Regulatory rent-seeking

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The Devil’s Advocate


In which the curmudgeonly old sod puts the world to rights.

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Exactly how Tether is backed, or if it’s truly backed at all, has always been a mystery. For years a persistent group of critics has argued that, despite the company’s assurances, Tether Holdings doesn’t have enough assets to maintain the 1-to-1 exchange rate, meaning its coin is essentially a fraud. But in the crypto world, where joke coins with pictures of dogs can be worth billions of dollars and scammers periodically make fortunes with preposterous-sounding schemes, Tether seemed like just another curiosity.

Bloomberg, 7 October 2021

WASHINGTON—Tether Ltd., the largest stablecoin issuer, agreed to pay a federal regulator a $41 million penalty Friday, the latest result of the Biden administration’s broader crackdown on cryptocurrency markets.

The Commodity Futures Trading Commission accused Tether of falsely claiming that it backed each of its crypto tokens with an equivalent amount of U.S. dollars.

Wall Street Journal, 15 October 2021

So here is the thing. If your regulatory role is aimed at policing the market, protecting consumers and preventing bad actors from — well, bad acting — then your actions need to be genuinely deterrent in effect.

If they seem calculated to raise funds from the ongoing proceeds of profitable businesses, whatever their turpitude, that looks more like an extortion racket than prudential regulation. After the Global Financial Crisis worldwide regulatory fines coming down on banks had less and less to do with real harm and bad conduct, and more to do with monetising dominant positions over cash-rich institutions that didn’t have the present political credibility to argue back[1] — it doesn’t look like you are preventing bad conduct as much as enabling it. This looks like rent-extraction.

Fining an outfit $40m when, on your own theory of the case, it has generated billions through fraudulent deception of investors — well, that’s just protection money, isn’t it? [2]

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