Regulation is Bullshit, but What’s the Alternative?

Ask anyone involved in finance about the SEC, CFTC, or FCA and they’re equally likely to respond in one of two ways:

• Regulators harm innovation

• Regulators accomplish nothing

Of course, we don’t live in a binary world, and it behooves the observer to avoid seeing things in zeroes and ones. Regulatory agencies will never be as effective as you want, and, also, they probably aren’t stifling innovation in the ways you believe. Unfortunately, the improvements that the talking heads suggest for the host of regulatory regimes fails to acknowledge the benefits that regulators provide.

The first talking point often heard from the likes of people like Hester Peirce and maximalists is that current regulation is unfair, mostly for working class and lower income individuals. They proclaim that not only do these laws and mechanisms harm the poor, but entrench the rich. They assuage your worries by comparing investing in securities to playing the lottery. They adamantly tell you that safeguards do little but harm innovation.

But history tells us otherwise. With every example of deregulation working to improve the lives of customers and citizens, there’s an equally horrifying example of deregulation failing miserably and harming millions, time and time again. Regulation and deregulation are never to be taken lightly (this is in respect to enforcing new regulations and vanishing old).

The second talking point is that regulators are simply a burden on taxpayers and that “self-regulation,” is a better solution. This gives me a good laugh. In my many years investing and observing I’ve yet to see a single instance of successful “self-regulation,” unless you count activist short-sellers — who openly admit, “there are no good guys.”

The alternative to activist short-selling is the anarcho-capitalist wet dream of “kill-the-scammers.” This doesn’t work for me — obviously this is a personal perspective, but I believe in criminal reform and not killing those who have unjustly harmed you. This will put me at odds with many in the cryptocurrency and libertarian spaces, but that’s fine.

There is a third option.

Everything Else

While complete and utter chaos may seem attractive in relation to what currently exists, again, history dictates otherwise. The same way capitalists can espouse a long list of failed socialist states, it’s easy to identify a slew of failed nation-states. Let’s take a gander at how anarchy has worked out:

  • Somalia
  • Somaliland
  • Yemen
  • The Democratic Republic of the Congo
  • Western Sahara

The list isn’t pretty. So, what’s the alternative?

There’s no doubt that regulators can do a better job. Simply point to Harry Markopolos and his attempts to reign in Madoff. Or, perhaps, the numerous environmental disasters dotting the United States that were only addressed by citizens. Maybe we can discuss how Boeing and other aircraft companies have been treated by the FAA for decades. There is an endless list of regulatory failures and moments of ineptitude. “Don’t throw the baby out with the bathwater.”

Gabriel Shapiro recently published an open letter to address the new safe harbors concept. I tend to agree with many of his thoughts. Though I may disagree with how ably regulators have dealt with a huge rise in grifters and scammers over an extended bull-run in trad-fin and cryptocurrency, I don’t believe dismantling regulators, giving them even less recourse, or giving bad actors the benefit of the doubt, is the answer. I tend to have some level of faith, naive or not, that, when it comes to regulators, they’re generally doing the best they can

Of course, I’m being proven wrong as I type:

But in that same breath, I’m not sure a stranglehold on industry is a good idea — even for concepts as useless as 99.9% of cryptocurrencies. I’m willing to acknowledge that despite market participants being advised carefully and thoughtfully regarding risk, they often fail to take those warning seriously. Many of us will continue to pursue too much risk for too little reward.

However, despite the data, the failures, and the obvious scams ongoing to this very day, I remain hopeful that eventually, whether through economic downturn or swift movement of regulators, most of these crooks will have their moment in the sun. While widespread deregulation and bullish markets often coincide, as soon as those markets turn south you can expect a brand new sentiment. Hold onto your butts.

Fraud. Fraud everywhere.