This would seem to be a private problem. If people choose to park their money with a non-transparent, unaudited random crypto startup, that's their decision and their problem. I'm not interested in paying for "regulators" in such cases.
Not really. It's a private problem only if it stays within the confines of the participants. But when it reaches a scale like this, the harm is wider.
I think the most important societal issue is that it damages investor and consumer confidence.
As a parallel, consider food regulation. When I go into a store or restaurant, the food I buy is very likely to be safe, because there are a lot of regulators making sure it happens. If they weren't operating, then I'd have to exert a lot more effort to make sure that each thing I eat is safe. Not only would this be a giant waste of effort, but it would significantly reduce the opportunity for innovation and cost reduction, because people would be reluctant to try new products and new restaurants.
Market confidence is even more important for finance, because it's much harder for individuals to know if a given company is really working. It would be a huge problem for society if everybody went back to keeping their money in mattresses and physically moving it everywhere.
And this is why cryoto is unlikely to go mainstream. Because the market for people who are willing to put up with the risks of unregulated banking are too small a minority to be worth it.
For the "invisible hand of the market" to lead to optimal outcomes, decisions need to be made by "rational actors" using "perfect information." It's right there, in the original text!
We can't legislate about "rational actors," but we CAN and SHOULD legislate about "perfect information." Any information hiding is essentially fraud or theft from the rest of the market, because it creates an information asymmetry distortion.
We could for example say that registered companies don't get company benefits (protection of owners from bankruptcy and protection of board from personal liability and such) unless they continually and regularly publish the full (even unaudited) books, not just the occasional brief filings we require now. That would benefit everybody in the market, except those who thrive on fraud and information asymmetry.
You don’t need to pay regulators, you just need to make people able to sue for damages or charge crypto purveyors with fraud. It’s manifestly clear that the majority of these are just pyramid scams.
"Sue later" is not a solution when the money is already gone. That might be ok when facing an industrial company that has plenty of physical assets that could be sold off under bankruptcy, but finance leaves nothing if it fails.
