Charlie Munger: Why the US should ban cryptocurrencies

In recent years, thousands of new cryptocurrencies, both large and small, have been issued by private companies in the U.S. These have subsequently been publicly traded without any prior government approval or disclosure.

In some cases, a large block of cryptocurrency is sold to the promoter for next to nothing and later purchased by the public at a higher price without fully understanding the pre-dilution that benefits the promoter.

All this wild and hairy capitalism is a lot like what Mark Twain described as saying, who is credited with saying “a mine is a hole in the ground with a crook on top.”

This lamentable excess continues because of gaps in regulation. Cryptocurrency is not a currency, a commodity, or a security. Rather, it is a gambling contract with a house edge approaching 100%, entered into in a country where gambling contracts have traditionally been regulated only by the states with loose competition. Clearly, the U.S. should now enact a new federal law to prevent this from happening.

Two interesting precedents can guide us in taking the right action. In the first, the Chinese Communist government recently banned cryptocurrencies because it wisely concluded that they did more harm than good. And, in the second, from the early 1700s, England responded to a terrible depression that occurred after a failed promotional plan to make huge profits by using slow-moving sailing ships to trade with poor people on the other side of the world.

What the British Parliament did in its agony when this frenzy of promotion broke out was direct and simple: it banned the public trading of all new common stocks, and maintained that ban for about 100 years. And, during that 100 years, Britain made by far the greatest national contribution to the progress of civilization, as it provided strong leadership in both the Enlightenment and the Industrial Revolution and gave birth to a promising little nation, the United States.

What should the United States do in the wake of the cryptocurrency ban? Well, there is one more course of action that might make sense: thank the Chinese Communist Party leaders for their outstanding example of extraordinary judgment.

Mr. Munger is the Vice Chairman of Berkshire Hathaway.