Regulation: who needs it?

One of the questions that often comes up when it comes to cryptocurrencies is the issue of governmental regulation. Recently a number of countries and even some US regulators, such as this rather colorful character in Alabama have issued warnings to people considering getting into Bitcoin which are mostly around the theme that because there is little or no regulatory oversight, getting involved with Bitcoin carries tremendous risks to the consumer, including but not limited to losing the entire investment.

I can definitely relate to these warnings. I currently have a few Bitcoins tied up in CoinLenders. These Bitcoins have been tied up there for months, and it’s doubtful I will ever get them back. Giving the service provider the benefit of the doubt, I choose to believe his story that the site was hacked and many of the funds stolen, rendering him unable to return his customers’ deposits. Back when Bitcoin was worth a thousand dollars, these lost Bitcoins could have been sold for a total of more than $4000 had I been able to do so. For me, that represents a huge loss, and it was very painful to have to let it go.

Had I held the same amount in a bank savings account and something like that happened to the bank, I would have been able to recover my funds thanks to FDIC “insurance.” Not only that, many of the regulations on the bank could have prevented such a breach from happening in the first place as they concern website security.

On the other hand, it has been said many times in many contexts that regulatory oversight, especially when it gets too heavy and restrictive, can and does put a serious damper on enterprise and innovation. Financial regulation in the United States especially makes it very difficult for someone to start a business without some major venture capital investment as it costs a lot to gain the required licensing to operate in the US.

A lot of people who are involved in the Bitcoin community are of the Libertariain political persuasion, which in oversimplified terms basically says that people should be free to do whatever they want as long as they are not hurting anyone else, and they should also take responsibility for their own decisions rather than looking to the government to protect them from the consequences of foolish decisions. In other words, the government should not be in the business of protecting consumers from bad food, bad investments or even snake oil medicines. It should be up to the consumer to inform himself of the risks before buying. If too many consumers get burned by a particular product, word will get around and the company will go out of business; in other words, market forces alone are sufficient to regulate things.

The above view is all fine and good, but when someone gets hurt, regardless of how they might have felt before about overly burdensome government regulations, they very often want the government to in some way mitigate their loss. When CoinLenders went down, there were plenty of people on the Bitcoin Forum calling for TradeFortress to be investigated and prosecuted as some sort of financial criminal, and that sentiment is definitely understandable. No one likes to lose four thousand dollars and many lost even more than that.

So on one hand governmental regulation especially when it comes to the financial world can be overly burdensome, to the point where it squashes creativity and enterprise. On the other hand without some kind of oversight, real people can and do lose a lot of money, sometimes even their entire savings on bad decisions which lie outside regulatory protection. But could there be a happy middle ground between these two extremes?

I believe that regulation has its place and that it can be a very positive thing, though specific laws should regularly be evaluated to be sure they are indeed accomplishing good things. I also believe that free enterprise is a positive thing and should not be burdened with excessive regulation. I believe strict regulatory oversight and free enterprise can easily coexist. Here’s how I see it working.

I believe the government in collaboration with the particular industry in question can set standards companies within that industry need to comply with in order to obtain a particular rating that is equated with excellence. Let’s say, for example, that we are talking about a hospital. The government sets the standards this hospital must follow in order to get a rating as a Q12* hospital. The government clearly posts what these standards are. If the hospital meets them, it gets to advertise itself as a Q12 hospital. If it doesn’t meet the standards, it does not get to designate itself as such, and to do so would constitute fraud, which can and should be prosecuted. Hospitals with a Q12 rating can use this rating in their marketing efforts and tell people why their Q12 rating makes them a better place to patronize than hospitals without the Q12 rating. Similar ratings can be set and awarded in other industries such as banks, trading platforms, restaurants and car dealerships.

What about individual businesses within each industry which for whatever reason do not wish to comply with the standards in order to obtain the rating? I believe they should be completely free to operate with the limitation that they cannot in any of their communication say or even imply that they have that rating. A hospital that does not meet Q12 criteria cannot call itself a Q12 hospital. I would even go so far as to say it should very clearly state that it is not a Q12 hospital, but that may be overkill.

A hospital might determine it has very good reason to not seek out a Q12 rating. Perhaps this hospital wants to use more holistic alternative healing modalities and has determined that following Q12 standards would be detrimental to its goal. Fine. It can clearly communicate that decision in its informational and marketing materials, and even market why it’s a good thing that it’s not Q12. The hospital might decide that it needs a different kind of rating which would allow it to meet more relevant standards. Perhaps it might even approach the government with a proposal to designate itself as a Q13 hospital. Or it might continue to operate without any rating.

In this scenario, regardless of the industry, individual businesses can choose to seek out the rating and abide by the appropriate standards, or they can choose to do business without the rating and as such, free from the restrictions that rating imposes. Potential customers would know right away whether or not the company has the rating, and it would be up to them to understand what the rating means (the government can provide informational websites to explain each rating) and whether or not the rating is important enough to them to cause them to only patronize companies with it.

What would the customer decide? I believe this would vary depending on the situation. There are some situations where it would be very important to the consumer for a company to meet certain criteria, and other situations where it wouldn’t be so important. I personally love alternative (non-allopathic) healing modalities. If the hospital Q12 rating applied to allopathic hospitals, I would very likely choose a non Q12 rated hospital which specialized in more holistic healing modalities. However, if I or one of my children suffered a serious trauma requiring surgery, I would probably take them to the nearest Q12 hospital because in my opinion allopathic doctors and surgeons really shine when it comes to trauma. In both scenarios, it would be my informed choice to go to one hospital or the other.

When it comes to my finances, there are certain situations where I really like the current governmental oversight. When I get my paycheck for my day job, I deposit it into my bank and from there I pay my bills. I cannot afford to lose those funds because if I can’t pay my utility bills the companies disconnect my home, and if I can’t pay my mortgage, the mortgage company could take my house away. For that money I really, really like FDIC insurance and the peace of mind that comes with knowing that should my bank get robbed in some way, I will be able to recover my funds.

With that said, I also really like the cryptocurrencies, especially Bitcoin, which lie outside of governmental regulation. Right now the status on Bitcoin is that I don’t need someone’s permission to use it. As such I am well aware that anything I do with Bitcoin is risky. I could buy a bunch today and have the value plummet tomorrow only to stay down for months. I could send them to a service such as CoinLenders only to lose them all and have no recourse. I could get paid in either Bitcoin or Devcoin for a huge writing assignment and then have the value of both plummet to the point where I’ve earned less than minimum wage for my efforts. I recognize all these outcomes are possible, even likely, and make my decisions accordingly. Even despite all that I have determined that the upside of cryptocurrencies is greater than the downside so I stay involved. However, I will not buy Bitcoin with any of my paychecks even if I believed the price would triple next week. Nope, my paycheck goes straight to my heavily regulated bank, thank you very much. Nor will I quit my day job anytime soon.

In other words, I believe as a customer of various financial (and other) services, I should have a choice about which ones I use, and regulatory status should be one of many features that I consider in making my choice. It does not have to be an all or nothing game. I believe financial services of varying degrees of regulatory status can coexist quite nicely, and customers can have a wide variety of options based on their financial needs at the time. High regulation is good; little or no regulation is good. It really depends on the situation and the customer as to which one is better in a given case.

So who needs regulation? I do, but only sometimes.

*Q12 is an entirely fictional rating I invented to make a point in this article.
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