BitCoin: State interference

In earlier posts
https://masculineffort.wordpress.com/2013/04/13/bitcoin-is-inflation-of-digital-currency-systems-possible/

https://masculineffort.wordpress.com/2013/04/12/some-questions-about-bit-coins/

I had raised some concerns regarding the long term viability of Digital Currency Systems from two points of view
1. Technical concerns: Safety/Forgery/Fraud/privacy/reliability etc
2. Barriers to entry being too low

Both the above concerns do not bother me any more. But permit me to add a new concern
3. State intervention: This is believe is another concern that is not trivial and must be looked into in some detail.

Let us analyse this by asking questions and performing thought experiments.

Q1. Are decentralized Digital Currency systems in the state’s intereste?
Ans. No. Of course not. Easy. Next!

Q2. So if Digital currency networks start gaining acceptance, would the state try to clamp down?
Ans. Ofcourse. Easy. Next

Q3. If the state tries to clamp down, would it be successful? Entirely successful? Partially successful?
ans. This, I believe is the question that we must answer.

What is it that the state can do to shut down the Digital Currency network?

Legal Steps and their effects
The state could declare that any BitCoin transactions are illegal and impose hefty penalties. This would effectively drive BitCoin transactions underground or abroad to other shores.

Let’s answer the question of movement to other shores right away. All states have fiat currency systems which are extremely lucrative to them. BitCoin is not in the interest of any state. I can see various governments collaborating with each other in order to destroy BitCoin. And in the developed world, I dare say they would largely be successful. For BitCoin, there would be literally nowhere to run.

BitCoin transactions would be limited to the Black Market, the underground economy, and dysfunctional states. Certainly no big company such as wal-mart would accept them. Small merchants might also say fuck it as they would be in no position to fight any legal challenges the state throws down at them. We would be left with black marketeers, smugglers, BitCoin die-hards and states where currency mismanagement is so bad that even normally law abiding citizens accept the risks of breaking the law. But it would not have a snowball’s chance in hell under a monetary system with steady 5%-10% inflation per annum. This issue of state opposition, I feel, is a significant limiting factor to the widespread use of BitCoin. Unless this question is satisfactorily answered by the BitCoin luminaries such as Peter Surda at
http://www.economicsofbitcoin.com/
I will prefer to stay away from BitCoin even as a speculative instrument, let alone a monetary one.

Additional comment: April 14, 2013: The only way that the mainstream law abiding folk will use BitCoin under a government ban is if it becomes impossible for the government to catch people transacting in BitCoins. The analogy is a government ban on “thinking” about anal sex under penalty of death. Since the government cannot get into people’s heads and know what they are thinking, this ban is meaningless. My question is, “Is BitCoin at this level of anonymity?”

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About masculineffort

A Man should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, seduce a woman, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.
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3 Responses to BitCoin: State interference

  1. Peter Šurda says:

    Of course, we cannot be entirely sure what the reactions to the state would be, or to what extent their efforts would be successful. Some things to remember though is that Bitcoin is more resistant than the other alternatives. And that’s what is important. The same argument could be brought against, say, gold. And indeed, as money, gold already failed, because it was replaced by fractionally backed paper notes, and subsequently fiat money. Gold isn’t money anymore, it is merely a highly liquid good. We also need to realise that “the state” is not a uniform lump, but a collection of many institutions with conflicting goals. And even various states are in conflict with each other.

    The conflicts would work in favour of Bitcoin. For example, let’s take the wars on drugs, money laundering and so on. These shift the demand into types of money that are controlled by the users themselves and are more anonymous, i.e. cash. So then the states add the war on cash. And then the reaction is to switch to something else, see http://mises.org/daily/5968/Laundered-Money . And one of these things might be Bitcoin. But if the war is then broadened to include Bitcoin, that won’t make any of the other alternative a better option. The war on Bitcoin wouldn’t be accompanied by the slogan “now you can use paypal to launder your money”. As long as Bitcoin preserves a comparative advantage, it will remain to be used.

    Here we see a conflict of goals: one branch of the state wants to control the money supply, and the other branch wants to control what people do with their money. If there is an competitor that is difficult to control, if the branches do not agree on which goal should take precedence, they might end up failing to achieve both goals. In addition to that, the goals of countries other than USA, for example, might not match those of the US, so other countries might back Bitcoin for the reasons of international politics, if they are for example cut off from the international banking system. In this gigantic power struggle, Bitcoin doesn’t care, it’s just an inanimate set of rules.

    In addition to the direct control of money in their own countries however, we also have international trade (about half of global trade) and informal economy (estimated at about 14% of global trade).

    Jon Matonis has written a lot about this on his blog, for example here: http://themonetaryfuture.blogspot.com/2013/02/government-ban-on-bitcoin-would-fail.html or here: http://www.forbes.com/sites/jonmatonis/2012/03/19/could-bitcoin-become-the-currency-of-system-d/ For an even more more extremist view, check out Michael Suede’s blog: http://www.libertariannews.org/2011/07/01/could-the-state-exist-if-property-rights-were-impossible-to-violate/ , and also very good one is the blog runtogold.com run by Trace Mayer.

    By the way, I’m not telling anyone to buy bitcoins. I’m attempting to provide economic analysis, not financial advice.

  2. Peter, Your comments are thought provoking as usual. Let me outline some concerns about your points
    1. You say that the state is not a lump, rather a collection of institutions with possibly conflicting goals. I agree with this statement. However, they WILL collaborate when their common interests are threatened. All states issue currency which their subjects/businesses are forced to accept. All the currencies are rotten and inflationary. BitCoin, being deflationary is a viable competitor/threat to all of them. No state wants to lose the monopoly of money creation. Collaboration with each other to limit the use of BitCoin is in the interests of all of them. Therefore, they will collaborate if BitCoin usage gets to a certain point.

    2. You say “one branch of the state wants to control the money supply, and the other branch wants to control what people do with their money”. True. But I do not see why they would not collaborate with each other to limit BitCoin usage. After all, it is in both their interests to collaborate. BitCoin hurts both of them by it’s very nature.

    3. If the U.S. declares war on BitCoin, every country will join up in the crusade with the possible exception of North Korea, Iran and some dysfunctional African states. But then I must ask the question. How does that benefit me, the common man? I expect to live and work in countries that happen to be U.S. allies and would not defy U.S. dictat. I’m not going to move to North Korea.

    4. Finally, there is no way someone law abiding and stable like me will ever risk using BitCoin if it becomes against the law. The benefits to me will be few compared to the penalties if I am caught transacting in them. This, I suspect is over 95% of the population. If BitCoin is just used by certain underground characters, how does it benefit me? Are you trying to tell me that there is no way the government can catch people transacting in BitCoins?

    I too am looking for economic analysis, not financial advice. Interactions with you are very helpful towards this end.

  3. Admin says:

    Good points. The million dollar question is how effective would the states be at restricting bitcoin. I address this issue in my post:

    The Real Problem With Digital Currencies and Privacy
    http://tinyurl.com/ccgt9ej

    Specifically:
    “The real problem is the widespread lack of understanding of property rights and individual liberty. It is the pagan faith and belief in “external authority” as described by Rose Wilder Lane in her book The Discovery of Freedom. What is needed is a powerful network of individuals who respect property rights and are willing to defend them. This “territory” is where the asset that backs the e-currency would be stored and defended. The individuals of this territory would reject and repel attempts to violate these property rights. The “territory” need not be centralized if it can be defended. E-currencies like Bitcoin have attempted to address these issues but they still face many challenges.

    “The ultimate territory is in the individual minds and actions of the masses who have learned, understand, and appreciate what property rights and liberty are all about. An excellent source for this knowledge is The Freedom School (http://www.freedomschool.org). The ultimate state of individual awareness is described as “autarchy” or “self-rule” (see http://centerforselfrule.org specifically the essay A Way To Be Free).

    “One man alone cannot defend his property but when he and his neighbors have matured to the point where they understand, respect and appreciate property rights; and when they can outnumber (or outsmart) the plunderers, they can then repel the attacks of the aggressors.

    “The answer is Autarchy.”

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