Regulating Cryptocurrencies... And Why It Matters

Authored by Charles Hugh Smith via OfTwoMinds blog,

Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

There's a great deal of confusion right now about the regulation of cryptocurrencies such as bitcoin. Many observers seem to confuse "regulation" and "banning bitcoin," as if regulation amounts to outlawing bitcoin.

Further confusing things is the regulation of cryptocurrency exchanges, where cryptocurrencies are bought and sold.

In China, for example, cryptocurrencies are not outlawed, but exchanges were shut down until regulators could get a handle on how to deal with the potential for excesses such as fraud, misrepresentation, etc.

A Wild West free-for-all is conducive to scammers, and so some thoughtful regulation that protects users is to be welcomed.

Governments tax income and capital gains. This is how they fund their activities. Clearly, gains reaped from cryptocurrencies are no different from gains reaped from other speculations and investments, so they should be recorded and taxed in the same manner.

Some enthusiasts of cryptocurrencies seem to think that regulations requiring the reporting and taxation of gains made buying and selling cryptocurrencies is tantamount to destroying cryptocurrencies.

I think this view has it backwards: fully legalizing and regulating cryptocurrencies as financial instruments legitimizes them in a much wider circle of potential users, and common-sense regulations are to be encouraged and welcomed, not viewed as threats to cryptocurrencies.

I want to stress that beneath all the speculative frenzy we see in the cryptocurrencies, what will retain value and remain scarce and in demand is whatever solves problems.

Cryptocurrencies have the potential to solve two problems:

1. reducing the cost and friction of financial intermediaries.

2. holding value as the $250 trillion in phantom wealth created in the asset bubbles of the past 12 years vanishes.

These are real problems: financial intermediaries introduce a great amount of friction and cost globally, and even a modest reduction in cost and friction (time, effort, compliance, recording transactions, etc.) would add up very quickly.

The global value of real estate, stocks, bonds and debt-assets such as mortgages and auto loans is around $500 trillion. By my rough estimate, about half of this was created in the past 12 years as central banks inflated enormous bubbles.

A house that was worth $200,000 in 2005 is now worth $500,000, but it provides no additional value as shelter; it is the exact same house with the exact same utility value. So the additional $300,000 of current market value is entirely phantom wealth.

The same can be said of all the other assets whose value has skyrocketed: the underlying assets/collateral haven't changed enough to justify the current valuations.

Once the bubbles in stocks, bonds, housing, commercial real estate and debt-assets start popping, the owners of all that phantom wealth will be desperate to sell what is dropping in value and convert that wealth into assets that are either holding their value or appreciating.

Virtually all of this newly created financial "wealth" is ephemeral. Bitcoin et al. are routinely criticized as being "worthless" due to their digital/ephemeral nature.

But critics rarely if ever examine the equally ephemeral nature of $250 trillion in financial "wealth."

Bitcoin in particular has two features which may be viewed as having value as all these coordinated bubbles pop:

1. The organization and distribution of bitcoin is mathematical. It is not something that can be changed at the whim of a handful of self-serving people in a room (i.e. central bankers).

2. It is limited in quantity.

Some critics claim this can be changed, but that's not the way it works. A group of bitcoin miners can propose a new version of bitcoin that will issue a trillion coins, but if nobody supports their new version, it dies.

In other words, the marketplace of users decides what has value and what doesn't.

Regulations that enable cryptocurrencies to solve the two problems listed above should be welcomed, as these problems are structural and impact everyone in some fashion.

Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

*  *  *

I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20). Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via


shitshitshit Raffie Mon, 12/18/2017 - 12:13 Permalink

 The push to regulate will most likely come when both the tether fraud and bitfinex will be nailed. As of now I suspect PTB to know the story but they will wait until the problem gets out of control so as to produce maximum impact & casualties in order to make everybody welcome the regulations as a means of protection. 

In reply to by Raffie

Citxmech greenskeeper carl Mon, 12/18/2017 - 12:51 Permalink

"A house that was worth $200,000 in 2005 is now worth $500,000, but it provides no additional value as shelter; it is the exact same house with the exact same utility value. So the additional $300,000 of current market value is entirely phantom wealth."This is a bit of an oversimplification.  That $500k house would have to be in a desireable area with a vibrant job market.  For every one of those there are many other homes whose value has not increased, or has even declined, at least relative to the real rate of inflation.

In reply to by greenskeeper carl

OpenThePodBayDoorHAL zebra77a Mon, 12/18/2017 - 14:46 Permalink

Never have so few facts been deployed by so many in support of so little."Protecting high costs and systemic friction"Um, hello, I can slide my card at 24 million merchants across the globe and in less than 1500 milliseconds anywhere on Earth can buy goods and services. The system that supports this can do 40,000 transactions per second (Bitcoin does 4) at a cost that is many orders of magnitude lower than Bitcoin. Remind me why I care that the bank settlements behind the transaction take place a few days later?No, I'd rather take out my crypto wallet (insecure as fuck), fiddle with keypairs and user interfaces, take eight additional steps, and if the merchant accepts it (none do) wait 20 minutes until the transaction is complete. Meantime if/when I screw up my money is gone forever.Bitcoin. It's a thing that goes up. It's going up because it's going up. That's cool. But don't try and tell me it's "the great new internet money". And don't try and tell me "people are adopting it". No. They're owning it as a speculative asset, they are not using or "adopting" it. Ask yourself: if Coinbase has 15 million customers then why do they only have a handful of BTC addresses?"Facts are simple and facts are straight, facts are lazy and facts are late" - D. Byrne

In reply to by zebra77a

zebra77a OpenThePodBayDoorHAL Mon, 12/18/2017 - 15:29 Permalink

Can your card move $100 million to a piece of paper in 10 minutes tax and currency exchange free half way around the world..?Bitcoin is ghosting the BIG dollars away from parasitic regulation.. Watered down fiat can be used for starbucks and donuts...Segwit and the lightning network  once implemented into bitcoin will accomodate sub-penny transaction in milliseconds.. 

In reply to by OpenThePodBayDoorHAL

Disgruntled Goat shitshitshit Mon, 12/18/2017 - 17:23 Permalink

It does seem strange .... I hear that that they cant even answer which mainstream banks they have relationships with, being that the value of Tether is now $1B+ .... and every tether is backed by 1 USD .... Bitfinex itself is a whole different problem ..... They have been called out by many in the reputable blockchain community, yet still, it goes on ... 

In reply to by shitshitshit

VWAndy Mon, 12/18/2017 - 12:10 Permalink

 More fiat magic is the last thing we need. Are you listening to the claims that its some kinda magical bean thats going to fix all the worlds problems? News Flash! There is no magic bean. Superman aint commin either. sorry

samsara Mon, 12/18/2017 - 12:10 Permalink

Martin Armstrong; The Practicality of Cryptocurrencies – Not Really Ready for Prime TimeTrying to actually use Bitcoin in the economy is anything but something that will replace any government currency. The transaction fees are outrageous typically 3 to 4 times that of a cash withdraw from an ATM. In this video, a journalist tries to actually use Bitcoin. The pizza ends up costing him $76.16 and the fee to use Bitcoin is $9.47.To use Bitcoin, there are middlemen who are the equivalent of a foreign exchange broker. It can take hours to get a simple order in to buy a pizza.From a practical viewpoint, cryptocurrencies are not quite ready for prime time. They are all hype and offering a futuristic vision of beating the governments, but the computing time it takes to actually use cryptocurrency and the complexities, demonstrate that what we are dealing with is by no means some instant success story that has beaten paper currency or a credit card, which is really also electronic money.

Exponere Mendaces samsara Mon, 12/18/2017 - 12:18 Permalink

LOLLook at the bio for this clown:

Martin Arthur Armstrong is an economic forecaster who uses his own computer model based on pi. In 1999 Armstrong was charged with fraud by the SEC and the CFTC. Armstrong was imprisoned for eleven years on contempt of court and fraud charges.

Yeah, but he knows Bitcoin eh? Suuuuuuuure he does. Maybe he's more familiar with being a fraudulent ex-con. Its funny how the ones that scream loudest against Bitcoin are usually the "dirtiest shirt" in the room.Drink some milk and take a nap grandpa, we got this.

In reply to by samsara

greenskeeper carl Exponere Mendaces Mon, 12/18/2017 - 12:37 Permalink

I'm not a big Armstrong fan, but i think the 'ex-con' descriptor is unfair. He was jailed under bullshit charges in a manner that a free society should not allow to happen. But, I wouldn't listen to a goddamn thing he says about economic forecasts. He's one of those guys that just keeps moving the goal posts when his predicted date comes to pass without his predicted calamity.

In reply to by Exponere Mendaces

Garciathinksso Mon, 12/18/2017 - 12:14 Permalink

FUCK. FUCK. FUCK.  There is more than one type of "regulation" it does not ALWAYS have to be GOVERNMENT regulation!  case in point, the Gold Standard is a natural, organic regulator, no need to competition crushing and/or corrupt government regulation .  Cryptos will self regulate. JAYZUZ!  USe your imaginations, dont get stuck like myopic libtards!

Cast Iron Skillet Citxmech Mon, 12/18/2017 - 17:07 Permalink

I understand that. What I'm saying is that we need a lobby to get a law passed that explicitly declares that cryptos (and gold & silver) can legally be accepted as money. It should be able to exist along side the current dollar system.The alternative would be to wait for the regulators in their systemic heartburn to lash out and call for a capital gains calculation each time you use a crypto to buy bubble gum.I am 100% certain they won't just ignore it as some hope.

In reply to by Citxmech