Why Bitcoin Cannot Be Banned | The Future of Money P11

Game theory and competing interests incentivize nations to adopt, not ban, Bitcoin.

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Note: I wrote the following excerpt in the summer of 2020, before El Salvador adopted Bitcoin. Special thanks to Parker Lewis and his fabulous series on Bitcoin, to which much of this article is credited.

Typically, the last hurdle one must overcome is the idea that Bitcoin will be banned. In order for Bitcoin to be banned it must function as money, and therefore a belief that it will be banned is an acceptance that it is money. Otherwise, what is there to ban?

Once people have accepted that Bitcoin is money, they are likely to concede to the narrative that governments will ban it before it becomes an offramp from fiat. On the surface this makes sense. Governments like their power and control, and perhaps there is no greater control over a population than the ability to create and manage the money supply.

‘Permit me to issue and control the money of a nation, and I care not who makes its laws.’

- Mayer Rothschild

For a moment let’s entertain the idea that a ban on Bitcoin is inevitable. At what point will this happen? Bitcoin’s current market cap is roughly 200 billion, less than 3% of golds. Put another way, gold’s market cap is 40x that of Bitcoin’s. Gold and Bitcoin pose similar threats to fiat, yet private ownership of gold is permitted.

If Bitcoin were to be banned, and holders forced to convert to fiat, it almost certainly wouldn’t happen unless Bitcoin’s market cap exceeded golds, at which point one would have a 40x return. Even if one believes that a Bitcoin ban is inevitable when its threat to fiat has become too great, isn’t that something worth betting on? Put another way, would you rather reap the asymmetric upside of a once in a millennium event, or not be a part of it?

But Bitcoin cannot be banned. Bitcoin is merely open-source code, and therefore a ban would be an infringement on some of mankind’s most basic rights. It would also require governments to shut down every blockchain forever, which is not only unreasonable, but nearly impossible.

Think about it. Mankind has an unparalleled technological breakthrough with the potential to transform society in ways we cannot yet fathom, discovers digital scarcity, reinvents money - and we’re going to halt all of that progress permanently?

In 1933, governments temporarily banned citizens from owning gold. Contrary to what many expected, gold increased in value compared to the dollar. Years later, the ban was lifted. Bitcoin is orders of magnitude more difficult to ban than gold.

Bitcoin is decentralized, borderless, and censorship resistant. It exists across thousands of nodes (a computer attached to the network) around the world. Banning Bitcoin would require a collective and simultaneous effort among hundreds of governments to prevent open-source software from running on the Internet, which is unfeasible at the scale required to ban Bitcoin.

Even if a ban is enforced in one jurisdiction, what’s to prevent nodes from running the Bitcoin network in another? Furthermore, the digital keys that store one’s Bitcoin can be memorized, which makes it impossible to know where the keys actually reside.

Claims that Bitcoin will be banned largely come from initial skeptics, but experts and politicians don’t believe a ban would be achievable. In a cryptocurrency and blockchain hearing, Senate Banking Committee Chairman Mike Crapo said:

‘If the United States were to decide — and I’m not saying that it should — if the United States were to decide we don’t want cryptocurrency to happen in the United States and tried to ban it, I’m pretty confident we couldn’t succeed in doing that because this is a global innovation.’^¹

In response, Allaire, CEO of the global financial company Circle, agreed:

‘It (Bitcoin) exists on the internet, it’s open-source software, anyone can implement it, it runs wherever the internet runs, and these have a monetary policy where these assets are algorithmically generated . . . That is a challenge that every government in the world now faces — that money, digital money, will move frictionlessly everywhere in the world at the speed of the internet.’⁵

Multiple studies have had the same findings.² In a study commissioned by the EU Parliament, experts concluded the following:

‘The economists who attempt to dismiss the justifications for and importance of Virtual Currencies (VCs), considering them as the inventions of “quacks and cranks” (Skidelsky, 2018), a new incarnation of monetary utopia or mania (Shiller, 2018), fraud, or simply as a convenient instrument for money laundering, are mistaken. VCs respond to real market demand and, most likely, will remain with us for a while. Policy makers and regulators should not ignore VCs, nor should they attempt to ban them.’

On whether Bitcoin could compete with fiat, they said:

‘Virtual Currencies (VCs) may offer another avenue for currency substitution, as observed recently in Venezuela. One cannot rule out that future progress in the area of information technologies can bring even more transparent, safe, and easier to use variants of VCs. This might increase the chances for VCs to effectively compete with sovereign currencies, including the major ones.’

What could be more bullish for Bitcoin than a commissioned study by the EU concluding a) Bitcoin is not a scam, b) it will remain with us, c) it cannot be banned, and d) it has the potential to compete with major sovereign currencies?

Last, and arguably the most important reason that Bitcoin won’t be banned, is game theory. The tragedy of the commons is a theory formed in 1833 by British economist William Lloyd that describes a situation in a shared resource system where individual users acting independently out of self-interest behave contrary to the common good of all users by utilizing the ‘shared resource’ through their collective action.

Put simply, although it may be argued that it’s in a country’s best interest to ban Bitcoin, game theory independently incentivizes each government to regulate it, and thereby gain a competitive advantage over those who ban it. A country benefits from adopting Bitcoin and permitting the corresponding mining operations to function within it, as well as from purchasing some share of the network as a hedge against its own fiat’s (inevitable) failure. The sooner a country does this, the greater share of the network it controls at a lower price. Game theory therefore incentivizes each nation to adopt Bitcoin as soon as possible.

Just as nations had to make the switch to the gold standard for forced self-preservation, eventually nations will be forced to switch to a Bitcoin Standard, or suffer the consequences of someone who holds a harder money than they do.

None of this may stop governments from trying or issuing temporary Bitcoin bans with large penalties for ownership, as governments have historically been known not to concede power (control over a money supply) without a fight. This will cause temporary setbacks in adoption (and likely in price).

In the end, though, they will concede. Just as individuals each have economic incentive to store their value in Bitcoin, so too do governments have incentive to permit Bitcoin within their jurisdiction. If government A bans Bitcoin while government B permits it, then government A will potentially lose economic strength to government B. This game theory will pull individual governments acting in self-interest to regulate Bitcoin in order to facilitate the explosion of economic growth that will take place on the blockchain and generate income through tax revenue.

Frankly, it’s more probable that governments will buy Bitcoin than ban it. Because this will disproportionately benefit early adopters (and create a positive feedback loop), it incentivizes countries to take immediate action.

Lebanon, which has suffered a tragic currency collapse and hyperinflation, is a prime candidate for Bitcoin adoption.³ A society cannot thrive without a functioning currency, and expecting the government to fabricate a new currency that gains the trust of its citizens immediately after the last one failed is insanity. (Zimbabwe abandoned their currency for the ‘safe haven’ U.S. dollar in their most recent collapse.)

Lebanon needs a solution to their monetary policy problems, and has three main options:

1. Adopt commodity money. This involves tying their currency to a commodity, such as grain or cigarettes. Possible, but it’s arguably not in the best interest of a country desperate to move forward to resort to practices of the past.

2. Adopt a dollar standard. This comes with a host of problems, including a global dollar shortage, people hoarding dollars instead of spending them due to threats of confiscation, and having one’s sovereign currency be at the mercy of a country with competing interests.

3. Adopt a Bitcoin standard. This would give Lebanon a massive first mover advantage, anchoring its monetary system in the hardest money in history, building trust amongst the citizens, and allowing the country to rebuild itself.
   

Is adopting a Bitcoin standard really that far-fetched for a desperate nation with its back against the wall?

A process of elimination makes Bitcoin seem like a reasonable choice when the alternative of fiat has already failed them. Which option Lebanon chooses has yet to be determined, but it seems inevitable that a country will eventually go all in on Bitcoin. Once they do, and if the model works, competing nations will be pulled to do the same, or potentially face the same fate as the Chinese when they hesitated to adopt the gold standard.

Bitcoin has no competition, as digital scarcity is a one-time discovery that cannot be repeated. Its network effect and decentralization make it almost impossible to replicate. Not only can Bitcoin not be effectively outlawed, but game theory compels nations to adopt and/or to buy it rather than to ban it.

1. U.S. Lawmakers Realizing They Cannot Ban Bitcoin

2. Virtual currencies and central banks monetary policy: challenges ahead: https://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf

3. Lebanon’s Currency Crisis Paves The Way To A New Future: https://www.forbes.com/sites/tatianakoffman/2020/07/09/lebanons-currency-crisis-paves-the-way-to-a-new-future/#53fa56d06a17