Friday, March 5, 2021

How the Government Will Shutdown Bitcoin

As a follow up to my post, Harvard Professor Warns Central Banks Will Never Allow Bitcoin to Go Mainstream, David Brown emails:

It would be helpful to understand the details when you say “The hammer is there whenever they want to use it”. The bitcoiners will say BTC is uncontrollable. My sense is, the devil is in the details. I have yet to hear a clear discussion of the “plumbing" of how they will clamp down, and the bitcoiners’ counter-arguments. It would be very enlightening.

RW response: 

Well, bitcoiners would like you to focus on the "plumbing." 

They have all kinds of fancy arguments of this kind and that. 

From another commenter at the post who talked about the plumbing:

Point being is that the selling point for bitcoin is that its payments are completely uncensorable as a result of the CPU cycles. Nothing and no one can stop you from sending a payment over the bitcoin network to whomever you want to.

Second level solutions can be built on top of bitcoin so you can buy your coffee, but having an unchangeable; indisputable, uncensorable way to send value is extremely valuable, even if you never buy coffee with it.

But shutting down bitcoin, in a way, is simple so you could never be able to buy coffee with it. It doesn't matter what the plumbing is. Here is the law that could be enacted:

"The government hereby makes it illegal to conduct transactions in bitcoin."

This instantly eliminates the ability for bitcoin to be used in retail transactions or in banking---or for an individual to be paid wages in bitcoin. If there are severe penalties, and there would be, what retailer or bank or cafe or other business is going to accept bitcoin in a transaction?

As for the uncensorable element, again we are talking about plumbing that has nothing to do with human exchanges.

Making bitcoin illegal would push bitcoin into the shadows, uncensorable or not. What are you going to do with bitcoin if it is in the shadows? Being a bitcoin dealer would be an extremely high-risk business. Transaction costs would soar. Indeed because of the nature of bitcoin transactions, the risk on any given exchange being exposed would be a lifetime proposition.

Bitcoiners focused on the "plumbing" fail to look at the situation from the non-plumbing transaction part of the exchange.

I hasten to add that as a first step, I don't expect the government to shutdown bitcoin or other cryptocurrency trading right away. The first step will be more regulations to identify bitcoin holders.

In a discussion I had just yesterday on another topic with some Silicon Valley people, we talked for a bit about bitcoin. Our thinking went this way:

There is a massive amount of money to be made in shutting down bitcoin.

If you short it before the shutdown, you could make a lifetime-size amount of money that puts you on easy street if you are leveraged. 

When the major league insiders are ready, this is what will happen.

Right now the more buying of bitcoin, the better for them. The more liquid the market, the more bitcoin can be shorted when the time is right. And the time will eventually come. 

It is a rigged game in favor of the insiders and you are not one of them. There is no way that the Fed is going to want to compete with bitcoin and other cryptocurrencies when the Fed is ready to introduce a Fedcoin.

I don't doubt the Treasury and Fed are polling right now to test and see what story the public finds as the most acceptable justification for shutting down cryptocurrencies.

20 comments:

  1. The better money always wins Robert. No laws can stop that in the long run. The US won a temporary victory against sound money for the last 50 years. A blip. Technology has found a way to fight back against the US victory with a decentralized store of value that the state can’t confĂ­scate like it can gold. All the complaints about blocksize are irrelevant compared to the fact that the US government can’t just take it from people like it can gold and dollars, and can’t stop people from sending it like it can gold and dollars.

    Your analysis is missing that much of the world (people and states) is looking for a dollar escape, and bitcoin is the perfect vehicle to escape US dollar hegemony. The world suffers from the Cantillion effect even more than we do. US laws don’t prevent Russia, Iran, North Korea, Venezuela, and even China from accumulating if China sees bitcoin as a way to weaken the US government. They all know their gold is in danger as long as it’s in US vaults and the US controls the seas. And it’s just a pain to use as settlement for trade. There are plenty of countries nominally within US orbit that will see the writing on the wall and join in as well (Pakistan and Brazil come to mind). Many states will accumulate secretly as well (they probably already are). People who live in countries with high inflation (Argentina? Ukraine?) will get legally or not.

    USA has a choice: prevent its people from accumulating bitcoin and relegate itself to being an economic backwater, or see the writing in the wall and let people accumulate. This would be akin to trying to stop your country from accumulating gold in the late 18th century in order to maintain your fiat money control domestically. Self defeating.

    Bitcoin can exist without the USA. Yes, the USA can make it difficult for US citizens to get bitcoin. They can’t stop people who want to get it from getting it. They can’t stop news about its value continuing to rise from reaching US citizens. People might not understand why, but they understand that holding fiat is a losing proposition when they have the option of buying something that appreciates when they save.

    Nigeria banned bitcoin, and the price of bitcoin has increased there. Yes, Nigeria is not the USA.

    No one in the USA has to ever buy coffee with it for it to provide the world immense value. The USA can’t ban bitcoin. It can just ban itself from bitcoin.

    ReplyDelete
    Replies
    1. So you have gone from the plumbing makes bitcoin uncensorable to the US is going to miss out?

      Do you have any idea the influence the US has on international finance?

      No one will get a dime in foreign aid or military aid if they allow bitcoin.

      End of bitcoin.

      Delete
    2. Bitcoin has been banned in Nigeria. Did it end bitcoin there? States aren’t omnipotent.

      A state could pass a law to satisfy the US that is poorly enforced, and can still acquire bitcoin. Look at it from a country like Brazil’s perspective. Wants to be a major player, accumulating bitcoin early could be a way for that to happen in a way it never could under the dollar system.

      I’m not saying Saudi or Israel is going to start stacking sats, but even if the only states to
      Accumulate early in are countries out of the us orbit, it gives players marginally in the US orbit an easy choice.

      US laws and influence are not going to end bitcoin. I’m not saying that they won’t have an impact, but this is like trying to stop file sharing in torrents which despite massive effort, legal sanctions, etc, the us was unable to do. Ending bitcoin will be like playing whack-a-mole over the entire world for people downloading files on their computer psuedanonymously.

      The us can get, say, Turkey to pass a law. Can they get Turkey to enforce the law? Will that law stop Turks from find ways to get it anyway? Will that law stop Turkey itself from acquiring it secretly?

      Delete
    3. https://www.reuters.com/article/us-myanmar-politics-usa-fed-exclusive-idUSKCN2AW2MD

      States want financial sovereignty from the USA too.

      Delete
    4. The amount of Bitcoin held by Nigerians is less than 1% of the country's GDP.

      Delete
    5. Most people just dont get it RW. Not only is the plumbing NOT bullet proof, BC is not scalable enough to create any traction in the transaction velocity arena to compete against anyone with a semi functioning Fiat.

      US having world reserve status even in its anemic position currently, still does call the shots. BC is not enough of a real spoiler at this point to even worry the big bank industry.

      In the meantime WHAT the FED and its ilk have is a robust test bed to analyze what does and does NOT work with the block chain out in the wild, so that when they decide to cash in, cancel it, or replace it the financial sector will bring an irresistible alternative that will out bitcoin .. bitcoin or suck the value from the platform.

      No getting around either of those nuclear options no matter how much you reason it Vince.



      Delete
  2. Yes the game is rigged. And yes, I have no doubt they’ll try to stop bitcoin, and do things like you’ve described like shorting before bans. That will just be a buying opportunity for the rest of the world. When that happens, I’ll keep holding and keeping buying however I can.

    ReplyDelete
  3. Don't tell the drug dealers.

    ReplyDelete
  4. Crypto evangelists and detractors both often forget that value is subjective. The adoption of the masses is what drives value, and they don’t make decisions for the same reasons you do. They will take the path of least resistance when it comes to money. That’s essentially what the primary property of money is:

    “It is the most marketable good which people accept because they want to offer it in later acts of impersonal exchange" (Human Action, p. 401.).

    Illegality really hurts marketability. A bunch of boring normal people won’t use anything that is illegal. They won’t anything that is inconvenient either. Thus crypto and gold both exist in small but significant niches for the time being. Their future as money won’t depend on academic arguments as much as it will mass adoption by boring normal people.

    ReplyDelete
    Replies
    1. I disagree. Do “regular people” have to participate in the illegal drugs market for cocaine to have value? As long as a big enough niche sees it as a store of value; it is a store of value. You are underestimating how valuable that is, and the lengths people will go to get it.

      No matter how many obstacles states put up, marginal people will continue to trickle in to the bitcoin network, and each person who joins increases that value of the network, making a new group of people the next marginal people.

      Delete
    2. I had a friend in my swimming class when I was young who remarked to me one day that the pool would keep getting warmer the longer we stayed in it and the more people who got in. But it never seemed to do that. It turns out that evaporative losses dominate the heat transfer equation for open air bodies of water, especially in dry climates. Inflows and outflows are complex.

      Regular people do participate in the drug market, especially for cocaine. Check out the documentary “Cocaine Cowboys”. What really drove the cocaine surge was it gaining status as a trendy upscale drug. Cocine isn’t used as money too. It is consumed. So the final transaction for it is an endpoint and the user is exposed to much less legal risk than the dealer.

      With money, we are all dealers. We are all exposed to legal risk of buying and selling money.

      Bitcoin will retain value even through illegalization to the extent that it remains in use by the marginal actors who continue to use it, I agree. But what is driving its price currently is not marginal actor participation. It is mass market adoption. What would the price be if made illegal? I don’t know. But I know I wouldn’t be able to sell tokens to my “normal” friends who are buying them now. I also know that a significant percentage of the crypto nerds right now who comprise the die-hard core of the movement will be shifting into fungible tokens like Monero as those technologies mature.

      So the future for it will be complex, and there are good cases to be made for it to decline in relative value, as all preceding implementations of technology have eventually done, even as technology itself continues to improve (see - improved tokens, de-fi, etc).

      Delete
    3. I agree that if adoption slowed the rate of growth would slow. Even if adoption stalled, it would still increase in value (just not at the rate it is now) just because it’s quantity increases much more slowly than does the supply of dollars.

      Bitcoin is not going to be replaced by better technology, as if there was a technology that was enough better that over time it would be able to overcome bitcoins network advantage, bitcoin could adopt it.

      I strongly encourage anyone interested to read Saifedean Ammous’ book “The Bitcoin Standard” for an Austrian take on bitcoin.

      But don’t believe that all bitcoiners are techno-geeks that don’t understand and look at human action and public choice theory (as Mr. Wenzel seems to believe). Bitcoin is a 100x improvement over our current monetary system that connects the entire world, and no amount of US whack-a-mole is going to prevent it from growing across the world, even if it is temporarily slowed in the US and its close allies.

      Delete
    4. Vince you are tilting at windmills. The growth of the Idiocracy as a whole in the face of David's astute observation of the convenience factor and stupidity of the populace at large is too compelling to dismiss.

      I wish it were not so. Perhaps our country wouldnt be circling the drain otherwise.

      Delete
  5. People claiming "it's value is hidden in the plumbing" use a very appropriate analogy, but not for the reason they think.
    Plumbing is useless without endpoints-- one need only see how Visa and Mastercard (or PayPal, etc...) can completely erase the ability of a business/person/entity to monetize transactions online or in person if they have been determined illegal/immoral/dangerous/wrongthink.

    You can sing circular-reasoned songs about how swell the bitcoin technology is, but until you acknowledge that it can be instantaneously criminalized and rendered absolutely useless *in real life* by the state (using it's corporate tech ghost hand) nullifying the businesses or people from *using* it for anything. Notice that NEVER comes up in the praise of the tech.

    It doesn't matter if you have some notional amount of bitcoin or etherium in some digital wallet somewhere when it is effortless by any government to make it as irrelevant as a German Reichsmark by mandating that no legitamate business is allowed to use it without pain of prosecution.

    Where are you going to spend it then? What good is it if nowhere in your town (or any main website or service) is mandated to report any and all bitcoin transactions to "help the government fight tax evasion, terrorism" bla-bla-bla...

    It's a casino game-- and it all sounds great until you step into the real world where nobody *uses* it for shit except as a gamble to make money-- and that will end the second they say it does.

    ReplyDelete
    Replies
    1. Criminalizing it does not “render it absolutely useless in real life” any more than legalizing it renders it useful.

      People have determined that it is a useful way of storing and transmitting value, therefore it is. People used it to safely purchase things on the Silk Road for almost three years despite federal efforts to shut it down came to fruition. There are many use cases for non censorable, immutable, psuedanonymous value transfers.

      You can say all you want that there is no value. People with skin in the game disagree, and they demonstrate that by buying it.

      Delete
    2. Yes it will just return to the dark web from whence it came, and it's use won't stop but merely continue on a black market. But it won't be a money maker or somewhere you keep your savings.

      As a sov anyway, I wonder what you mean, because it seems like a monumental gamble compared to a savings account.

      The use cases for psuedoanonymous transfers shows you are missing the point here: those use cases are antithetical to government - like it or not a government will always demand the ability to interfere in transactions that are criminal (child porn, trafficking, drugs), and yes, the very same government will also abuse this power.

      I know many people who have bought bitcoin for the first time recently, and absolutely none of them want any more than a quick speculative buck.

      Delete
    3. All you have to do is look at the steady stream of institutions and large market players in the financial sector and the question of a gov making it illegal becomes moot. And those are just the ones who admit to getting into it, imagine the ones slowly adopting it that are quiet about it?
      Its beyond that point now. As it grows its volatility also will become less and less as volatility is part of growth. Even Amazon or Google were volatile early on.
      It will be the worlds reserved currency, with a second layer over top functioning as daily purchasing tools.
      Banks will start to hold it, funds are now going onto stock markets around the world. Its an unstoppable machine and is the great reset.
      There can never be more than 21 million of them. Its scarcity is its value, like the gold standard once was.
      Get in now, or be on the sidelines.

      Delete
  6. Terrific points on all sides in the comments here. I would add a few:
    1) As the government grows more corrupt and tyrannical, and debases its fiat even more rapidly, “normal” people take more and more risks to maintain/grow their wealth.
    2) The pattern in point 1 also leads normal people to engage in the gray and black markets more. Government corruption leads to the moral compromise of the population as Solzenhitsyn wrote regarding the Soviet Union.
    3) Something will eventually replace the US dollar. Perhaps not Bitcoin, but given the technological advances of the last 30 years, an internet-first fiat seems to have a much greater chance than one that is spawned by the old world banking cabal.

    ReplyDelete
  7. JP Morgan is onboard now, with basket stocks invested in crypto. Tell me again how the gov is gonna make it illegal. Microstrategy, grayscale, tesla, paypal, mastercard, etf funds traded in canada and soon in USA.
    Its too late now. You best buy some, its digital gold and there are only 21 million of them. There were 19.6 million, millionaires in the world in 2018. There are only 3 million bitcoin left to be mined. When the value of one bitcoin reaches one million dollars, one satoshi will be equal to one penny.
    You do the math, if every millionaire wanted to own one bitcoin, they cant. The price in fifteen years will be 15 million per coin.
    Add in govs when they start to adopt it. This is a financial revolution never seen before and bitcoin beats back every attack against it. With the covid destruction of the world economies, the printing of fiat has destroyed its value. Anyone holding dollars is losing value by the minute.
    You cant stop it, and its way past the U.S gov stopping it. Its a perfect system.

    ReplyDelete
  8. USG needs the black market. Without the many billions laundered by cartels in 2008 no more financial system. Nobody uses illegal drugs.
    Nobody does anything that is illegal.
    Everyone goes the speed limit.
    Cannabis became legalized, too much to enforce it, they are happy with the tax revenue.
    It also helps sucking up excess liquidity as people hold.

    ReplyDelete