Bloomberg columnist: "Regulatory arbitrage" is a cryptocurrency advantage that forces outdated regulations to iterate and update.

The most common criticism of cryptocurrency is its ability to bypass a significant amount of existing regulations. However, Bloomberg columnist Tyler Cowen points out that this is similar to many startups, and that "regulatory arbitrage" is a feature of cryptocurrency rather than a fault, also signaling the message that outdated regulations need to change.

Author Tyler Cowen is a columnist for Bloomberg and has his own blog Marginal Revolution as well as a podcast Conversations with Tyler.

In a previous report, he discussed with a16z co-founder Marc Andreessen the specific advantages of Web3 over Web2.

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Regulatory Arbitrage

Tyler discussed in a Bloomberg opinion piece what he sees as the advantages of cryptocurrencies. In contrast to common criticisms of cryptocurrencies for being unregulated, he points out that "regulatory arbitrage" is actually a strength in the crypto space, highlighting the need for outdated regulations to change.

Note: Regulatory arbitrage can be understood as financial institutions reducing compliance costs and obtaining higher profits by exploiting gaps between different regulatory frameworks.

Why Regulations Need to Keep Pace?

The most common criticism of cryptocurrencies is their ability to evade regulation, but Tyler believes this is similar to many innovations; "regulatory arbitrage" is a feature of cryptocurrencies, not a fault, and also underscores the message that outdated regulations need to change.

Tyler gives reasons why regulations need to change:

Reason One: Tokens as Securities?

Many regulatory bodies view tokens as having security-like attributes and should be regulated, but this is not a one-size-fits-all situation. Tyler points out:

Before the advent of cryptocurrencies, issuing securities involved a lot of institutional groundwork, such as investments, legal planning, etc., while issuing tokens is usually simpler and faster, even very immature institutions can complete it. In simple terms, software and blockchain can do the work that used to require offices and a large number of personnel.

Reason Two: Difficulty for Existing Regulatory Bodies to Intervene

Tyler points out that in the future, there may be software combining blockchain applications that automatically issue tokens through smart contracts triggering conditions, which would be a significant event of environmental change.

He believes that U.S. regulators typically focus more on major intermediary institutions rather than software, so once blockchains begin to massively verify, store, and exchange information, regulatory bodies may find it difficult to intervene, and existing regulations may not be applicable to the most critical crypto applications.

Tyler says that despite the criticisms these applications may receive, they require a completely different regulatory framework:

Given the above situation, shouldn't regulations change? Regulatory bodies have to adapt to a decentralized market structure with lower costs and more difficult control. It is common sense that when software can replace mainstream investment methods, regulations should change, even if opinions on this matter differ.

Slow Progress in Regulation

Unfortunately, Tyler points out that regulatory changes are typically slow, and regulatory bodies usually stick to the status quo before their positions become untenable. However, the advantage of crypto, namely regulatory arbitrage, will compel regulatory bodies to act:

Even if you think the current regulations are appropriate, you should acknowledge that cryptocurrencies are the product of early regulatory arbitrage, such as junk bonds evading some equity regulations in the 1980s. In the long run, regulatory arbitrage has always been a means of forcing regulatory updates to some extent.

Cryptocurrencies are Not Perfect

Indeed, many cryptocurrencies' issuances are part of fraud or Pump and Dump strategies under marketing packaging, but these negative phenomena should not overshadow the potential benefits they may bring. Many valuable innovations, such as railways and the internet, also faced investor fraud in their early days.

Tyler emphasizes that it is not to say that the phenomenon of regulatory arbitrage is excellent; it could lead to over-regulation in the end or, conversely, the existence of regulatory loopholes for longer periods, leading to more prolonged fraudulent activities or systemic risks.

However, regulatory arbitrage remains a part of promoting lower costs and improving regulatory processes. He concludes:

People often ask me what the advantages of cryptocurrencies are, and they are helpful in many ways, but one of the most underestimated advantages is its existence in the form of regulatory arbitrage.