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In the US, a red flag law is a gun control law that permits police or family members to petition a state court to order the temporary removal of firearms from someone who may present a danger.

This article isn't about guns or gun control.

Believe it or not, there were red flag laws for automobiles. No, it wasn't a law to let family member petition a court to take a teenager's car away, although I'm sure my parents would've appreciated a law like that. It was a law that required the new automobiles to have at least three people -- a driver, an engineer, and a runner. The runner had to walk or run in front, to warn horses and their rider of the approaching vehicle. The vehicle wasn't allowed to exceed 4 mph. It was called the Locomotive Act of 1865, but commonly called the Reg Flag Act. It is difficult to innovate when the main purpose of the automobile is suppressed. Thankfully, this unreasonable law was never a US law, or we might've ceded dominance of the automobile industry to another country.

So what does this ridiculous, and later repealed law teach us, and why is it on a site devoted to better crypto regulation? It has three lessons.

  1. That absurd laws that can be applied to new technology when lawmakers don't understand the benefits of the technology. Or the risk of applying outdated laws and old thinking to new technologies.
  2. That technological innovation is inevitable, despite absurd laws being applied by uninformed lawmakers. Cars were ultimately going to be better than equine transportation.
  3. That there are risks and dangers to the health, progress and innovation of a country when applying absurd laws to inevitable technological progress.

Let's look at these lessons, and how they apply to the current situation with crypto, banking, and securities.

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In this analogy, traditional banking is the horse. Like horses in the 1800s, they have served us well, and were the finest form of transportation (lending and money storage) at the time. I love horses, but they're not great modern transportation. If my Uber driver showed up on an Appaloosa, I would not be thrilled. So what changed? The invention of the internal combustion engine gave us better transportation options. Similarly, the invention of Bitcoin gave the world a completely new technology and better banking options. And like the internal combustion engine led to jet engines, there have been a lot of derivative blockchain technologies that have pushed the decentralized finance (DeFi) world forward.

The US, as the leading country in financial innovation would want to keep that lead, even as inevitable technology innovations improve the speed, efficiency, shape, character, and nature of finance. For this reason, it is important for US lawmakers to get this right and not force the innovation to other shores.

Why do we keep from applying absurd laws like the FATF Travel Rule to this new technology where every transaction is completely transparent? In the best case scenario, lawmakers are afraid of the technology, and in the worst case the banking lobbyists are actively attempting to squash the new-fangled motorcar, err, crypto. Lawmakers might genuinely believe that it is temporary, and not the future of money and value transfer. This was probably true of buggy builders, horse breeders, and my favorite, the infamous buggy whip manufacturer.

Did the Red Flag Act slow down the adoption of automobiles. Yes, but likely only in the jurisdiction where it was applied. This allowed other places to take the lead. I suspect the US, and Detroit specifically, were the main beneficiaries of this absurd restrictive automobile law in Europe.

The danger now is that the US puts absurd laws in place in order to protect the US banking industry, at the risk of the entire country falling behind in the new financial technology. We already see this in NY with protectionist license requirements.

I urge lawmakers to get expert advice on the transition that is happening globally. Understand the Crypto - First Principles that are as unforgiving as gravity and have consequences for violation. Learn from the mistakes of the past. Pass enabling legislation to keep the US competitive in this new technology innovation.