Thank You, Paul Krugman, for Making the Case for Light-touch Crypto Regulation

Paul Krugman deserves a lot of credit. He provides a living example of why people should not be given unchecked power to make decisions for others.

In case you haven't heard, Krugman thinks crypto is dumb-"nothing but 'technobabble and libertarian derp.'" That's fine. We're all entitled to our opinions.

Krugman also thought the Internet was overrated, writing in 1998 that "by 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."

Krugman, though, even gets credit in connection with this woefully incorrect prediction because he subsequently did something noble-he admitted his error: "I was clearly trying to be provocative, and got it wrong, which happens to all of us sometimes." Of course, it does, and kudos to anyone willing to acknowledge his mistakes.

But what if Krugman's wrong about crypto? Because, again to his credit, this is a possibility he's recognized: "…I'm a crypto skeptic. Could I be wrong? Of course."

If the US took a pro-innovation and light-tough regulatory approach to crypto-as it did for the Internet-skeptics' opinions of crypto, right or wrong, wouldn't matter so much, because the technology would be free to rise or fall on its own merits.

Unfortunately, the U.S. has taken an overtly hostile approach to crypto that's more prohibitionist than regulatory. Frankly, it seems consistent with another Krugman line that "killing the crypto industry would be a public service." (Imagine if this crew had been in charge of Internet policy in the 1990s.)

Krugman appears to understand neither how crypto "regulation" actually works in the US at present, nor what reforms are in the offing. He fears, for instance, that the outcome of the next election may "stop regulators from treating crypto assets and institutions the same way they treat stocks and banks." There are many problems with this sentence. For one, not all crypto assets are properly considered "stocks," and not all crypto "institutions" are properly considered banks. To say they are doesn't even capture the maximalist position of even the most heavy-handed regulators.

But even if one charitably assumes that what Krugman meant is that crypto should be regulated in a comparable way to comparable financial instruments, that still does not describe the status quo. The problem with the current state of crypto regulation, for example, is not so much that an agency like the Securities and Exchange Commission is trying to regulate crypto but that it is refusing to do so by failing to provide clear rules for how token issuers and exchanges register even when the agency asserts they're under its jurisdiction.

In addition to the poor grasp of regulatory dynamics, there are reasons to think Krugman's crypto skepticism is off the mark. Core to his argument is the assertion that crypto serves "no useful purpose." Yet he goes on to provide something of an elegant description of a core crypto function: "What Bitcoin and its emulators try to do is sidestep the need for a legal framework with a technological fix that doesn't depend on banks' centralized record-keeping." That's well said.

Following that acknowledgment, Krugman, perhaps tellingly, subtly changes his argument that crypto serves "no useful purpose" to the argument that its useful purpose is better served by alternatives: "But what problem does it solve that can't be handled more easily and cheaply in other ways?" That nuanced shift matters a great deal. Because following Krugman's logic, crypto is useful if it proves easier and cheaper to use.

There are such cases. Bank payment services may be cheaper and easier if you have a bank account. But they also may not be. As our colleague Nick Anthony documents, for instance, there are plenty of times when Bitcoin transaction fees are lower than bank transfer fees and plenty of times when they're not. It depends on when you transfer the bitcoin (during high or low demand hours) and what your needs are for the bank transfer: is it cross-border and how fast do you need it to settle?

Moreover, there's much work being done to make crypto transactions even cheaper. For instance, "Layer 2" blockchains-which record transactions on separate ledgers to increase scalability before bundling and recording them on main chains like Ethereum-can dramatically reduce fees. Krugman's argument doesn't grapple with these developments. It doesn't even seem aware that key blockchains no longer rely on energy-intensive proof-of-work mining but have transitioned to more energy-efficient alternatives.

In addition, Krugman assumes one has a bank account. Many around the world don't, and crypto is useful to them. Vietnam frequently is at or near the top of the charts for crypto adoption, likely due to its historically high rate of unbanked citizenry, among other factors. Crypto is also useful for sending money where the traditional bank system is teetering, as in a warzone.

Globally, the value of purchases via stablecoins (cryptocurrencies pegged 1:1 to another asset, like a fiat currency) has risen significantly recently, including in advanced economies. But the focus of Krugman's crypto skepticism is a bit more provincial, pointing to "digital payment systems that skip the hocus-pocus, like Venmo and Apple Pay" as superior alternatives.

While Venmo and Apple Pay are great options for many (one of us has essentially testified to Congress to that effect), they don't solve every problem for every person. Venmo doesn't work internationally, and Apple Pay requires an Apple device and payment card from a participating provider. Neither of these are criticisms, they're just recognitions that all products and services, including other competing digital payment apps and crypto tools, have different benefits and limitations. A diversified payments ecosystem, of which crypto can be one component, ensures that different needs can be met at different times.

In addition, applying Krugman's implicit argument retrospectively reveals its flaws. Why Venmo and Apple Pay, haven't you heard of credit cards? Why credit cards, haven't you heard of Charga-Plate? And yes, why the Internet, haven't you heard of fax machines?

Ultimately, we too recognize that our interpretations may be wrong. That's precisely why we don't want to impose them on everyone else through interventions that narrow Americans' options. Krugman, by contrast, seems concerned that American voters may care about something he dislikes and want to hold onto something he would like to see disappear. So how about a compromise: let people who want to use crypto use it, and let Krugman sit this one out.

Related Tags