Regulation, reputation, and power

REPUTATION, REGULATION, AND POWER Just the fact that the SEC is fighting means it is losing. Why? Because the regulatory state’s power is a function of its reputation. Carpenter wrote the canonical book[1] on this in the context of the FDA, but the concepts also apply to the SEC. In short, for decades after its creation, the regulatory state expected — and obtained — absolute acquiescence. When it even *gestured* at a company, it was like a ringwraith extending its finger in the Lord of the Rings. Everything around that company shriveled and died. Employees left, investors sold, customers bailed. Oh, and the media denounced. Indeed, the media was a laser spotter for the regulatory state. Typically an organization like the SEC worked with friendly reporters to leak an investigation beforehand, softening up a target with press airstrikes before the state moved in. The goal was to strip all sympathy from the ostensible corporate criminal, to try them in the court of public opinion, and to not incidentally advance the careers of reporter and regulator alike. Pulitzers and promotions all around; who cares if the target was framed. But now in the year of our lord Satoshi 2023, things have changed. First, the 20th century regulatory state was premised on concentration. The SEC is built to regulate Goldman and Morgan, not 1000 crypto holders. The FDA is set up for Pfizer and Merck, not 1000 biohackers. And the FAA is meant for Boeing and Airbus, not 1000 drone hobbyists. The sheer number of targets in our decentralized era means this archaic giant is fruitlessly swatting flies. Second, the IQ of the regulatory state has dropped off a cliff relative to their targets. If you really understand a space, do you want to be a builder/investor, or a hater/regulator (but I repeat myself)? There’s more fun and upside in building than destroying. Our good fortune is that regulatory arsonists get paid less than firefighters. Third, the fact that agents of the state must argue their case on social media — where citizens can talk back, and where corporate journalists no longer have special privileges — this is an enormous fall from grace. The unelected agents of the regulatory state are finally facing digital democracy. Fourth, the technologies themselves have been engineered for censorship-resistance, incentivized uptake, and global adoption. Which means other jurisdictions both inside and outside the US are diverging from the federal government, from Texas to the EU. Finally, the majority of global GDP and population is now outside the US, and the endless domestic and foreign political conflict of the last 10 years means the regulatory state no longer controls a lion’s share of the global market at home or abroad. I haven’t even gotten to other factors, like the potential overturn of Chevron deference, or the return of self-confident/self-made founders after decades of gelded general managers. But that’s why the state is losing. If you plot sentiment towards regulation since 2010, their reputation — and hence their power — is sharply down and to the right. Still, they are fighting. My view is that they end up with more power over fewer people. Extremely harsh crypto regulations that are only obeyed in the bluest of blue states — and actively disregarded by everyone else, both inside and outside the US, much like sanctuary city laws override federal immigration law and foreign countries set their own policies. This doesn’t mean you don’t need to fight — you do. It just means that you can win. Because the arc of history is long, but it now bends toward decentralization. [1]: https://press.princeton.edu/books/paperb…