The idea of a stateless digital currency is radical. It has never been done before; gold is the the original stateless currency but gold is not digital. Like any radical innovation, Bitcoin is greeted with lots of narratives that explain why this can never happen. One narrative is that a stateless currency will never happen because governments won’t let it happen. This chapter explains why many governments do want to shut down bitcoin, but why governments will be constrained from doing so in the real world. Desire does not equal capability; I want to run a 4 minute mile but I cannot do so.
This is Part 1/chapter 12 in The Blockchain Economy serialised book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index please go here.
Bias disclosure: I think good government is a good thing. I agree with Thomas Hobbes that life without any form of government is “solitary, poor, nasty, brutish, and short”. Bad government is obviously a bad thing (fascism, communism). Sadly we don’t have many examples of good government, so there is rightly a lot of pushback against bad government and bitcoin is part of that pushback.
This chapter looks at five types of countries and how they think about bitcoin:
- Countries with weak currencies and weak democracies.
- Offshore Countries positioning as global hubs.
- Countries with a tendency towards freedom & innovation.
- Superpowers that may set the de facto standard.
- Countries that are confused and have competing agendas.
Then we move on to look at four things that worry governments about bitcoin and how these worries can be addressed.
We end with 3 stories about government and bitcoin that you can safely ignore.
Added 4th March 2019
- Venezuela is the first country with a Fiat currency crisis at a time when Bitcoin is a real option
For a long time, entrepreneurs faced competition and regulators sent them the rule book. Regulators were government employees who thought about competition only in the abstract; competition was something that other people had to worry about.
Today, the environment is more fluid as governments recognize the economic return on innovation in terms of jobs and GDP growth. The regulators now face real competition because their political masters have to keep citizens happy and citizens care about jobs and GDP growth.
Both Fintech upstarts and incumbent global banks are increasingly mobile; so jobs can disappear fast if regulators get it wrong. Plus, innovation is the primary driver of productivity which drives GDP per capita.
Pity the poor regulator who must balance that with protecting citizens from fraud and enforcing existing laws.
Jurisdictional competition explains why no single government can stop bitcoin.
Countries with weak currencies and weak democracies
In these countries, citizens don’t trust the Fiat currency as a store of value, so a stateless currency is a real alternative. In a weak democracy, it is easy for the government to simply ban whatever they don’t like, such as bitcoin. This becomes a vicious circle – less trust leads to more controls, which leads to less trust, which….
In some countries it is already game over for the Fiat currency which became useless due to hyperinflation – think Zimbabwe and Venezuela. Many narratives put hyperinflation firmly in the past (and talk about the pre Hitler Weimar Republic in Germany) yet hyperinflation is also very real today. There is no clear definition of hyperinflation vs high inflation, but that is largely academic if you live in these countries. Many countries have inflation over 15% and you could define that as just high inflation, but once inflationary expectations set in, the path to hyperinflation can be very fast.
If you face the prospect of hyperinflation, you would be prudent to seek alternative stores of value (whether that be gold or bitcoin or some other tangible asset such as diamonds).
When you read stories about countries banning bitcoin, ask whether that country has:
A: a weak currency.
B: weak democratic institutions.
C: high inflation.
Usually the three are related i.e a country that has one characteristic often has all three. Now you can add a 4th characteristic which is “bans bitcoin”. These countries are worried about capital flight and bitcoin makes capital flight easier, so government desire to ban bitcoin is obvious as is their citizens desire for bitcoin. When the ingenuity of millions of citizens meets bureaucratic controls, you can usually bet on the millions winning.
A study at investing.com found that 36% of their Venezuelan users were interested in cryptocurrency information.
The African continent has many countries with weak currencies and weak democracies. For a purely fun science fiction view of where this could go, read The Pan African Currency Union based on bitcoin replaces US $ as reserve currency.
Offshore Countries positioning as global cryptocurrency hubs.
Derided as tax havens in the past, many are now re-positioning to attract cryptocurrency entrepreneurs.
They have little to lose and a lot to gain. They have to make sure their country is not perceived as a haven for tax evaders, money launderers and other bad actors. They are primarily concerned with how people outside their country use cryptocurrency. If other countries adopt overly restrictive regulations, cryptocurrency activity will move to these hubs.
They have a natural role as a place to locate exchanges, mining and vaults. Countries positioning in this way include Isle of Man, Gibraltar, Cyprus and Malta.
Countries with a tendency towards freedom & innovation
These countries also often have strong currencies and strong democracies. Take Switzerland as an example. The Swiss love their currency. It has historically been a strong store of value; so bitcoin does not appear like a threat. Because of an unusual bit of history (which Daily Fintech first learned about in 2015 in Geneva), Switzerland is officially a multi-currency country. There is a legal alternative currency in Switzerland called WIR that was created in 1934 by people who wanted to create an alternative to a financial system that had failed so dramatically in 1929. Does that sound familiar? WIR accounts for a tiny % of Swiss GDP but it is real and legal.
Thanks to that WIR history, Switzerland is a multi-currency country and bitcoin is legal tender; you can pay local taxes and fines to the government in bitcoin and buy bitcoin at any railway station ticket booth.
This is no threat to the national currency, which Swiss people trust. However it does help to position Switzerland as a hub for cryptocurrency innovation and Switzerland is obviously more than an offshore hub; it is also a talent magnet and good place to run a global business and a reasonably sized (but super-conservative) local market. Switzerland also has strong privacy laws, which was the driver for the pretty dramatic news of a Silicon Valley company moving to Europe, reversing the usual flow of entrepreneurs from Europe to Silicon Valley (Xapo story on Daily Fintech is here). It is no surprise that Switzerland ranks #1 in the Global Innovation Index.
In an update that speaks to the jurisdictional competition theme, Xapo now list their HQ as Hong Kong.
Another country with a strong currency, strong democracy and a history of innovation that is very welcoming to bitcoin is Japan.
Superpowers that may set the de facto standard for regulation
- China is concerned with capital flight and this tends to make them anti-bitcoin. However China is also a big and dynamic economy and a big player in bitcoin, so the government is a bit conflicted in how to deal with it.
- America has the current reserve currency and has been the locus of innovation in the past, but is hobbled by battles between States (New York and California have very different points of view on bitcoin) as well as a dysfunctional and bitterly divisive political landscape.
- The European Union could take a leadership role because of a leadership vacuum left by both America and China.
Countries that are confused and have competing agendas.
All the superpowers struggle with competing agendas (protecting citizens and incumbents vs fostering innovation). Two other countries with significant economies that face confusion and competing agendas related to bitcoin are:
- Korea. With a relatively strong currency, strong democracy and history of innovation, one would expect Korea to be positive towards bitcoin. However other more geopolitical reasons may weigh on this decision as Korea is geographically positioned between China and Japan and has an erratic nuclear armed neighbour in the north.
- India. India is in transition and it is hard to see how this will play out. India has a historically weak currency and has only recently started becoming innovative (as opposed to coding for hire), yet has long had a vibrant democracy. If India makes the transition to a digital economy that is more driven by domestic consumption than exports, one could expect India to welcome bitcoin and for the currency to strengthen, but it could also go the other way.
Four things that worry governments
- 1: Will citizens be exposed to more fraud & financial crime? Not if you enforce existing laws such as segregated accounts (the issue behind Mt Gox and many traditional financial services frauds) and securities laws.
- 2: Will citizens desert their national currency? Not if you avoid the temptation to inflate away your currency. If you do, your citizens will use gold, US$ or bitcoin. The issue is not bitcoin.
- 3: How will we collect tax? Treat bitcoin as an asset and tax the capital gains. That is simple and most countries already do this.
- 4: Will anonymous cryptocurrencies be used for illegal activities? Yes, but so will your Fiat currency; there will always be suitcases of cash in dark alleys. If you offer some benefit from using cryptocurrencies with KYC and KYT (Know Your Transaction), then most citizens will use them most of the time. Zero illegal transactions is clearly an impossible goal.
3 Types of Story About Government and Bitcoin That You Can Safely Ignore
These are 3 types of news stories that get issued by government PR:
- XYZ Government is studying Blockchain and Distributed Ledger Technology. Of course they will take the time to study this, it means nothing.
- XYZ Government FiatCoin is about to be launched. This means a) government controls supply b) transaction verification is done using DLT rather than in a ledger in the central bank’s core accounting system. There maybe some efficiency advantages for the central bank from using DLT and some PR boost, but no real advantage for citizens.
- XYZ Government Fines ABC Company for something related to bitcoin. Fining large companies is simply part of the government revenue model, no news here.
Venezuela is the first country with a Fiat currency crisis at a time when Bitcoin is a real option
Added 4th March 2019.
TL:DR. When the government is guaranteed to rob you each and every day, it is worth taking bit of risk to exchange Fiat to Bitcoin in a dark alley using LocalBitcoins
This section covers
- Hyperinflation robbery is not just yesterday’s news.
- Watch what real people do, ignore governments flailing around.
- Exchanging Fiat to Bitcoin in a dark alley using LocalBitcoins sounds scary unless the alternative is worse
Hyperinflation robbery is not just yesterday’s news
Yes inflation is robbery. If it is still $1 it may sound good, but not if $1 buys what used to cost 10c.
There are 3 types of inflation:
- Low enough to be considered “good inflation” by many economists – around 2-3% pa.
- High enough to be a big concern – nudging 10% pa. It’s not hyperinflation, but could become so and nobody will trust it as a store of value (run the numbers over a few decades if you doubt this). Many countries including USA and UK have had this level of inflation and dealt with it by having high interest rates.
- Crazy aka hyperinflation. Venezuela, sadly for its citizens, certainly qualifies.
Many countries have had hyperinflation – think Zimbabwe recently and Weimar Germany in the 1930s. Venezuela is the first country to suffer hyperinflation when Bitcoin is a real option (and is also a much bigger economy than Zimbabwe).
Watch what real people do, ignore governments flailing around.
Before Bitcoin, the classic policy response of a country with hyperinflation was to peg the local currency to USD. This is less of an option today for two reasons:
- Governments that fear the US Government may feel more nervous about adopting the USD.
- If Inflation is the problem, the currency that is the least inflationary looks best. So Bitcoin looks better than USD.
After Bitcoin, the policy response includes creating a Fiat Coin. This is lipstick on a pig. Fiat Coins are still not sound money, even if they sound cool and modern and give some incremental efficiency gains by using Blockchain.
Ignore these governments flailing around; that is not where the action is. Instead watch real people use Bitcoin to solve real problems in their lives. Those of us living in countries with a stable Fiat currency can only imagine the desperation caused by hyperinflation. If you think buying some Bitcoin will help feed you and your family, then buying some Bitcoin will get onto your Must Do Today A List.
The reality for the people is that if feeding you and your family is your concern, black market USD looks as good as black market Bitcoin. So people will use both. What is new is that Bitcoin is now an option alongside the USD.
BTW, “black market” is a pejorative term that only carries moral weight if the government is doing the right things for its citizens. Governments that allow hyperinflation forego such respect.
Exchanging Fiat to Bitcoin in a dark alley using LocalBitcoins sounds scary unless the alternative is worse
These traction numbers (from CoinDance) are enough to to make VCs salivate. In the first month of 2018, some 807 Bitcoin was traded for bolívar on the LocalBitcoins exchange. In the first month of 2019, this number hit 6,347, rising to 10,805 if you happen to add the first two weeks of February.
I have never used LocalBitcoins, because it sounds a bit scary – you can get robbed (before after the transaction) – and I have other safer options. If you live in a stable country you have two much safer alternatives:
- For small sums you can use a Bitcoin ATM. For example, in Switzerland I can buy Bitcoin at 1,000 kiosks in rail stations run by the Swiss Government.
- For big sums you can use Brokers & Exchanges after going through some routine KYC.
Bitcoin vs Altcoins in the market laboratory of Venezuela
Venezuela is where Altcoins will either emerge triumphant or be trampled by the growing might of Bitcoin.
Altcoins such as BitcoinCash (BCH) and Dash claim to be better than Bitcoin (BTC) for regular spending. Venezuela is the market laboratory where we will soon know if this true. The market verdict is not yet out but early indications are:
- BitcoinCash (BCH) does not seem to be getting much traction.
- Dash is getting some traction but not as much as Bitcoin (BTC).
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).