In recent years, gambling has become increasingly legal throughout the United States. New casinos are springing up in various locations beyond Las Vegas, and even professional sports leagues that once opposed sports betting are now embracing it. Despite its questionable social advantages, gambling is open to the general public, with only age restrictions in place. However, the same cannot be said for startup investing.
Investing in startups, venture capital funds, or funds that focus on collectible art is limited to a specific group known as “accredited investors.” The American government seems to prefer individuals risking their money in casino games that are likely to result in losses rather than investing in startups that have the potential to succeed.
Accredited investor laws restrict many types of investments to so-called “sophisticated investors.” However, this sophistication is not determined by knowledge or experience, as there is no test to assess these qualities. Instead, it is measured based on wealth. According to the government, being sophisticated means having an annual income of at least $200,000, which is five times the median income of the average American, or a net worth exceeding $1 million.
It is worth noting that someone’s knowledge about a particular investment is irrelevant. This means that a 60-year-old who inherited their family construction business can freely invest in AI startups, while a 24-year-old with a degree in machine learning cannot.
These accredited investor laws are not only classist but deeply unfair. They are intended to protect ordinary individuals from risky investments, yet they are enforced by the same government that encourages them to bet on the next Powerball jackpot. The lottery, which is a government monopoly, has abysmal odds, even by gambling standards, yet it is heavily marketed to the poor. This is why economists refer to it as a “regressive tax.”
These dynamics play a significant but often underrated role in wealth inequality. One of the main reasons for the growing wealth gap is that asset prices have consistently outperformed wages. In other words, those who derive their wealth from investments have fared better than those who rely on employment income. While various types of investments have performed well in recent decades, those reserved for the already rich have seen the most substantial gains.
Cryptocurrency has been an exception to this trend. Bitcoin (BTC) and Ethereum (ETH) have been available to the public and have outperformed other investments. However, the U.S. government has intervened, declaring the Ethereum initial coin offering (ICO) illegal because it allowed ordinary individuals to participate. If it were up to the government, the incredible returns from the Ethereum ICO would have only benefited those who needed it the least.
These regulations are why most crypto projects now primarily raise funds from venture capital funds and angel investors, both of which require accreditation. It is also why most crypto projects limit their airdrops to specific recipients. The government claims this is for people’s protection, yet it has no issue with promoting complex same-day parlays to countless individuals before the next professional sports match. While over half of all Americans have reportedly gambled in the past year, less than 20% qualify as accredited investors.
Cryptocurrency often serves as a mirror for our society, forcing us to deeply consider how things currently operate because we now have an alternative. While we often view this reflection as technological, it also reveals some of the shortcomings of our legal and regulatory systems. Unfortunately, the view is not very flattering.
Omid Malekan is a guest columnist for Cointelegraph, an adjunct professor at Columbia Business School, and the author of “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms.”
Please note that this article is for general information purposes only and should not be considered legal or investment advice. The opinions expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph.