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The pros and cons of Bitcoin regulation

Venezuela Bitcoin Boom
In Bitcoin we trust. Source: AP

Pro regulation

It sounds like a great investment, with its price increasing 17 times since the beginning of the year. And Bitcoin disciples assure that its meteoric rise is far from over. After all, the cybercurrency with its distinctive “B” logo is expected to revolutionize the world’s payment systems and ultimately sweep away the old regime.

What could go wrong? Everything. The miraculous multiplication of money is at best a gigantic bubble – and at worst a pyramid scheme for unsuspecting private investors. Yes, the technology behind Bitcoin is fascinating and could potentially transform the entire financial system many years from now. But Bitcoin itself? It hardly has any intrinsic value. Paying with cybercurrency is expensive, insecure, extremely slow and inefficient. The exorbitant increase in the price of Bitcoin is purely speculative. More and more investors are attracted by the promise of getting rich quickly.

What’s the problem? Doesn’t everyone in capitalism have the right to ruin themselves financially? Of course they do. But the government should ensure that this is done fairly. And it doesn’t look like that’s the case here. Bitcoin exchanges are unregulated and thus open to cheating, manipulation and price-fixing.

The next big financial scandal could well be lurking behind Bitcoin mania.

What has long been banned on stock markets – such as price-fixing and insider trading – has has so far been neither monitored nor punished on crypto exchanges. Worse still, trading in Bitcoins is like a giant pyramid scheme. A small but sophisticated Bitcoin aristocracy owns most of the cybercoins. Those who are getting in now will mainly increase the price gain for this early generation. These early investors ultimately control when they decide to get out, bringing the pyramid crashing down in the process.

It is absurd: While the lessons of the financial crisis have led to investment advisors being overwhelmed with rules that are sometimes completely exaggerated, it’s the Wild West when it comes to Bitcoin trading. Claiming investor protection here, as is customary in the stock market, has nothing to do with a call for paternalistic intervention. If the government does not act, enormous damage will be inflicted on our already underdeveloped investment culture, especially since the next big financial scandal could well be lurking behind Bitcoin mania.

English writer John B. Priestley said that an optimist is usually someone who is poorly informed. But sometimes it’s someone who is simply being had.

Daniel Schäfer is head of Handelsblatt’s finance desk. To reach the author: d.schaefer@handelsblatt.com


Contra regulation

Central bankers are usually known for not saying much with a lot of words, but when it comes to the Bitcoin phenomenon, Danish central bank chairman Lars Rohde sheds all restraint. “Stay away, because it’s fatal,” he warns. The man is right. In all likelihood, investor hysteria around the cryptocurrency is probably the biggest bubble since Dutch tulip mania in the 17th century. Bitcoins are unpredictable because they have no intrinsic value, and they are more dangerous than a visit to the casino. But at least you know the rules there, and every player can calculate the odds, whereas there are still many gray areas when it comes to Bitcoins.

But does this mean that the new artificial currency has to be strictly regulated? Regulators and policymakers should, of course, ensure that trading takes place in a regulated manner, and they should try to immunize the market as much as possible against attempts at manipulation. But beyond that, there is currently no reason to regulate the cryptocurrency just because overzealous politicians believe that cybercoins are as harmful to uninhibited investors as smoking or hard drugs. After all, there is more than just hot air behind the bubble. It is also one of the most interesting financial innovations of recent decades. Besides, there are limits to the extent to which a paternalistic state should and may protect its citizens from itself.

As we know, individual freedom ends where it affects the freedom of fellow citizens, but only there. When applied to the economy, this means: As long as Bitcoins are not (yet) a threat to the financial system, there is no reason to put a stop to speculation. Bitcoin is not Lehman Brothers.

So far, every gold rush has attracted an army of fortune hunters, many of whom have ruined themselves. As long as investors are not lured into the trap under false pretenses, there is nothing wrong with that. And especially in the case of Bitcoins, investors are being inundated with warnings. Bundesbank President Jens Weidmann is absolutely right to say that “merely the fact that investors can lose money is no reason to intervene.” In other words, people have a right to spend their money the way they want, even on unreasonable things.

Michael Maisch is deputy head of the finance desk. To reach the author: maisch@handelsblatt.com

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