they will turn to our banks and investment companies for recompense and perhaps even to the government for failure to regulate. A potential backdoor to government support.

But there is more.

The world financial system is already freighted with enough risks.  

We don't need to pile on any more.

This is one that we can take a pass on.

CRYPTO: Keep the Faith, Baby

All Colander, No Spaghetti Monster

 

One might have thought that recent unraveling of the crypto-con space might have shaken faith in this imaginary “asset” class.

But alas, it has not.

Aside from the diehard crypto believers whose faith cannot be shaken, there has been what is an interesting and troubling—at least to AA—reaction among financial commentators.

Sadly even from the august salmon coloured pages of The Financial Times!!

Now pundits—even those of the financial persuasion—must “pun” on a regular basis to justify their employment.

On topics of current concern, even when they don’t really understand the basic issues involved.  

As usual, there are others--financial types, politicians, etc.--who add their voices to the mix.

Two central failures:

• Clinging to the “sacraments” of crypto after abandoning the faith. 
• A naive belief that imposition of certain standards on the industry via greater regulation will solve the problem.

A look at the first manifestation of this syndrome in this post.

Like the Pastafarian who loses faith in the FSM but still sports his/her colander, these pundits cling to Blockchain. And to DeFi.

Taking these in order.

Blockchain

The assumption is that Blockchain will allow the quicker and nearly frictionless completion of transactions.   

That is no doubt true for certain transactions conducted at certain volumes.  

But the overall utility may be modest like super yachts for oligarchs and the like.

However, if we are looking to process payments, a system's capacity is paramount.

• How many transactions the system can process per unit of time. 
• The cost of processing a transaction.

Parties interested in system economics can explore this further by looking at volume comparisons between the old and therefore presumably “bad” Visa card and the new and therefore “good” Blockchain.

Similar for average transaction costs and their variance. 

The latter of particular importance if speed is of the essence.  

And if one of the key goals is providing financial services to the "unbanked".

DeFi

According to crypto dogma, the current financial system is centralized and therefore “bad”. 

DeFi will eliminate centralization and is therefore “good”.

But like crypto, DeFi has proven to be a lot less than claimed.

It has merely replaced one set of intermediaries with another. 

And in doing so it has reduced the number of intermediaries.  

There are a lot more banks than crypto exchanges.

But some may argue that true DeFi –peer to peer transactions--can be implemented.

Let’s look at that a bit closer.

Practically how does one connect with someone to find a counterparty for one’s ”transaction”?  Generally via the internet as opposed to "in person".

I can’t think of any example of that sort of contact which does not take place through an intermediary.

Whether that’s sharing your wisdom with the rest of the world via tweets or blogposts, searching for information, looking for a rental, etc.

If you were to attempt a direct peer to peer contact without using an intermediary platform, it would be theoretically possible.  It would also be costly and time consuming.  

And you would probably not reach all the potential “peers” you wanted to reach.

That is important because you want to go where there is sufficient supply or demand to accommodate your “transactional” need as well as an infrastructure to facilitate your transaction quickly at the lowest cost. 

If you're selling 1,000 Bitcoin, Joe might buy a couple, but that would require finding a lot of other Tom's, Richard's, Harry's.  

In the next post I'll look at the second manifestation which is more dangerous and pernicious.

Twitter: Unanswered Questions & Logical Conclusions (?)

SAM's Consultant Logician Philip Francis Queeg

 

 

The press has reported that someone who is in an excellent position to know has stated that a replacement CEO for Twitter would have to be "foolish".  

I believe the exact words were "foolish enough to take the position" or some variant.

However, there was no reported assessment about the state of mind of the recent purchaser of Twitter who it would seem to me--and perhaps to you--would have a lot more at stake than a "hired hand".

Does logic, perhaps geometric logic, enable us to draw a reasonable conclusion?

As a side note, most successful businessmen and their bankers report that rigorous up front due diligence generally--but not always--leads to better decisions than that conducted after the closing.