The Real First Rule Of Regulation

Last Updated: 22 February 2024

You’ve hinted at the real first rule of regulation, Paul: The need for regulation is inversely related to the level of transparency in the market.  The more transparency you have, the less regulation you need.

But I’m with Jim on the need for some regulation, and I want to comment particularly on your point about favoring naked CDS contracts.

First, I hope we can all agree that there needs to be a lot more transparency in this market.  You never really knew what kind of exposure companies had in the CDS market. That lack of transparency allowed individual companies to take on more risk than the market might otherwise have allowed—vis AIG, which had $400 billion in CDS exposure.

But more broadly, why shouldn’t we ban naked CDS?  The risk of such contracts is obvious; they essentially leverage the impact of debt failures. They seem custom-designed to create a domino effect, and to exacerbate the boom and bust cycle of the economy.

Shouldn’t we stop that?  Shouldn’t we either ban naked CDS contracts, or, alternatively, regulate them like insurance and require them to be backed by sufficient pools of capital?

Regular CDS contracts have a clear value.  CDS contracts backed by walled-off capital make all the sense in the world.

But naked CDS contracts?  Why leverage up the impact of failure?

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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