Decoding Cryptocurrency Regulation in a Readability Framework
Cryptocurrency regulations vary greatly from country to country. However, the reason for this surprising change is still unknown. To explain these differences, the researchers developed a new theoretical framework based on James C. Scott’s idea of ’readability’. Legibility refers to the extent to which a state ‘sees’ (i.e. recognizes and legitimizes) the market. This framework explains how market demand and state supply of capital shape markets over time, providing a more complete picture of the broader political and economic dynamics of cryptocurrency markets and financial markets.
Cryptocurrency governance has been one of the most controversial global finance topics since its introduction. While some countries have enacted elaborate regulations for cryptocurrencies, many are still reluctant to oversee the market, and some have banned cryptocurrencies outright. Most studies show that public authorities naturally want to regulate markets and include them within their mandate. However, this view is questioned because cryptocurrency regulation varies greatly across the world. Moreover, these differences cannot be explained solely by the development of the financial market and the capabilities of the country. This naturally leads to the following questions: What causes these differences and what factors are driving market regulation?
To answer these questions, Associate Professor Jack Seddon from the Department of Political Economy at Waseda University and Associate Professor Miles Kellerman from the Institute for Security and International Affairs at Leiden University introduce the concept of ‘readability’ to financial market analysis. “The broader debate over to what extent cryptocurrencies should be regulated may be better understood as a political fight over whether to make private markets “legible” to the state. Our framework conceptualizes these dynamics as a balance of two variables: market demand for regulation and national supply,” explained Dr. Seddon. Their new framework was presented in a study published February 5, 2024, in the journal Business and Politics. This research was funded by The Law, Politics and Economics of Financial Benchmarks: JSPS KAKENHI Grant Number 20K13438.
In this innovative framework, supply and demand variables together determine the ideal market readability state. The demand side represents the competing interests of various market actors surrounding the pursuit of legibility, while the supply side shows how likely it is for a state to regulate a particular market. When both supply and demand are low, the market is completely unregulated. In contrast, when both demand and supply are high, as is the case in most real markets, the market is in a state of cooperative readability.
Additionally, when state supply is high and market demand is low, the market falls into the legibility debate, where the state wants to include the market within its legal scope, but market actors refuse to do so. Alternatively, readability problems arise when demand is high and national supply is low. The researchers also presented the expected market developments with this readability status over time. According to this framework, most markets start out as pure unreadability, go through readability or readability debates over time, and finally achieve collaborative readability.
They utilized this framework to study the evolution of cryptocurrency markets in the United States, European Union, and Japan. Their analysis showed that all three went through the expected readability steps, albeit at different speeds. For example, the United States is currently in the readability debate phase, while the EU has progressed from readability debate to cooperative readability. Japan, unlike the other two countries, made a quick transition from pure readability to collaborative readability. Moreover, research has shown that once the end state is achieved, markets do not tend to regress.
These results suggest that readability is a powerful concept that can also be applied to understanding other markets. In the future, researchers aim to study other markets and countries to realize full generalizability. Dr. Kellerman emphasized the importance of this research, saying, “This research is very relevant to pressing regulatory issues. For example, a prolonged debate over legibility in the cryptocurrency market could delay the introduction of regulations to protect consumers. By mapping patterns of debate over readability, our framework takes a first step toward better understanding the political economy of financial regulation.”
reference
Author: Miles KellermanOne and Jack Seddon2
Original paper title: Into the ether? Or into a state? Readability theory and cryptocurrency market
Journal: Business and Politics
DOI: https://doi.org/10.1017/bap.2023.38
belong:
OneInstitute for Security and Global Affairs, Leiden University, Netherlands
2Department of Political Economy, Waseda University, Japan
About Waseda University
Waseda University, located in central Tokyo, is a leading private research university with a long-standing commitment to academic excellence, innovative research, and civic engagement at the local and global levels since 1882. This university has produced many change-driven talents throughout its history. It includes nine prime ministers and many leaders in business, science and technology, literature, sports and film. Waseda has close partnerships with overseas research institutions and is committed to advancing cutting-edge research and developing leaders who can contribute to solving complex global social problems. The university has set a goal of achieving a zero-carbon campus by 2032 in line with the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015.
To learn more about Waseda University, please visit https://www.waseda.jp/top/en.
About Associate Professor Jack Seddon
Jack Seddon is currently an Associate Professor of International Political Economy at the Department of Political Economy at Waseda University, Japan. He received his master’s and doctoral degrees. He received his PhD from the University of Oxford in 2012 and 2016, respectively. He is also Principal Investigator on the Stirling Area Review Project, supported by an ESRC New Investigator Grant. His research focuses on international political economy and economic history. He has also co-authored book chapters on finance and governance by Edward Elgar and Cambridge University Press, published by Oxford University Press, London.
About Associate Professor Miles Kellerman
Miles Kellerman is currently an Assistant Professor in International Organizations and Multilevel Governance at the Institute for Security and Global Affairs at Leiden University. He received his master’s and doctoral degrees. He received degrees from Oxford University in 2015 and 2020, respectively. His research focuses primarily on economic crime. His other research interests include economic statecraft, multilateral development banking, and global capital markets regulation. Outside of academia, he has worked professionally in the field of financial crime prevention within global banks and as a consultant in London, New York, Washington DC and Amsterdam.
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