The Public Policy Case for Banning Crypto

It's time to stop tiptoeing around this issue. Democratic societies should outright ban crypto.

It's time for politicians to stop listening to so-called "moderate" positions on crypto because they are not moderate. Allowing crypto to continue to exist is the extreme position. Allowing crypto to continue to exist and metastasize is a net negative for society because of the absolutely horrific negative externalities it produces.

Markets function optimally when they facilitate productive investments, catalyzing innovation and propelling economic growth. Cryptocurrencies, however, deviate significantly from this ideal. Crypto is a casino not a market. They do not generate productive economic activity; instead, they foster an environment of speculation that destabilizes the financial systems and erodes investor confidence. By allowing cryptocurrencies to flourish, we are essentially nurturing a beast that thrives on speculative bubbles, much akin to the tulip mania of the 17th century. The volatility associated with cryptocurrencies undermines the foundational stability that markets require to function effectively.

Systemic Risk

One of the gravest concerns regarding the widespread adoption of cryptocurrencies is the systemic risk they pose to the global financial system. Financial markets thrive on stability, trust, and predictability, where institutions are heavily regulated to prevent contagion effects and ensure liquidity. Cryptocurrencies, however, introduce a high degree of volatility and unpredictability into the financial ecosystem while providing no tangible benefits to the real economy.

Systemic risk is not merely a theoretical construct but a palpable threat, as witnessed during various financial crises in history. Cryptocurrencies operate outside the realm of traditional financial regulations, creating a parallel financial system that is vulnerable to hacking, fraud, and sudden market crashes. These unregulated markets can lead to cascading failures, where the collapse of a significant cryptocurrency or exchange can have ripple effects across global financial markets.

Moreover, institutional adoption of cryptocurrencies exacerbates these risks. As traditional financial institutions, including banks and investment firms, begin to include cryptocurrencies in their portfolios, they expose themselves to the same volatilities and uncertainties. This blending of traditional and cryptocurrency markets creates channels through which financial instability in the crypto space can transfer into the regulated financial system, magnifying systemic risk and undermining economic stability.

Consumer Harm

Consumer protection is a cornerstone of well-functioning markets and a fundamental tenet of Keynesian economic thought. Cryptocurrencies, however, have proven to be fertile ground for myriad forms of consumer harm. The opacity and complexity of cryptocurrency transactions make it exceedingly difficult for average consumers to understand the risks involved, paving the way for exploitation and fraud. Fraudulent initial coin offerings, pump and dumps, Ponzi schemes, and misleading marketing tactics have lured countless unsuspecting individuals into investing their life savings into highly speculative assets, only to see them evaporate in sudden market downturns or outright scams. The lack of regulatory oversight means that there are few, if any, safeguards to protect consumers from such rampant exploitation.

The psychological and financial stress caused by gabmling on the extreme volatility of cryptocurrencies cannot be understated. Traditional investments come with their own risks, but they are often mitigated through regulatory mechanisms, investor education, and insurance schemes. Cryptocurrencies, on the other hand, operate in a regulatory vacuum, leaving consumers exposed to wild price swings and the constant threat of total loss.

Even the technical nature of cryptocurrencies poses a threat. The requirement for secure storage, the potential for losing access to digital wallets, and the perplexing nature of blockchain technology put consumers at a significant disadvantage. The ease with which digital assets can be lost or irretrievably locked away epitomizes the profound consumer risk inherent in technology is poorly designed and not fit for purpose.

Regulatory Arbitrage

In addition to market inefficiencies, cryptocurrencies pose significant challenges to regulatory frameworks that are designed to protect consumers, maintain financial stability, and prevent illicit activities. The quasi-anonymous nature of cryptocurrency transactions facilitates money laundering, tax evasion, and funding of illegal activities, circumventing the regulatory safeguards that are cornerstone to maintaining economic order.

Economists advocating for stringent regulations argue that traditional financial instruments are stringently regulated to avoid systemic risks – a precedent starkly ignored by the crypto ecosystem. This regulatory arbitrage not only endangers individual investors but also poses existential risks to the global financial architecture.

Environmental Externalities

Perhaps one of the most egregious externalities introduced by cryptocurrencies is their extraordinary environmental cost. Bitcoin and other popular cryptocurrencies rely on energy-intensive mining processes that contribute significantly to carbon emissions. This is particularly disconcerting in an era where climate change mitigation is paramount.

Numerous reports have indicated that the energy consumption of major cryptocurrencies rivals that of medium-sized countries, with very little of that energy being sourced from renewable means. This poses a severe contradiction to global efforts spearheaded by economists and scientists alike to transition towards sustainable energy solutions. We are essentially burning vast sums of energy for speculative gain -- a pursuit antithetical to sustainable economic practices.

It becomes abundantly clear that the presence of cryptocurrencies in the market is detrimental on multiple fronts – it bypasses essential regulatory frameworks, destabilizes financial markets, promotes speculative rather than productive investment, and contributes alarmingly to environmental degradation.

Crypto Culture

Cryptocurrencies have not only introduced financial risks and inefficiencies into our economic system but have also precipitated significant cultural shifts that are cause for concern. Drawing from the insights of seasoned economists and sociologists, we must scrutinize how the prevalence of cryptocurrency and blockchain technology has exacerbated problematic behaviors, particularly among young men. The allure of fast wealth through cryptocurrency trading has striking similarities to gambling. Unlike traditional investing, which is typically grounded in rigorous analysis and strategic decision-making, cryptocurrency markets are often likened to high-stakes casinos. These markets are characterized by extreme volatility and speculative trading, where massive gains and losses can occur in mere moments.

This speculative nature has disproportionally attracted young men, many of whom are drawn to the thrill of high-risk, high-reward scenarios. These individuals often fall prey to gambling tendencies, engaging in constant trading and compulsive behavior that mirrors addiction. This has led to significant social isolation, as individuals become increasingly consumed by the digital pursuit of quick wealth, forsaking real-life social interactions and responsibilities.

The unregulated and decentralized nature of cryptocurrencies also serves as fertile ground for fostering extreme ideologies. The allure of crypto often dovetails with a skepticism of traditional financial systems and government regulations. While healthy skepticism can drive reform and innovation, the crypto space has given rise to and magnified more dangerous undercurrents, including extreme right-wing populist views. Within various online crypto communities, there's a growing trend of celebrating anti-establishment rhetoric and conspiracy theories. These spaces often nurture discontent with mainstream financial systems and governments, promoting ideologies that reject societal norms and fostering a distrust in institutional integrity. This cultural contagion spills over into broader socio-political arenas, contributing to the rise of populist movements and extremist views.

Perhaps equally troubling is the way cryptocurrencies have revived and propagated fringe economic theories, particularly those that romanticize a return to hard currencies like gold, often referred to as "goldbug" ideologies. These perspectives are rooted in a fundamental distrust of fiat currencies and a longing for a monetary system tied to tangible assets. While appealing in their simplicity, these theories overlook the complex realities of modern economics and the role of fiat money in providing necessary flexibility for economic policy and growth.

The cryptocurrency craze has lent unwarranted credibility to these outdated and discredited economic views, pulling young enthusiasts into a belief system that contradicts mainstream economic thought and established financial principles. This regression into unsophisticated economic thinking undermines public understanding of the nuanced mechanisms that underpin modern, advanced economies.

Liberty, Risk and a Free Society

In a free society, the cornerstone of individual liberty is the principle that people should be able to do what they wish with their own money. This libertarian viewpoint champions personal autonomy and property rights, arguing that individuals, not governments, are best positioned to make decisions about their financial resources.

The essence of this argument lies in the belief that personal freedom includes the right to engage in voluntary exchanges, to invest in varied financial instruments, and to explore innovative economic opportunities like cryptocurrencies. Advocates assert that the market's invisible hand naturally regulates itself, and any interference from government constitutes an overreach that stifles innovation, reduces economic freedom, and hampers individual responsibility.

Supporters of this perspective often argue that cryptocurrencies represent a democratization of finance that they provide access to financial services for the unbanked and underbanked populations, fostering inclusion in the global economy. This libertarian ethos holds a hopelessly naive vision of freedom, it is imperative to recognize that individual actions, especially financial actions, do not occur in a vacuum. The interconnected nature of modern economies means that individual behaviors can have far-reaching implications. Consequently, even in a free society, there must be limits when individual financial choices precipitate widespread harm.

Actions of individuals should be limited only to prevent harm to other individuals. In the case of cryptocurrencies, the potential for such harm is significant and multifaceted. For instance, the extreme volatility of crypto markets doesn't just impact individual investors; it has systemic repercussions that can destabilize broader financial systems. Market crashes and failures in major cryptocurrencies can lead to widespread economic instability, undermining the financial wellbeing of countless individuals beyond the initial gamblers and speculators.

Cryptocurrencies have been increasingly associated with facilitating illicit activities, including money laundering, tax evasion, and financing terrorism. The quasi-anonymous nature of transactions poses significant challenges for law enforcement agencies, enabling a parallel financial system that circumvents traditional regulatory oversight. This not only endangers domestic security but also has severe implications for international stability. Allowing unfettered use of cryptocurrencies can weaken efforts to combat global terrorism and organized crime, posing significant risks to national and international security.

Cryptocurrencies also have the potential to undermine the geopolitical interests of democratic nations like the United States. For example, the proliferation of cryptocurrencies can weaken the influence of national currencies and the ability of governments to implement effective monetary policies. Central banks rely on monetary policy tools to manage economic stability and growth. The widespread adoption of decentralized digital currencies can erode this control, making it harder to respond to economic crises and inflationary pressures.

Moreover, hostile nations and non-state actors can exploit the decentralized and unregulated nature of cryptocurrencies to bypass economic sanctions and fund geopolitical adversarial activities. By allowing the free terrain of cryptocurrency transactions, democratic societies inadvertently empower entities that seek to destabilize global order through economic means. In democratic societies, the prohibition of certain activities based on their potential to cause widespread harm is not unprecedented. For instance, governments regulate or ban substances like drugs and weapons due to their potential severe harm to society at large. Similarly, gambling is often strictly controlled or outright banned to prevent addiction, poverty, and associated societal detriments.

Cryptocurrencies, with their considerable potential for financial instability, illicit activities, and geopolitical threats, pose comparable, if not greater, risks. Therefore, it is both logical and prudent to consider the regulation or outright banning of cryptocurrencies to safeguard public welfare, national security, and global stability.

Non-Innovation and Malinvestment

Much of the allure surrounding cryptocurrencies and blockchain technology hinges on the narrative of so-called "innovation". Proponents argue that blockchain will revolutionize various sectors by providing unprecedented transparency, security, and efficiency. However, when scrutinized through an objective lens, it becomes evident that blockchain's touted benefits are often overstated and that superior technologies already exist to fulfill these claims more effectively.

First, let’s examine the core promises of blockchain: decentralization, security, and transparency. The misguided premise is that decentralized databases and distributed ledger technologies, lower energy consumption, and superior data integrity when compared to traditional blockchain structures. This is demonstrably false. Traditional centralized databases can achieve similar levels of transparency and security through robust cryptographic methods and well-established auditing protocols. These technologies have the added advantages of scalability, reliability, and regulatory compliance — all critical factors that blockchain often struggles to meet. The promise of blockchain as a tool for trustless interactions is compelling in theory but falls short in practice when evaluated against existing, proven alternatives.

The pervasive belief in blockchain's purported revolutionary potential has precipitated massive malinvestment and misdirected capital. Investors, enticed by the hype, have poured billions of dollars into speculative tokens and web3 projects, diverting crucial resources away from more productive and sustainable technological advancements.

The case of Initial Coin Offerings serves as a prime example of this phenomenon. ICOs raised unprecedented amounts of capital, yet a significant portion of these projects failed to deliver on their promises, leading to substantial financial losses. This influx of speculative capital into dubious blockchain projects represents a colossal misallocation of resources that could have been better utilized in sectors with tangible and proven benefits. Similarly, traditional financial institutions and corporations have expended considerable resources exploring blockchain applications, often yielding marginal improvements at best. These efforts constitute opportunity costs — capital, time, and human talent that could have been directed towards developing and adopting truly innovative and efficient technologies.

While defenders of cryptocurrency often cite decentralization and technological innovation as its foremost benefits, these arguments falter in the face of broader economic, regulatory, and environmental considerations. The public policy perspective presents a compelling case for policymakers to ban cryptocurrencies. This measure would not only align market activities with productive economic ends but also safeguard the financial system from undue speculative risks and contribute to a sustainable and regulated economic order. The time has come for bold public policy action to ban cryptocurrencies and purge this predatory casino masquerading as innovation or finacial liberation.