Since its inception, the governance of cryptocurrencies has emerged as a contentious issue on the global financial stage. While some nations have meticulously crafted regulatory frameworks for these digital assets, others remain hesitant to intervene, with a few even opting for outright bans. Conventional wisdom posits that governmental bodies naturally seek to regulate markets to enhance oversight and stability. However, the stark discrepancies in cryptocurrency regulation worldwide challenge this assumption, transcending mere differences in financial market development and state capacity. This raises fundamental questions: What factors underpin these disparities? What motivates regulatory actions in financial markets?

Associate Professor Jack Seddon from Waseda University’s School of Political Science and Economics and Associate Professor Miles Kellerman from Leiden University’s Institute of Security and Global Affairs, in their innovative research, introduce the concept of ‘legibility’ as a pivotal lens for analysing financial markets. This concept reframes the ongoing debate surrounding cryptocurrency regulation as a political struggle over whether private markets should be made ‘legible’ to the state. Their framework, which posits that this struggle hinges on two core variables: market demand for regulation and the state’s inclination to supply regulatory oversight, offers a fresh perspective on the complex dynamics of cryptocurrency regulation. Their findings, published in Business and Politics on February 5, 2024, and supported by The Law, Politics and Economics of Financial Benchmarks: JSPS KAKENHI Grant Number 20K13438, mark a significant contribution to the field.

In this novel analytical framework, the interplay between demand and supply determines distinct states of market legibility. On the demand side, diverse market actors vie for regulatory clarity, while the supply side gauges the state’s readiness to formalise oversight. When both demand and supply are low, markets exist in a pure illegibility devoid of formal regulations. Conversely, high demand and supply levels lead to collaborative legibility, where markets operate under clear regulatory frameworks.

Furthermore, when state supply exceeds market demand, contested legibility ensues. Here, the state seeks to regulate despite resistance from market participants. Conversely, contested illegibility arises when demand for regulation outstrips the state’s readiness to supply it. The framework also posits a temporal progression through these legibility states: most markets commence in pure illegibility, transitioning over time through contested phases to achieve collaborative legibility.

Applying this framework, Seddon and Kellerman analysed the evolution of cryptocurrency regulation in the United States, European Union, and Japan. Their study revealed varying trajectories: the US navigates contested legibility, while the EU has progressed from contested to collaborative legibility. Japan notably advanced swiftly from pure illegibility to collaborative legibility. Importantly, their research suggests that once collaborative legibility is attained, markets tend not to regress.

The findings of this research not only underscore the broad applicability of the legibility framework beyond cryptocurrencies, but also offer practical insights into regulatory dynamics across diverse markets and jurisdictions. Future research aims to extend these insights to other sectors and countries, enhancing the framework’s robustness and generalisability. Dr. Kellerman, highlighting the study’s relevance, noted, “This research addresses critical regulatory challenges. For instance, prolonged periods of contested legibility in the cryptocurrency market may delay consumer protection regulations. By mapping contestation patterns over legibility, our framework provides a foundational understanding of the political economy of financial regulation, thereby contributing to the development of more effective and efficient regulatory policies.”

More information: Miles Kellerman et al, Into the ether or the state? Legibility theory and the cryptocurrency markets, Business and Politics. DOI: 10.1017/bap.2023.38

Journal information: Business and Politics Provided by Waseda University