Gary Gensler, the chairman of the Securities and Exchange Commission, may be everything a classical liberal wants to avoid. I will take him as representative of the federal bureaucracies that want to control cryptocurrencies and the emerging decentralized finance (“DeFi”) markets. (See Andrew Ackerman, “Stablecoins in Spotlight as U.S. Begins to Lay Ground for Rules on Cryptocurrencies,” Wall Street Journal, December 25, 2021.)
In an instructive article, The Economist evoked the breath-taking potentialities of DeFi: cryptocurrencies, blockchains technologies, fungible or non-fungible tokens, etc. (“Adventures in DeFi Land,” The Economist, September 18, 2021). A few quotes:
Piece by piece a new kind of economy is being built through applications on various blockchains. Each addition makes it more likely that the whole will amount to something meaningful and powerfully disruptive. …
The Ethereum blockchain, which underpins much of DeFi activity, settled $2.5trn-worth of transactions in the second quarter of 2021, including payments and transactions to facilitate trading and lending. (Visa, a payments giant, settled about the same amount in the same period …) …
Innovations, such as automated marketmakers, arbitrage systems and self-stabilising currency regimes, are already pushing the boundaries of financial technology. …
That makes it possible to construct smart contracts—self-executing agreements in which a chain of actions follows when certain conditions are met. These are automatically enforced and cannot be tampered with. …
[Non-fungible tokens] for instance, could become more widely used. Today they are digital collectable claims, but in theory they could represent ownership claims on homes. Mortgage creation could then be wrapped into a single, efficient bundle.
These developments illustrate what Friedrich Hayek explained was a major benefit of liberty (Law, Legislation and Liberty, Vol. 1: Rules and Order [University of Chicago Press, 1973], p. 56):
Since the value of freedom rests on the opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom.
The Economist often tends to trust government regulation at least as much as the autoregulating order of the market, but Gensler looks like an incarnation of the “man of system” described by Adam Smith:
The man of system, on the contrary, … is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.
According to the Wall Street Journal (Paul Kiernan, “SEC’s Gensler Doesn’t See Cryptocurrencies Lasting Long,” September 21, 2021), Mr. Gensler compares cryptocurrencies to Wild West banking:
Mr. Gensler likened the thousands of cryptocurrencies in existence to the so-called wildcat banking era that took hold in the U.S. from 1837 until 1863 in the absence of federal bank regulation. Before President Abraham Lincoln created the Office of the Comptroller of the Currency, banks issued their own currencies, which they sometimes refused to redeem for their purported value in gold or silver.
What a strange view of economic history! Before and after Lincoln, American banks have been heavily regulated, often more heavily than banks in other Western countries. Canada provides a good comparison. Since 1840, Americans have experienced 12 episodes of banking panics with widespread withdrawal suspensions; Canadians have had zero. In 19th-century America, so-called “free banks” (which were not free at all) as well as the “national banks” were forbidden to issue money not backed by government bonds. They faced branching limitations and prohibitions, hence the proliferation of “unit banks” with a single place of business. In Canada, each bank could freely issue its own currency up to the value of its capital until the early 20th century. After Canada was officially founded in 1867, branching was never limited. Canada was the efficient Far West. American regulation has been the Far West only in the bad sense of the term. For more details as well as sources, see my “A Very Bad Solution to Very Real Problems,” Econlog, January 31, 2018.
In 1933, under Franklin D. Rosevelt, the US government stopped redeeming dollars for their promised gold value and not only “sometimes,” but definitively.
Not surprisingly given his biases and knowledge failures, Gensler thinks that investors need his protection. He says that the “robust enforcement and examinations regimes … are essential to protecting investors, maintaining fair, orderly, and efficient markets.” What about free markets instead of what politicians and bureaucrats think is “fair, orderly, and efficient”? (See his recent statement before the Senate Committee on Banking, Housing, and Urban Affairs.) Apparently, he needs to dictate what he thinks investors want—shibboleths like “environmental, social, governance” (ESG) disclosures—because only the government, as opposed to markets, can give people what they want. Also unsurprisingly, he complains that his agency does not have enough money and staff. Protecting so many people is an expensive piece of cake.
Jennifer Schulp of the Cato Institute quotes from Gensler’s Senate testimony (“The SEC’s ‘Daddy’ Issues,” National Review, September 24, 2021):
Senator [John] Kennedy [R, La]: As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?
SEC Chairman Gensler: No. No. (laughs)
Senator Kennedy: Then why do you act like it?
Mr. Gensler shows blind confidence in the competence of the federal government—that is, of its politicians and bureaucrats. It is as if public-choice analysis had taught us nothing during the past seven decades. Government failures are generally worse than market failures.
What does the Chinese mirror have to do with this? As I explained in a recent Econlog post, the image that Americans see when they look at China is, or should be, the deformed image of their own government’s authoritarian failures—deformed and multiplied of course by the extra power of the Chinese state. A case in point: just a few days ago, the Chinese government forbade all cryptocurrency transactions. The more totalitarian a government is, the more it fears cryptocurrencies and decentralized markets that can escape its authority. Let’s hope the US government will try to be different from its Chinese counterpart instead of being seduced by the image it sees in the mirror.
READER COMMENTS
Monte
Sep 27 2021 at 3:54pm
Government failures are generally worse than market failures.
Yes, and generally expected to fail. Planned obsolescence. Examples: The Digital TV switchover and Cash for Clunkers programs, which had the unfortunate effect of encouraging large numbers of people to replace their “junk” with new items, resulting in significant resource waste.
Bad policies must always and forever be replaced with newer ones, never allowed to wither away or allow markets to prove more efficient. Government, like nature, abhors a vacuum.
Craig
Sep 27 2021 at 6:35pm
The problem with cryptos, right here, right now, and we just saw this with China is that if cryptocurrencies actually succeed in their promise, they will be subject to a sovereign risk of some sort. At minimum governments are going to want to ensure that these systems are tax compliant and ultimately people are going to find out that blockchain isn’t going to prove anonymous. The governments are going to be privy to every single financial transaction you make with them.
Maybe governments will prove incompetent to ban crypto? Not sure, but if they’re successful there’s a good chance they will try and as much as they were incompetent in banning drugs, they surely ruined the lives of tens of thousands of individuals many of whom are rotting in federal prison to this day.
Beyond that there’s at least some chance that stable coins like USDT are a scam. They claim that they are backed one for one with a US Dollar.
Apparently its only 2.9% and of course those dollars were probably spent to bolster BTC’s price (who knows?)
Finally, one last word of caution, eventually the leftists are going to look at people buying cryptos at $1 or $10 per BTC and now selling for $40k and they’re going to scream unjust enrichment. Trust me, that’s coming.
At the end of the day maybe crypto helps you escape fiat.
Peter Gerdes
Sep 27 2021 at 9:20pm
Well it shouldn’t be a surprise since cryptocurrencies are only popular as a device to evade regulation. If it was legal (no know your customer laws) everyone would prefer a numbered, anonymous bank account where all transfers are irrevocable (money gets stolen you gotta sue the thief to get it back) to Bitcoin except a small number of people buying Bitcoin as some kind of statement. (u could also just do some king of majority protocol amount small number of authorities to avoid single point of failure)
So it’s actively incoherent to maintain the regulations that prevent us from doing the same things bitcoins do without the huge wastes of electricity and computational power and not to regulate Bitcoin out of existence.
Either it’s a social benefit to have the equivalent of digital cash or it’s not. If it’s beneficial let banks issue anon numbered accounts without asking for id .. if not why let the worse version escape regulation but not better version?
Pierre Lemieux
Sep 27 2021 at 11:21pm
Peter: Perhaps you are right. But you cannot really expect any coherence from Leviathan if by coherence you refer to all arrangements in favor of more liberty. Leviathan will try to advance regulation and control everywhere he can, will be stopped (by opinion, law, its own inefficiency, etc.) in some areas, and the remaining “loopholes” will fortunately allow some liberty. This is in large part why regulations are different across different countries–because the obstacles are different. If you took all regulations that exist in at least one country (even just in “free” countries) and if you implemented all of them in one single country, you would get the worst tyranny that the world has ever known.
David Seltzer
Sep 29 2021 at 9:18pm
Call me cynical, but I wonder if Gensler’s ulterior motive is to maintain government monopoly on issuing fiat currency. Dollars have value primarily because the IRS accepts them for payment of taxes. BTW. How competent is the SEC? Bernie Madoff fooled them for years. Subsequently the SEC took responsibility for its abject failure. For years our compliance officers, with great trepidation, dealt with SEC functionaries. It was mind numbing.
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