I'm not terribly happy with the decision, though I can't say I'm surprised. I enjoy the drama of the Wild West that is Ethereum and the rest of the cryptocurrency ecosystem. Minimal regulation encourages innovation, while regulated markets can exist for people who want stability and certain guarantees to prevent fraud (or at least make it difficult).
I wonder what would happen if financial regulations became more "optional". I.e. the SEC exists to provide guarantees if a given company wanted to get the SEC's seal of approval but does not enforce most regulations on entities that don't seek SEC approval (and thus investors would know such entities are riskier). I suppose eventually a "too big to fail" company would avoid regulation and consequently go under, and that would be the end of that.
The regulations put in place by the SEC are not to help companies, but to protect U.S. citizens from being scammed all the time.
Sure, the wild west is fun, but if you are in an economic ecosystem where a large percentage is comprised of scammers/fraudulent companies, then it will be detrimental to long term success.
Of course. We don't restrict the rights of the entire population to engage in voluntary interactions to preempt crime. We punish actual criminals to deter other would-be criminals, and leave everyone else to be free.
We don't require a publishing license because someone might use their right to free speech to libel someone else. We punish the libeler.
You realize that's not in the slightest bit true, don't you?
For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery. You can't contractually disclaim gross negligence on your part. You can't have a contract that unilaterally benefits one party without consideration provided for the other. You can't accept a contract while intoxicated. You can't contractually agree to something that is a crime. ... the list goes on.
>You realize that's not in the slightest bit true, don't you?
What isn't true?
>For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery.
A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
> Of course. We don't restrict the rights of the entire population to engage in voluntary interactions to preempt crime.
I gave one example of many of the ways in which we absolutely do restrict the rights of the entire population to engage in voluntary interactions to preempt crime. We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively. As another example, we place restrictions on freedom of assembly -- voluntary interactions of groups of people -- based upon location and time of day because of the potential to create a disturbance, not the fact of having done so. And so on.
>I gave one example of many of the ways in which we absolutely do restrict the rights of the entire population to engage in voluntary interactions to preempt crime.
Yes I can see how you interpreted my comment that way. I meant we should not do that. In writing it, I was thinking along the lines of "you don't do [some unethical thing]" as a normative statement, not a description of what you don't do. The wording I chose doesn't make that at all clear, so your interpretation is understandable.
>We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively.
Like I said: A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
Extreme libertarian views like yours have been rejected almost everywhere in the world. Maybe it's your opinion that allowing scammers to manipulate people is their basic right, but no one seems to share that sentiment.
Can't we simply punish the scammers, so as to warn others not to do the same? Generally speaking the regulation of the markets doesn't do all that much to protect individual investors. We just (sometimes, rarely) punish people after the fact. How many regular investors got screwed in 2008 and how many people went to jail?
"Punish criminals to prevent crime" is ultimately a fear-based strategy. For it to work, your potential criminals have to be frightened enough of the consequences of getting caught that the rewards do not outweigh the risk. It works well when the rewards are small, the probability of getting caught and punished is high, and the punishment is considered sufficiently odious.
You can begin to outline the conditions under which it breaks down: if the probability of getting caught and punished is small, if the rewards are high, or if the punishments are insufficiently threatening. Investment scams and other organized crime is a great example. The rewards are high - millions and millions of dollars. The chance of getting caught are low - a lot of what you do will appear legitimate, and a lot of what you are doing wrong rests on intent. You have to separate the self-deluded from the con men. And if you do get caught, your punishment might be relatively light (a few years in prison as a nonviolent offender), and if you are clever with how you hide the money, you might get to keep most of what you steal.
In some sense, the SEC is like cops patrolling where they are most worried about crime. You are changing the math by increasing the risk while decreasing the reward, which dissuades more criminals than ineffectually punishing a few while others prosper.
You're not even representing my view accurately. My view is that scammers should be punished, not the entirety of the population on the premise of preempting crime.
Rejecting a person's argument on the grounds that it's "extreme [insert label]" that "everyone rejects" is not constructive.
A couple examples: restricting them from soliciting investment without going through a $6 million compliance process for gaining approval to do an IPO. Restricting people from engaging in anonymous securities transactions with each other.
This is not a sentiment that can be proven wrong. It's a statement on basic rights.
And history shows that attempts to control complex industries with cookie cutter rules imposed from on top create the most dysfunctional industries in the economy, namely finance, pharmaceuticals, and healthcare.
Much like vaccines, meat inspection, and building codes, we've forgotten what it's like without them. We (Great Britain and USA) have been making securities regulations for 400 years.
The important lesson of securities regulation is that it helps the "good" guys more than it hurts the bad guys.
When I buy 100 shares of PZZA, I want to be reasonably confident that Papa Johns is cooking pizza and not the books. That confidence, or trust in the system, reduces friction that helps both buyers and sellers of securities.
A case for mandatory vaccination can be made, as it addresses public health threats, which are negative externalities. Meat inspection cannot. You can choose to eat only government certified meat and not suffer any ill effects from non-certified meat being available on the market.
Just because you want products certified by a government body to be safe doesn't mean you have a right to force others to live according to your standards.
> A case for mandatory vaccination can be made, as it addresses public health threats, which are negative externalities. Meat inspection cannot.
Meat inspection deals with a different failure of ideal markets than direct externalities, to wit, information asymmetry. However,the market inefficiency produced by information assymetry itself has negative externalities, so it's not unrelated.
People, left to their own devices, manage complexity effectively.
For example, most people don't understand how microprocessors work. But this is addressed through an effective and spontaneous process of delegating responsibility.
The government can play a positive role in helping manage this complexity, by providing certification programs, and freely available public information. What it should not do is constrain the actions of individuals, by mandating that a particular standard be used.
There is a massive negative externality for allowing scammers to run free in a situation where the upfront ability to assess fitness-of-goods is lacking.
The cost of dishonesty, therefore, lies not only in
the amount by which the purchaser is cheated; the
cost also must include the loss incurred from
driving legitimate business out of existence.
That's not an externality. An honest business is not entitled to any customer's business. If the customer wants to squander their money away at the casino, leaving them with no money to spend at the honest business, they have that right. It's their money, and they are not obligated to spend it at the honest business.
And in any case, the market for lemons is a theoretical exercise. It does not actually happen in real markets, because there are various market mechanisms that emerge to address it.
> And in any case, the market for lemons is a theoretical exercise. It does not actually happen in real markets, because there are various market mechanisms that emerge to address it.
The "market mechanisms" you speak of are government regulations establishing minimum standards and forms of redress (e.g., and most on the nose, lemon laws).
I think this is a special case of Gresham's law that bad currency drives out good. The problem is information asymmetry. You may be trying to buy SEC securities, but if they are swamped with fakes, it causes huge friction costs to figure out whether to transact and that hurts the market. Only experts (accredited investors?) have the resources to play.
Everyone is not worse off. We have seen rapid innovation in the Bitcoin market, toward far better risk management and security practices, in the absence of regulatory restrictions. Some speculative claim that everyone is worse off if they're free doesn't justify robbing someone of their rights.
Of course. Anyone that scams should be punished. That does not require introducing a license for engaging in some consensual activity, and prosecuting anyone that does this activity without the license. This fearful attitude that will sacrifice the liberty for the promise of security will leave you with neither.
Which is why most publicly-traded companies would get the SEC seal of approval in my hypothetical scenario--institutional investors (which I think own most of the U.S. stock market) would demand it.
It might not change the overall ecosystem that much.
Many companies doing ICOs are already locating themselves in friendlier jurisdictions, and making some effort to block U.S. contributors.
What efforts are these? All I've seen are checkboxes on their web site making the user tick a box confirming that they aren't a US citizen.
Geo-blocking US IP addresses won't work either, because an ethereum contract can't refuse a transaction based upon its source IP address (it doesn't know it). So if an ICO publishes their ethereum contract address online (e.g. via a twitter post), they are implicitly advertising to US investors.
The most serious effort I've seen had a geoblocked website that worked with a Chrome plugin. You could get around it, without even using a proxy, but only if you could understand the smart contract code and figure out how to prepare the data it required.
To my way of thinking, if you're sophisticated enough to do that, you're sophisticated enough in blockchain matters to make your own investment decisions.
It's a common fallacy that people think "I'm good at X, so I must also be good at Y" It seems to afflict techies the most, somehow we think just because we can understand computers, we must therefore be skilled in other domains too, like investments...
I'm not claiming that being good at computers means I must be good at investing.
I'm claiming that if I understand smart contract code, I'm good at evaluating a white paper's technical claims about a project being built with smart contract code.
Also I'm claiming this makes me better prepared to invest in these projects than, say, a cardiologist. But the SEC would be perfectly happy to let the cardiologist invest, while restricting the programmer who actually understands the industry.
They're already doing it. It's near impossible to do it effectively, if the contributor is comfortable interacting directly with smart contracts, but they're doing things like geoblocking their websites, making you click a box saying you're not in the U.S., etc.
At one point, financial regulations were somewhat optional. The SEC was created to put an end to securities fraud, because it turns out that having no rules on speculation is a bad idea.
Do we need to repeat history, just to prove that financial regulations are a good idea? We had a Depression once. I'd not like to do it again.
Indeed, and yet the market cap of these cryptocurrencies has grown much faster than that of almost any company you could name over the last few years. (Yes, I know that's an apples-to-oranges comparison, but apparently a lot of people, myself not included, are willing to take the risk.)
I believe there are different tiers to some securities regulations, right? I seem to remember some sort of "professional investor" status you can apply for, that lets you participate in certain private offerings. And I believe the different marketplaces (NYSE, NASDAQ, etc) also differ in the requirements, although I guess these would come on top of common regulations required by the SEC.
A fundamental problem with different tiers of regulation is that people tend to misjudge their competence. Look at the list of Madoff victims, or that congressman who got a bunch of his colleagues to buy his Australian healthcare micro-cap. And while it may feel almost like justice when a congressman fails in such a public and spectacular way, for everyone who deserves it, there will be thousands of people fleeced by corrupt "investment advisors" pushing scams onto unsuspecting victims.
It's easy to say it's these people's fault, and "Americans shouldn't be treated like children". But that sort of just-punishment-for-stupidity rhetoric implies, under the most gracious interpretation, that people people are capable of learning, and that such scams would therefore only be a transient phenomenon. History shows pretty well that this is not the case: new stupid people are born every day.
The less charitable interpretation is that there's just nothing wrong with exploiting peoples' stupidity to take their money. In that case, I wonder why this logic doesn't apply to physical capability as well: we don't need police, a real American can defend his property on his own. And if he's too old, or weak, or not organised enough to always have at least as many defenders around him than there are attackers, then he deserves a good beating...
People tend to not enjoy living under such conditions, so they start outsourcing their protection, both physically and financially. It gives them peace of mind, and it's also extremely efficient in terms of economics: "Hey, why don't we get together, hire someone who specialises in understanding investment risk, and tells us if this company's CEO is actually a convicted felon who has already bought the one-way ticket to Bolivia."
...and after a few rounds of professionalizing this concept, you end up with the SEC.
There's also a fundamental misunderstanding of the term "risk" at play in these debates:
There's the usual "risk" of investments that, in a functioning market, should be almost linearly (anti-)correlated with the potential reward. This is the risk that's meant in all those formulas.
The risk of the Wild West is that you're falling for a scammer. This is a risk that behaves rather differently than the other risk.
The first, good, reward-promising risk is what one might call the uncertainty of things you cannot (practically) know without trying: will people enjoy this movie, will these scientists come up with a drug that works. You can make educated guesses, and the market serves to incentives people to guess well, and therefore allocates money to the most worthy causes available. Importantly, regulations try to make all relevant information available to everyone, and the idea is that all that's left to do is having good intuition, and you may be better at that than all the investment banks combined.
The second risk, that of falling for a sweet-buzzwording scammer, is a risk that only exists because you don't know all the relevant information. But that information exists, and others have it. In such a market, you're almost sure to lose your money, because it is possible to eliminate such risk if you have enough money to invest: Others, who have more resources than you, may just send somebody to the company's address and discover that the CEO has a face tattoo of a Swastika and has his grandmother generate random numbers by flipping coins.
I wonder what would happen if financial regulations became more "optional". I.e. the SEC exists to provide guarantees if a given company wanted to get the SEC's seal of approval but does not enforce most regulations on entities that don't seek SEC approval (and thus investors would know such entities are riskier). I suppose eventually a "too big to fail" company would avoid regulation and consequently go under, and that would be the end of that.