Who Are We Protecting, and From What?

Gambling is increasingly legal in the US: Casinos, sports betting, the lottery, and so on. The economic benefits of most forms of gambling are limited. There is some job creation and collection of additional taxes, but these benefits come at the expense of players.

Put differently: Casinos are highly profitable and the lottery helps fund the government because players are guaranteed to lose in the long run. Incentives are misaligned.

Like gambling, investing in startups and “alternatives” like venture capital or hedge funds is also risky. But unlike gambling, this type of risk is economically productive. It provides capital to entrepreneurs and liquidity to markets.

A big part of America’s economic success is our ability to finance startups and our efficient capital markets, often described as “the envy of the world.”

Just as importantly, the incentives from this kind of risk taking are aligned. If a startup founder makes money, so do his investors. If a VC fund manager collects carry, it’s because she made her LPs a profit.

Except for certain age restrictions, gambling in the U.S. is open to the general public. There are no tests for the “sophistication” of a blackjack player or the annual income of a sports bettor.

The most popular form of gambling is the lottery. It has the worst odds because it is a government monopoly. It’s popular because it is heavily marketed, particularly to poor people. That’s why economists call it a regressive tax.

Except for certain hard to satisfy (and economically unfeasible) exemptions, investing in startups or alternative investments is restricted to the wealthy. Accredited investor laws require startup founders and fund managers to only accept money from so-called “sophisticated” investors.

But they don’t require prospective investors to take a test or demonstrate experience, they simply ask how rich they are. Accredited investor laws are based on the classist assumption that rich people are smart and poor people are stupid.

Never mind the history of Enron, Lehman, Madoff, SVB, and every other major collapse in recent memory, all of which featured one group of affluent people interacting with others.

The U.S. government assumes that a billionaire boomer who inherited all his wealth is more “sophisticated” when investing in AI startups than a 23 year old with a degree in machine learning.

That same government has no problem with the 24 year old blowing all his money on fantasy football or the Powerball. There’s now even a lotto app.

Less than 20% of Americans can qualify as accredited investors, but over 60% of Americans have gambled in the past year.

Wealth disparity has grown significantly in the past 20 years, in part because investments have outperformed income. Put differently: those who derive their wealth from their assets have outperformed those who do so from their labor.

Within the investment landscape, so-called “private markets” have outperformed public ones, in part because different government regulations like Sarbanes Oxley incentivized successful startups like Facebook (which 80% of people couldn’t invest in at the outset) to go public later than their predecessors.

This phenomenon was aided by the growth of venture capital and growth equity funds (which 80% of people can’t become LPs for) and the rise of secondary trading platforms for private shares (which only 20% of people can use).

Given the demographic breakdown of wealth in America — now skewing in favor of older people — this phenomenon also has an intergenerational component.

Like most demographic trends, the rise of economic inequality has many contributing factors. But government policy clearly plays a role.

The U.S. government wants ordinary (and younger) Americans to do risky things that are guaranteed to lose money while simultaneously barring them from doing risky things that may generate a positive return.

This is not an accident. Everything that I’ve argued here is easy to verify and regularly discussed in policy circles. That makes it a deliberate choice.

Ironically, the one exception to this phenomenon has been crypto, at least until recently. Coins like Bitcoin and Ether are the only risk assets that were available to the general public and outperformed over the past decade.

Their orthogonal arrival, technical complexity, and niche communities made them a far more likely investment for a smart 24 year old than a billionaire boomer. Their decentralized nature also meant that access was generally ungated.

The data shows that younger people — who own disproportionately less equity and real estate — own disproportionately more crypto. The same goes for minorities like blacks.

The U.S. government is now trying to put an end to all of this. Agencies like the Securities and Exchange Commission, which is led by a 66-year old centi-millionaire, are trying to force crypto into the same accredited investor laws that held back a generation.

Mr. Gensler made most of his wealth becoming a partner at Goldman Sachs at a time when it was a private company. He’s the prototypical winner of the status quo.

Today, thanks to the SEC’s crackdown, virtually all crypto projects either restrict early investments to accredited investors or exclude Americans altogether.

Some don’t even let American’s collect airdrops, free money that could make a major difference in the financial life of a young American who is sophisticated enough to deposit Lido staked ETH into EingenLayer, but not Sophisticated enough to be rich.

This too is by design.

America’s current disposition towards gambling, investing, and crypto is a socioeconomic disaster. It’s bad economic policy and deeply immoral.