ie it's a 'banking' problem, specifically a 'fractional reserve banking' problem, not a crypto problem.
This is exactly why fractional reserve banking is heavily regulated.
While there's nothing intrinsic about cryptocurrency that would make it more prone to fraud than anything else, the culture around it seems highly susceptible to it.
There are absolutely intrinsic things that make cryptocurrency more prone to fraud. The inability to reverse transactions, quasi-anonymity, and lack of any central authority to resolve disputes.
To limit fraud to the levels you see in traditional finance, you would need the regulations and oversight by centralized organizations that you have in the traditional space. The entire purpose of cryptocurrencies are to avoid those things, so while you technically could have them with a cryptocurrency, you would end up with no good reason to have a cryptocurrency at all.
I will substitute a word from your post that will help you understand this easier:
"The entire purpose of cash is to avoid those things, so while you technically could have them with cash, you would end up with no good reason to have cash at all."
Cryptocurrency is not antithetical to banks just like cash and gold are not. It is a digital version of cash, not credit.
You cannot easily scam millions of people around the world out of their hard-earned cash in a couple of days. You cannot easily move millions of dollars in cash without conspicuously hauling objects around and/or engaging many people to help with that. You can reverse a cash transaction immediately by grabbing the person and calling the police. You cannot maintain anonymity when dealing in cash without giving strong cues to bystanders and counterparties and risking being recorded on video. It is not the purpose of cash to avoid any of those “downsides”; but it clearly is a feature of cryptocurrencies.
Cryptocurrencies are a qualitatively new thing humanity has never had to deal with ever, no matter how insistent are cryptocurrency aficionados’ in calling it merely “a digital version of cash”. This serves their wallets, by suspending deserved wariness and encouraging unsophisticated people to invest into a financial pyramid, but not truthful description of reality.
Holding no cryptocurrency myself (I don't need to buy anything with it atm :D) I would hardly call myself an 'aficionado'. But you must understand that to compare does not mean to equate. All I was saying is that cryptographic currencies have some of the properties that cash has, but that they also have the ease of transport and storage afforded to us by credit.
I don't see the issue with being able to transport cash across the 'net. Governments can still regulate businesses, banks, so if you go and buy a car and your government wants to know to tax it, the business selling you the car can just report this income. If a bank held your asset for you, they could just be subject to similar regulations as when they hold other assets for you. Once you stop treating it like credit or like some amorphous blob that cannot be regulated, this stuff gets pretty simple to understand.
The very idea of “physically unconstrained cash” is relatively new to humanity so there are some unknown unknowns, but even then I think the issues are obvious by now.
The necessity to handle a physical object limits the scale of potential upsides (help relatives, etc.) and downsides (scam people, etc.) of cash—and it might have transpired that, with that necessity removed, the downsides and exploits are much more sought after and outweigh potential upsides.
(This is just one sentence you claimed incorrect; I don’t see the the point on going through the rest because maybe I’m missing something but they seem similarly obvious to me personally.)
If you're going to argue through analogy, you ideally need to ensure agreement with the analogy. Since asynchronous discussions make this difficult, we often need to settle for motivating the analogy instead. Simply assuming it is usually not persuasive.
But if an exchange claims that they hold your crypto 'frozen' and completely separate from their trading activities, and especially if the exchange also deal in government currency, then I think it's quite right for government to regulate, and ensure the exchanges are compliant.
I think from a purist perspective that is true. I said this upthread but what people really want is more USD in their checking account. These exchanges are a place where they can roll the dice and maybe make that happen. As I said before, i bet 95% of the people burned couldn't care less about the philosophical aims of crypto currencies and just want a chance to get rich (in USD).
The purists care about independence from government but they also don’t like centralized exchanges so they don’t care if they are regulated.
The other people are in for the gamble rather than the fundamentals of crypto. A certified casino is probably more trustworthy to them.
As long as the government doesn’t try to regulate the chain, both groups are satisfied.
Maybe what's better and cheaper is to let this wild west "enjoy being poor" nonsense flame out until everyone shoots themselves and it's curtains.
It will sort of be like Usenet - it didn't go anywhere but you have to know how to find it.
I agree it's a banking problem in that they're trying to streamline a new economy by not doing what "legacy banking" does. Which is like streamlining airlines by starting the rule book from scratch. But the rules and regulation of the airlines have been paid for in blood. Discard them at your own peril.
Or, in the case of cryptocurrencies, at the peril of the finances of anyone investing in your experiment.
Seems hard to try to disentangle money and how money gets managed at scale.