Does The Invisible Hand Apply to Bitcoin? The Importance of Self-Regulation of Digital Asset Markets

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By Cristian Gil, Co-founder of GSR

What would Adam Smith have said about the emergence of the crypto markets? Would the proclaimed “father of modern economics” call it a triumph of the invisible hand, versus the command economy that has come to define traditional capital markets? For those who follow both crypto and traditional markets, the absurdity of that question is fairly obvious. The opportunity represented by crypto markets, both as a technology and new asset class, has been dwarfed by the prevailing speculative behavior, characterized by excessive exuberance and bad actors.

The revisiting of Smith’s “The Wealth of Nations” and what history has taught us about free markets is nevertheless merited when we consider the best path forward for the crypto market. It is essential to understand that the invisible hand of a free market — chiefly, the unobservable market force that helps the demand and supply of goods to reach price equilibrium, as described by Smith — operates under certain assumptions.

Smith made it clear that substantial structure is required in society for the invisible hand to work efficiently. Among other factors, property rights must be upheld, and there must be widespread adherence to moral norms such as prohibition against theft and misrepresentation.

Another way to express Smith’s conditions is that there must be a level playing field, adequate transparency, and consumer protection. These are the hallmarks that represent the efforts of the federal regulators, and are the most significant structures lacking in the crypto market.

Like many others I’m hopeful that 2019 will bring a degree of regulation to the digital asset space. However, it’s not accurate to believe that regulation will come about through osmosis and  bring order, clarity, and fairness to an otherwise opaque and fragmented peripheral market. In reality, the crypto market does not pose nearly as large a systematic risk for society as the stock market did in the pre-regulated market crash of 1929.

Crypto is a small market that arguably receives disproportionate amounts of attention, and federal regulators need to be efficient with their increasingly limited resources. Before we take a cheap shot at the government, let’s give credit where credit is due. The federal regulators provided the societal structure required for today’s traditional financial market to operate, and we expect them to do the same for crypto for there to be widespread adoption.

We believe that the future of regulation is crucially dependent on how we, as key market participants, act in the coming weeks and months. If we want the crypto economy to develop into a fair and orderly market with adequate consumer protection supported by federal regulation, we need to work towards this collectively.

At GSR, we take the approach of being an active member of the industry's self-regulatory organizations (SROs). Securities industry SROs are historically important institutions and existed before federal securities laws were enacted, they set standards of conduct for the members and disciplined errant members. Important concepts of federal law were acquired from early SRO regulation. Today some of the key securities industry SROs have become integrated into the scheme of federal statutory regulation, and now operate subject to SEC oversight of all of their activities.

Last month, the formation of Association for Digital Asset Markets (ADAM) was announced through which GSR, along with nine other industry leaders including Cumberland and Galaxy, are spearheading an effort to create a set of principles and protocols to foster fair and orderly trading in digital assets. The intention is for this group to grow and become a global organization which contributes greatly toward regulatory clarity and alignment across trading domains.

If our SRO efforts are successful, it may prove to be a useful test case for federal regulators. That could lead them to action some constructive developments in 2019, which in turn could spur widespread adoption of digital assets. In an environment of market uncertainty and heightened regulation expected to come, industry players who are willing to adopt an approach of flexibility and transparency will win the confidence and collaboration of key stakeholders in the digital asset economy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Cryptocurrency , Fintech , Technology

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