Crypto regulation is inevitable. You might as well have a seat at the table.

It's probably no surprise to anyone reading this that a lot of people involved in the cryptocurrency industry hate the idea of government regulation. And so their reaction to Sam Bankman-Fried's recent thoughts about what regulation should look like were not exactly encouraging.

Well, I had somewhat of a different reaction:

The crypto news site The Block picked up my tweet (and others') in their story:

The list of high-profile crypto-related accounts on Twitter sharing similarly negative sentiments is long, while those defending Bankman-Fried's proposal are few and far between.

Those coming to Bankman-Fried's defense tended to cite the belief that regulation in the crypto industry is an inevitability. "Better to have a dialogue about it than to pretend that crypto is immune to regulation or ought not be regulated," shared one account, which Bankman-Fried retweeted.

Techmeme also tagged my Twitter handle in their post.

In case it's not clear from reading the above block quote, the "cite" linked in it links to my tweet, which I show above. In any event, I don't read my tweet as defending Sam Bankman-Fried, but rather as merely akcnowledging that if regulation is inevitable, it is better to have a seat at the regulators' table, than to cavil about the existence of that table.

There was some mildly negative reaction to my original tweet. I expanded upon my thoughts here:

My argument is fairly straightforward, though unappealing to some part of crypto world. The argument I present is as follows:

1. I would prefer to live in a world in which there was not a set of complex regulations. But we don't live in that world, and I, pace Hume, make a distinction between the world as it is and the world as I think it ought to be.
2. So my assumption is that some kind of regulation for crypto is inevitable. Given that assumption, it seems to me that it would behoove the crypto industry to shape the dialogue between the industry and the regulators.
3. This seems to be what SBF is trying to do with his tweet.
4. This is what literally every other industry on the face of the earth does: advocate for its interests, and try to steer regulators to a compromise that works for both parties.
5. Again, I don't pretend to like this state of affairs. But I'm also a realist, and I don't think complaining about someone's regulatory proposals gets you a seat at the table.

But what about the Network State!

It's at this point that the perceptive observer of crypto world will exclaim "But Balaji says in his book The Network State that crypto networks obviate sovereign governments!" Maybe they will do that at some future point, but they don't do it now. And businesses care about the present, not some theoretical future which may or may not happen.

But let's give Balaji his due. His book is worth reading, even if it does not have immediate relevance. His central claim is:

A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.

All of this sounds very interesting and theoretical. But it doesn't address the world as it is today. Today, the cryptocurrency industry is threatened by regulation. And people who own crypto-related businesses, such as Sam Bankman-Fried, are correctly concerned about those regulations. The Network State may come to be. It may not. But it does not in any way deal with questions of immediate concern. It is no refutation of SBF's proposal.

My view of Balaji's book closely accords with Arnold Kling's:

Substantively, [The Network State] also struck me as fictional, in that it does not address the issue of how people can extricate themselves from existing states in order to join a Network State. Suppose that my house is located in Silver Spring, Maryland, in the United States, and I wish to join Balaji-land. How do I get out of paying taxes to my county, state, and the U.S. Treasury? Which regulations of my local jurisdiction am I able to jettison?

I do not think that my neighbors will be content to let me say that because my house is in Balaji-land, I do not have to pay taxes to help pay for the playground that my children use, the roads that I drive on, and other local amenities. I do not think that they will want to exempt me from laws forbidding commercial establishments in residential areas, or laws pertaining to drug or alcohol sales.

In any event, a general principle which has served me well, and which I think crypto world would do well to learn, is that it is better to have a seat at the table, than to complain about that table. It is better to have input into the regulations that will affect your industry, than to pretend that regulations won't affect it. It is better to have some influence over regulators than to assume, as some do, that zero knowledge proofs will allow an end run around regulations. History is written by the victors. So, too, are industry regulations. Better to get on the side of the winners and negotiate with the regulators, than to make like an ostrich and stick your head in the sand.