The Doom and Gloom of Regulation News

Nearly everyday now, I read a range of articles focused on regulating the crypto sphere. Pundits claims it will destroy the crypto markets, government officials claim they need to protect the people from the evils of the markets, politicians want to prevent "money laundering and terrorism" or more likely, tax revenue.

Regulation news in the last few weeks out of South Korea created market panics and political backlash before the dust settled and nothing significant was changed besides taxation of exchanges.

So, the question many people ask me, "Is regulation good or bad for the crypto markets?" Of course, this is the best question to be asking because there is no easy answer. Easy answers are for the intellectually lazy. I won't claim to know the answer regarding the crypto sphere, but I can shed some light on what the Pros and Cons of regulation are and how they affect consumers, businesses, and markets in general.

Lemonade Wars

I like to use children's lemonade stands as a great illustration of how regulation affects competition, consumers, labor markets, etc. The concept of a lemonade stand is very easy to grasp for most Americans because it is part of our Americana culture of the past like Paperboys, Ice Cream Socials, and Skating Rinks. Even if you're too young to have participated in any of these things, they are easy enough to understand and follow.

Joey is 10 years old and starts a lemonade stand in his neighborhood. He borrows some tables and chairs from his parents and sets up his business in the front yard of his parents' house. Joey puts signs made of old boxes on his table advertising his lemonade and he greets everyone that passes by his stand offering them some of his cold, homemade lemonade for a hot summer day. Joey sells his lemonade by the cup and gets 50 cents for each cup. Everyday, Joey is selling about 100 cups of lemonade and he is very happy about it.

Here are Joey's expenses:

Rent - free
Advertising - free
Cost of Goods Sold - 10 cents (20% food cost)
Labor - 0

Joey is clearing $45 dollars a day and spends some of it at the local arcade explaining his riches to the other neighborhood kids. Suzy hears this and decides she wants in on the action too.

Suzy sets up her lemonade stand several houses down from Joey's. As her parents have more money, she takes a loan from her parents and prints nice signs advertising her lemonade and places them on telephone poles throughout the neighborhood. She also pays Juan to ride around on his bicycle telling everyone about her lemonade. She sells her lemonade by the cup for 30 cents and she is selling 200 cups a day. Suzy also sells homemade cookies for 20 cents each and is selling 100 of these a day. She buys in bulk from warehouse store where her parents are members to reduce costs.

Suzy's expenses:

Rent - free
Print Ads - $20
Cost of Goods Sold (food cost) - 5%
Labor - $10 to Juan
Loan - $30 ($20 plus interest)

Daily net profit - $66 and she pays her loan back on day 1.

1. Suzy is very happy. Juan is happy because he has a job. Joey is unhappy because he lost 75% of his business.
2. Joey lowers his price to match Suzy's but makes less net profit because his food cost is more, but he's still happy with his income in general.
3. Consumers are happy because the price drops.
4. Everything is great!

Then somebody in the neighborhood gets sick. They believe that it is because of the lemonade they drank and the whole world goes crazy for Suzy, Joey, and Juan.

The city decides that lemonade stands should be inspected to meet health regulations, they should also have licenses, they should be paying taxes on profits, and they should pay Juan more than $10 a day, and who gave them permission to put up signs in their yards or on telephone poles. Activists are angry because the lemons are imported from another county and cookies have gluten and sugary drinks cause diabetes. How is the sick person going to be compensated if the lemonade company doesn't have insurance?

What happens to the lemonade stands?

Typically, the city decides to put import duties and "Sin Taxes" (also known as Pigouvian taxes) on lemonade and cookies. Juan gets laid off. Joey decides that this isn't worth his time any longer and sells his business to Suzy. Suzy gets 100 percent of the market and raises prices to compensate for all the regulatory fees and taxes. Consumers pay more and have less choices. Other kids don't have the money to get into the lemonade business at all because the expense has created a barrier to entry in the market of lemonade and cookie sales. Suzy hires accountants and lawyers to manage her regulations. Suzy buys liability insurance. Suzy's parents continue loans to Suzy for all her expenses.

What are the Pros in this situation?

1. The city has safer lemonade and cookies to eat with less chance of getting sick.
2. The city has increased revenue from taxes and licensing (maybe they can even hire Juan)
3. The city is protecting people from making poor eating decisions.
4. The local lemon producers don't have to compete with anyone outside the city.
5. The local Accountants, Lawyers, Insurance companies, and Bankers have increased their income.

Cons?
I think these are obvious. The big questions are how important is the safer lemonade, tax revenues, and licensing? How about consumer choices? Should we regulate people's purchasing decisions? Is it better to buy local even at the additional expense and the elimination of competition? What role should banks, insurance companies, accountants and lawyers have in society.

The lemonade illustration points to a lot of discussions on what levels of regulation we should adopt. There are almost limitless applications. Some of the bigger issues are consumer protection, fair competition, political influence, open markets, community standards, and 3rd party (non-producing) profiteering.

Last. What if I told you that Suzy pushed for the regulations all along? She now has 100% of the market and can set prices to whatever she wants because she has no competition.

What if I told you that the extra revenue for the city didn't get spent on anything that would prevent sickness, but instead was put into a program that would buy votes in the next election?

What if I told you that bankers, accountants, insurance companies, and Bar Associations were behind the push?

How about local lemon growers or businesses that sell sugar/gluten free lemonade and cookies?

My biggest concern about pending regulation in crypto is that it won't protect consumers enough to warrant all the government interference. I'm always suspicious of support for regulation to protect citizens from terrorism, money laundering, fraud, etc.

However, I'm also watching people that got burnt on bogus ICO's, BitConnect, exchange/price influencing.

I'm very curious to hear people's thoughts on these items and to develop a good discussion. What is the proper balance? Is government really capable of protecting consumers?

Like this article? Please share, upvote and comment.
Don't like it? Comment and tell me why. Let's discuss it.
All intelligent comments get an upvote for effort.
Send me a copy of one of your posts and I will try to read it quickly.

All photos were downloaded from https://pixabay.com/

Follow me on:

Facebook - https://www.facebook.com/jr.byers.58
VK - https://vk.com/id185155240