Sceptics often argue that governments will ban bitcoin when it gets too important and threatens national sovereignty. At least these critics understand the importance of bitcoin and the power government currency monopolies exert over us. What they fail to understand is the power of distributed open-source technologies and the game theory faced by governments when making these decisions. TLDR: Bans are ineffective – they merely cede global technological power to peers. Authoritarian governments are more inclined to attempt regressive regulations. If you live under that type of regime, you need bitcoin more than you think.
You cannot ban bitcoin; you can only ban yourself from bitcoin
Self-regulation is the most important component of distributed open-source technologies, like bitcoin. Bitcoin supply is pre-programmed at 21mn, blocks are mined every 10 minutes on average, miners are rewarded with new bitcoin, supply growth halves every 4 years, anyone can view and validate transactions by running a node and no-one can be censored from the network if they have internet and abide by the consensus rules. These principles remain intact no matter what you, I or regulators think. A government can attempt to ban its citizens from using the network, but bitcoin will continue to run on the internet. The Securities Exchange Commission’s (SEC) Hester Peirce made this point recently when she concluded “governments would be foolish to ban bitcoin.”
Ban’s are ineffective, potentially impossible
Even if a government were to ban bitcoin, it would be ineffective. The US government banned alcohol under the prohibition, but liquor was widely available during that time. Bitcoin is not even a physical entity so how is government going to seize it? It is excruciatingly difficult to ban people from using code on the internet. Ask China - they have tried to ban Facebook, but the Chinese access Facebook via VPNs. There are even question marks over the legality of a bitcoin ban in the US because bitcoin is just code, which could be protected under the first amendment right to free speech.
Global regulatory competition raises the stakes
A ban would be foolish and ineffective, but governments could certainly increase the barriers to entry and increase friction. Regulators could raise KYC and AML requirements or raise taxes, which would likely slow adoption. But it is difficult to believe that government would execute remarkably stricter policies on bitcoin relative to other financial assets. There is little precedent. And if they did, would they be willing to bear the consequences? Do the world’s leading powers want to turn away from this powerful technology when others embrace it? To get an idea of this geopolitical trade-off, listen to this interview with Republican policymaker Kevin McCarthy:
US policymakers are concerned about the possibility of handing the initiative to China. It is this type of regulatory competition that has pushed Miami Mayor Francis Suarez towards embracing bitcoin as he encourages tech savvy capital to his city.
Perhaps positive bitcoin regulation is just as likely as negative regulation?
Coordination unlikely in a multipolar world
A ban would be more impactful if all countries coordinate and execute simultaneously. But what is the probability of global coordination in the fractious world of geopolitics? The UK is too busy arguing with the EU and the US bickering with China to clamp down simultaneously on bitcoin. Marko Papic’s multi-polar worldview strengthened my conviction that the geopolitical conditions do not exist for a global coordinated clampdown on bitcoin.
Regulators are warming to the tech
Turning from the macro to the micro, are governments willing to destroy bitcoin companies within their borders? Think about the jobs at Coinbase, Gemini, Luno and VALR… Truth is, bitcoin is becoming entrenched, particularly in the world’s biggest economy. Exchanges exist in most countries around the globe, corporates hold bitcoin on their balance sheet, the Chicago Mercantile Exchange (CME) offers bitcoin futures and people in the US Congress are outright supporters of BTC. It is noteworthy that in recent week’s ex US regulators have joined Binance and BlockFi, which highlights a growing relationship between crypto businesses and government. There is a high probability that politicians hold bitcoin themselves.
I suspect that bitcoin holders are a stronger, more organized and vocal lobby group than opponents
Millennial’s might demand financial empowerment
Most countries have adopted a wait and see approach because they do not know exactly how to approach the technology. They hope that innovation, jobs, and economic growth will emerge, and they argue that the industry is too small to present a real threat. But the longer they wait, the more entrenched the industry becomes, and the less likely negative regulation. This factor becomes more meaningful if one considers Millennial’s rise to economic and political prominence.
Millennials are 3 times more likely to hold crypto than their parents because they are familiar with new technologies and comfortable with intangible assets. With each year that passes, this generation moves closer to the seat of political power. At the very least, they become a consideration for vote-hungry politicians.
Perhaps you need bitcoin more than you think?
Ineffective – yes, unlikely – yes, but banning is still possible.
Evidence shows that governments who ban new technologies tend take on a certain character, though. They tend to be more authoritarian and less supportive of individual liberties, like China and Venezuela. It is in these countries where people need bitcoin the most. Venezuelans do not care what the government says - they need bitcoin to protect themselves from hyper-inflation. Afghani’s and Belarusian’s need access to digital bank accounts to liberate themselves from their oppressive governments. Turkey and Nigeria both great recent examples of needs-must. In the past month Erdogan’s Turkish government announced measures to stop merchants from accepting bitcoin. Nigeria clamped down on exchanges. Interest in bitcoin has shot through the roof in both countries.
Turkey and Nigeria were already a bitcoin hotspots because people in those countries know that their government does not protect the value of currency (the USD has gained 450% and 170% vs. the Turkish Lira and Nigerian Naira respectively since 2010). It is telling that these government measures to control bitcoin have not dampened interest.
Moral of the story: if you think your government is going to ban bitcoin, then you need it more than you think.
At some point governments might become threatened by bitcoin and the cryptocurrency ecosystem. It is understandable that looming regulation is a barrier for potential investors. But once you dig into the potential scenario’s you figure out that (just like you) government’s most effective response is to embrace the technology. Under this scenario they can at least try to extract as much tax revenue from the burgeoning industry as possible. Unless governments can muster renewed global coordination, bans are foolish. Only the most regressive governments will prevent their citizens from interacting with this powerful technology. It is in those countries were people need bitcoin the most. Each individual needs to decide where they sit on this spectrum. But do not take too long in making your decision. The stakes are too high and the opportunity too great to allow the regulatory threat to prevent action altogether.