Bitcoin and Cryptocurrency Technologies

kind of business that will handle large volumes of currency, you’ll need to talk to a lawyer who
understands these rules.
7.7: Regulation
Now let’s directly address the 'R' word — regulation. Regulation often gets a bad name, especially
among the kind of people who tend to like Bitcoin. As the argument goes, regulation is some
bureaucrat who doesn't know my business or what I'm trying to do, coming in and messing things up.
It's a burden. It's stupid and pointless. This argument is common and well understood, and while it’s
often at least partially correct, we won’t repeat it here.
Instead, in this section we’ll look in some detail at reasons why regulations might sometimes be
justified, because that argument is not as well understood. To be clear, the fact that we're spending
most of this section talking about why regulation might be good shouldn't be read as an endorsement
of widespread regulation. It's simply that we want to bring a bit more balance to the discussion in a
community where regulation is often considered to be inherently bad.
The bottom line argument in favor or regulation is this: when markets fail and produce outcomes that
are bad — and agreed to be bad by pretty much everyone in the market — then regulation can step in
and try to address the failure. So the argument for regulation, when there is an argument, starts with
the idea that markets don't always give you the result that you'd like.
Let’s make this a bit more precise, using terms from economics. What worries us is a market failure,
and by that we don’t simply mean that something bad is happening or somebody feels they are
getting ripped off or treated unfairly. We mean that there is an alternate allocation of goods to the
market participants that would result in ​everybody​being better off, or at least not worse off. Such an
alternate allocation is called a ​Pareto improvement​.
Lemons market.​Let’s discuss one way in which the market can fail, a classic example called the
lemons market. The name originated in the context of selling cars. Let's say that all cars are either of
low quality or high quality (with nothing in between). A high‐quality car costs a little bit more to
manufacture than a low‐quality car, but it's much, much better for the consumer who buys it.
If the market is operating well (if it’s ​efficient​as economists call it) it will deliver mostly high‐quality
car to consumers. That’s because even though the high‐quality car is a bit costlier, most consumers
prefer it and are willing to pay more for it. So under certain assumptions a market will provide this
happy outcome.
On the other hand, let's suppose customers can't tell low‐quality cars apart from high‐quality cars. A
low‐quality car (a ​lemon​) sitting on the lot may look pretty good, but you can't really tell if it's going to
break down tomorrow or if it's going to run for a long time. The dealer probably knows if it's a lemon,
but you as the customer can't tell the difference.
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