Cryptocurrencies seem to be on the minds of every government official. Politicians, central bankers, and regulatory heads continue to call for new regulations. However, the design of those regulations is surrounded with uncertainty––an uncertainty that is partly due to the novel nature of cryptocurrencies themselves. If impending regulations are to avoid crushing the technology, that novel nature must be better acknowledged. To that end, government officials should be careful to recognize when they are solely trying to place cryptocurrencies under existing categories––as if regulation is the default condition––instead of addressing the question of what benefit regulation might have.
Decisions, Decisions, Decisions
Chris Brummer argued at the first installment of the Cato Institute’s Center for Monetary and Financial Alternatives’ (CMFA’s) event series on cryptocurrency regulation that regulators traditionally face a trilemma. They must decide between (1) achieving market integrity, (2) enabling innovation, and (3) establishing clear rules. Brummer argued that regulators, at best, only get to choose two of these three options.
While regulators might face the trilemma that Brummer described when they consider a new product or service, cryptocurrencies are so novel that they require regulators to recognize another trilemma. Namely, regulators must decide between regulating cryptocurrencies as (1) what they were designed to be, (2) how they currently function, or (3) what they have the potential to be. Yet it’s through this lens that it becomes clear that cryptocurrencies rarely fall neatly into any one form.
Figure 1. The trilemma of cryptocurrency regulation
Read the rest of this post →