>They don't take into account the fact that human beings are not independent, perfectly rational actors.
and
>That's the practical reality of fallible humans with finite computational capacity.
and
>Fortunately, laws do recognize that fact. A lot of them exist to shield people from being predictably exploited.
And who votes in these people who enact these laws? Other people. They are not always rational, especially when dealing with issues of enormous complexity, that obfuscates the effects of policy.
These laws will inevitably be used to stifle competition to vested interests, in the name of consumer protection. See [1] above. Governing a complex society composed of hundreds of millions of people through cookie cutter rules on what non-coercive interactions are exploitive is not practical.
The spontaneous order of a decentralized, non-coerced society works surprisingly well. For example, after the Mt Gox insolvency, people in the cryptocurrency space wisened up, and stopped using Bitcoin exchanges that didn't use the highest security standards, like cold wallet storage.
Yet the Wild West days of Bitcoin exchanges were a necessary phase at a time when the Bitcoin market cap was less than $20 million and no VC company in the world would have funded a Bitcoin exchange, so exchanges run by amateurs were the best we could hope for.
In other words, had there been regulations requiring millions in capital to start a Bitcoin exchange, we never would have had a nascent exchange industry in the first place, and Bitcoin would never have gotten off the ground.
As the market grew, and venture capital began flowing into exchanges, those exchanges became more professionally run and more secure. This was a natural evolution that didn't need to be guided by top-down decree. Also, the emergence of security standards that
effectively protected against major hacks was a result of trial and error, and the culture within the cryptocurrency market of retail traders and investors evolving to become more vigilant. This is a more robust situation than a market of sheep consumers corralled by regulators who become the target of rent-seeking parties looking to use regulatory barriers to stifle competition.
A couple of Bitcoin exchanges in the US were actually shut down in the early days, due to regulatory enforcement action, which contributed to MtGox dominating the market. Absent those regulatory restrictions, venture capital would have began investing in US based exchanges much sooner, and thus we would have had professionally run exchanges sooner than we did.
In conclusion, regulations destroy innovation and the development of industries, and the lost benefits of that outweigh the short-term harm caused by an industry's growing pains.
There is good reason societies that adopt liberal democratic principles have historically prospered relative to those subscribing to paternalistic ideologies. Thankfully with cryptocurrencies, industries operate more on liberal democratic principles, whether the political institutions want them to or not.