A Crypto Truce Emerges Between Fraud and Revolution

I sense a growing middle-of-the-road regulatory consensus on cryptocurrencies. It splits the difference between “crypto is a Ponzi scheme to defraud investors and enable criminals,” on the one hand, and “crypto solves ancient financial problems and will usher in an era of prosperity and freedom,” on the other. It envisions a future in which domesticated crypto plays nicely within the traditional financial regulatory system.

Last week, four senior International Monetary Fund executives published an outline for international regulation of crypto on the IMF Blog that does a good job of summarizing this view. It proposes four principles for crypto regulation: one good, one bad and two ugly.

(1) The defense against the substitution of sovereign currencies is the maintenance of robust, trusted, and credible domestic institutions.

The good — a refreshing blast of sensible fair play. When competition threatens, up your game. Keep your market share by giving customers a better product, not by whining to regulators to hobble your competitors. Satoshi Nakamoto created Bitcoin in response to the 2008 financial crisis, when traditional financial institutions seemed in danger of collapse and financial regulation seemed to be part of the problem rather than part of the solution. Confidence in sovereign credit, central bank competence, and respect for the rule of law was low.

Crypto gained where sovereign-managed fiat currencies were mismanaged, and financial repression was severe. Commercial successes were areas where traditional financial institutions charged outrageous fees and offered abysmal customer service. Crypto reversed Gresham’s Law — good money drove out bad.

(2) To protect national sovereignty, it is important not to grant crypto assets official currency or legal tender status. Doing so…could generate fiscal risks for government finances, and could threaten financial stability or rapid inflation.