The U.S.-based political think tank, American Enterprise Institute, recently published an essay arguing for the self-regulation of the cryptocurrency industry and said that government regulation should only be used as a last resort.
Broynwyn Howell, author of the essay, started off by mentioning how it is understandable for governments that see the price volatility and technical complexity of cryptocurrencies to have an initial reaction to regulate cryptocurrencies. However, he quickly points out that bad regulation could spell bigger issues and that governments should learn more about the industry first. He points to the emergence of the early financial shares market in the 18th century and bank-issued currencies in the 19th century as evidence for how self-regulation in various industries can function to benefit consumers.
“So long as alternatives exist, strong incentives are provided for those issuing currencies and operating the exchanges to address activities that decrease trust and therefore the attractiveness of their platforms to users. Users also have strong incentives to invest in information identifying those currencies and exchanges with stronger (more trustworthy) and weaker (less trustworthy) activities and governance arrangements”
He then went on to mention how new businesses and analysts are emerging in the cryptocurrency space to “requisite investigations, thereby contributing to more informed actors and more efficient markets than would otherwise be the case.” Howell finishes the article by mentioning that government intervention and regulation should only be a last resort if there is clear evidence that self-regulation has failed.
Self-regulation benefits consumers
The previous periods of market self-regulation that Howell mentioned benefited consumers since consumers were able to spend their money freely, and thus, encouraged businesses to act in the best interests of consumers in order to make revenue. This free market competition existed in the early financial shares and private bank notes market with little to no government intervention. Today, this period is often said to have been “lawless” with “wildcat” banks, but it actually eliminated moral hazard since everyone was responsible for their own financial due diligence or unnecessarily risked losing their money. This disincentivized heavy risk taking and incentivized individuals and businesses to make responsible decisions, which in turn, benefited all consumers. Then in a repetitive game where reputation is on the line and moral hazard is minimized, businesses would act in the best interests of consumers to gain their business and thus financial rewards. This was also demonstrated when J.P. Morgan made private loans to distressed, yet solvent, banks during the Panic of 1907 to gain trust as an effective money manager among more consumers. Today, however, those incentives are lost and moral hazard has become entrenched because of government intervention distorting incentives.
Many aspects of the current cryptocurrency market mimics the early financial markets and private bank notes era. Individual cryptocurrencies are constantly competing to offer the best services to consumers, but since regulations are minimal, consumers have to understand the pros, cons, and risks associated with each cryptocurrency. Not only do cryptocurrencies minimize moral hazard by teaching consumers to be responsible for their own finances by securely keeping track of their private keys, but to also properly research the probability of which coins, tokens, and exchanges will be successful. A self-regulating cryptocurrency market also incentivizes entrepreneurs to emerge and fill a market information void by gathering and presenting information to make consumers more knowledgeable of the space. Like J.P. Morgan in the Panic of 1907, there are also incentives for individual cryptocurrency developers to act in the best interests of consumers since that will increase adoption and thus increase long-run benefits for everyone.
Dash leverages incentives to benefit its users
Dash is uniquely structured with multiple strong incentives between the miners, masternodes, and treasury to ensure that the Dash network and community is constantly in good care. First, the miners are incentivized to enable and secure the network by receiving 45% of the block rewards, which has kept the Dash hashrate around 1.5-2 petahashes over the past few months. Then the masternodes are incentivize to stake 1000 Dash to receive another 45% of the block rewards, which further secures and enhances the network though various comparative advantages such as InstantSend. Lastly, the treasury uses the remaining 10% of the block rewards to fund various projects to maintain and advance Dash, which includes development of the code and community outreach to bring on new users and to support and educate current Dash users. The treasury also enables projects like Dash Force News and Dash Watch to better inform consumers about Dash and the projects on the Dash network.
These incentives built into the Dash network allows individuals to benefit other Dash users by seeking rewards that benefit themselves. This self-interested motivation that causes mutual benefit in a free market has been the foundation of good economics for centuries. This further instills confidence in Dash users – Dash has structured its code around strong economic theory. Thus, Dash is able to self-regulate itself based on what consumers desire without the need for government intervention.