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
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?”