"What if the government bans bitcoin?" has been a common concern raised by newcomers for years. It's time we address this once and for all.
by Arman The Parman on 26 Apr 2022
IIf you think about it, acknowledging that bitcoin will be banned by governments is acknowledging that bitcoin is a threat to the status quo - and to be a threat, that means it must be a credible alternative to the current monetary system. That’s a step in the right direction for someone who may have been sceptical previously.
Because bitcoin is SO good, yes, governments are likely to see it as a threat and some may, and have, tried to ban it. I won’t ask you to believe I know what will happen. Instead, I’ll explore the possibilities and play out what could happen, hypothetically, and cover all options, and you can decide for yourself what’s realistic.
How might governments respond to bitcoin?
There are 3 possibilities which I’ll explore in turn.
- Governments can try to ban bitcoin
- Governments may try to attack and kill bitcoin
- Governments may embrace bitcoin
1. Governments can try to ban bitcoin
A ban by government comes in two forms:
- Isolated bans around the world
- A coordinated ban by the majority of the world’s governments
The former is easy to deal with - any government that bans bitcoin is actually banning itself from bitcoin. If, as expected, bitcoin becomes the dominant money of the world, the country(ies) that ban bitcoin will fall behind, and not benefit from sound money. The wealth of these nations will suffer, hurting them in international trade. It certainly won’t hurt how bitcoin functions and its adoption by those who seek freedom money, although it would temporarily hurt the price of bitcoin.
It should also be noted just how ineffective government bans are on things that are demanded by its citizens. Consider how effective the bans on alcohol, drugs, bibles, and certain movies have been.
The latter possibility (a coordinated ban) is actually something serious and worth considering more deeply. Imagine a world where most governments are coordinating in such a way that they conspire to limit the freedom of the citizens that elected them. Is this a world you would want? If we are on track for this type of coordinated authoritarianism, wouldn’t we want to resist? Is there anything at all that allows us to resist such an infringement of our rights? Yes, it’s bitcoin…
The only thing that can stop worldwide coordinated authoritarianism is bitcoin, and the only thing that can stop bitcoin is worldwide coordinated authoritarianism.
You don’t know who would win this battle with any certainty. Neither do I. But this weapon, bitcoin, was created to fight EXACTLY this. Abandoning the only weapon we have to resist is like entering a knife-fight, and throwing away your knife because your opponent might win. Also, if we lose this battle, the rulers of the world will own everything, and the people, us, we will own nothing. If we are destined to own nothing, what is the harm in buying bitcoin and trying to resist?
It ultimately comes down to this:
Do you want to fight for your freedom, or do you prefer the safety of being oppressed?
What happens though, if this particular coordinated attack is carried out? Does bitcoin die? I would argue, even then, it’s highly unlikely that Bitcoiners, passionate lovers of freedom, would give up. Bitcoin would move underground, the fiat conversion rate would be hurt, but a black market would develop. The fact that governments (which by then are possibly making everyone’s life hell) went out of their way to ban bitcoin, is likely to make people seek out bitcoin. In this world, we will say, “thank God we have bitcoin”.
2. Governments may try to attack and kill bitcoin
“Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.” -Satoshi Nakamoto
Attack the blockchain data?
Simple attacks like that just won’t work because bitcoin is truly decentralised. For example, to destroy bitcoin, every single copy of the blockchain would need to be destroyed. The blockchain is data, and there are many copies - both public and hidden.There are thousands of copies (bitcoin nodes) all over the world. It is simply impossible.
Governments have already tried to ban mining. Recently in China (previously the largest region mining bitcoin) banned all bitcoin mining. Miners obeyed. But they also moved. The ASICs (single purpose powerful computers designed to mine bitcoin) were relocated or sold, and used in other parts of the world. Bitcoin didn’t flinch. The network was not disturbed, and several months later, the worldwide hashrate recovered and is now at an all time high.
Governments may also cooperate to ban or coerce miners using an ESG narrative. Even if this is successful and deters big companies from mining, that allows smaller players to be profitable (a result of the bitcoin difficulty-adjustment embedded in the protocol). Perhaps if there is extreme impairment of big players, people at home may be able to mine profitably. To be secure, there is no known “minimum worldwide hashrate” - it’s quite possible for bitcoin to be secure enough with only 10% of its current hashrate.
Governments may cooperate to incentivise miners in such a way to make mining only possible for big companies (market intervention to give selected companies an unfair advantage), and then force those companies to censor transactions. If this is actually successful, censorship of some transactions will hurt, but doesn’t kill bitcoin, and doesn’t give any government control of the monetary system (The reason bitcoin was created). Transaction censoring is also highly unlikely, because those miners not under influence will still take on the “censored” transactions and include them in the blocks they win. The users who are censored will have to wait longer to get on the blockchain, so really it’s more a nuisance for them rather than censorship.
A 51% attack has been discussed as well. This is where a government, theoretically with limitless resources, accumulates 51% of the hashpower of the world. Assuming this is realistic for a moment, what can they do? They certainly would cause havoc, but would not kill bitcoin. Their ability to censor or delay transactions is increased. Their ability to rewrite some blocks is also increased. They would also be able to engage in a DDoS attack (distributed denial of service attack), where they would mine empty blocks and re-write blocks by competitive miners that do try to include everyone’s transactions. Because they have the majority of the network, and earning bitcoin is not an incentive, they can afford to do this. This is actually a HIGHLY expensive attack, and the preparation of this attack is not something that is easy to hide - a nation accumulating that much hashpower is going to be noticed. Bitcoiners are not simply going to give up. Bitcoin is antifragile. It is code, and will get stronger. It is possible that the developers could release a patch and make all the effort from this attack worthless. I don’t need to speculate what that patch would be, and I won’t deny that it would hurt bitcoin to have to do this, but merely the threat that there is such a defence, deters the attack from ever being undertaken.
Bitcoin is already functioning well enough, so threatening the developers will not kill it. In addition, developers are smart enough to successfully go dark, use pseudonyms, and continue to work.
Governments could attempt to seize bitcoin from their citizens, just like FDR’s Executive Order 6102. This would be incredibly unpopular, and unlikely, but FDR did exactly that with gold. The difference with bitcoin is subtle. In 1932, if people and companies did not hand in their gold, that component of their wealth would be excluded from the payment rails of the local and international banking system. People wouldn’t be able to transact with their gold unless it was face to face. This was a weakness of gold which eventually led to fiat money not backed by gold.
Bitcoin users do not have this problem. If their bitcoin was excluded from the banking system (ie they were unable to electronically sell their bitcoin for fiat), that wouldn’t be so damaging, because bitcoin can be sent peer to peer, instantly, ALL OVER THE WORLD. Bitcoin doesn’t need the banks - it replaces the banks. So, if such an executive order came to pass, Bitcoiners would more effectively resist than gold holders in 1932.
Do not forget also that if many Bitcoiners do give up their bitcoin to government, that hurts those people, not bitcoin; bitcoin still survives, and those that kept their bitcoin keep their wealth.
Attack custodial services?
It’s quite realistic that governments may seize the bitcoin held by exchanges or major companies - “for national security”, for example. Anyone who keeps their coins on the exchange would have then “donated” their bitcoin. This is particularly a risk as the price of bitcoin continues to rise, and fiat currencies hyperinflate. This doesn’t kill or hurt bitcoin, in the same way that a bank robber successfully robbing a bank doesn’t hurt the dollar.
3. Governments may embrace bitcoin
The smartest approach; whichever nation leads the way will benefit the most. This is probably the most likely scenario if considering incentives.
The more that various nations adopt bitcoin, the lower the chance that they will all cooperate to conduct a coordinated attack on bitcoin (bitcoin’s biggest threat).
One nation has already thrown its hat into the ring, El Salvador. In 2021, President Bukele made bitcoin legal tender in the country, alongside the dollar. While this is not the same as a nation accumulating bitcoin, the move was associated with a bitcoin accumulation strategy.
At the time of writing, three further announcements were made at the Bitcoin Miami Conference:
- Madeira (an autonomous region of Portugal) will be welcoming Bitcoiners with tax exemptions on bitcoin payments. It initially seemed like this was a legal tender announcement, although that was not the case.
- Prospera (a special economic zone of Honduras) is adopting Bitcoin as legal tender.
- Senator Indira Kempis, will be introducing a bill to give bitcoin legal tender status in Mexico.
In addition to entire nations adopting bitcoin, other important developments to take note of are politicians that publicly support bitcoin, or are known to own bitcoin. The more politicians that do this, the more likely it is that the nation will embrace bitcoin, or at least, the less likely it will attack bitcoin.
Some examples are:
- Senator Cynthia Lummis (Wyoming, USA)
- Jane Hume (Australia’s minister for financial services)
- Indira Kempis (Mexican Senator)
- Pavel Nikolayevich Zavalny (Chairman of the State Duma, Russia, accepting bitcoin payments for oil and gas)
- Andew Yang (US presidential candidate)
- Francis Suarez (Miami Mayor)
- Pierre Poilievre (Canadian member of Parliament)
There may be nations quietly accumulating bitcoin as well. Given that it is competitive, it’s in a nation’s interest to acquire bitcoin without alerting the world, so they may continue to purchase/mine at a low cost.
Bitcoin may be acquired by nations in a few different ways:
- Force - confiscations from exchanges, companies, and citizens.
- Purchasing - either with reserves or printing money
- Mining - equipment may be confiscated or purchased.
The first option is the most effective way to get the most possible bitcoin quickly, and I expect some nations will do this. Note - it does not kill bitcoin. Just because an entity maliciously acquires bitcoin, does not mean that it destroys the money.
I also expect purchasing in the open market to happen to some degree. Governments that do this by printing money will eventually destroy their own currency, but in return, will have more bitcoin for the next monetary period. The people that will suffer are:
- Those that adopt bitcoin last
- Those that sell their bitcoin to the government (whatever the price)
- Those that continue to invest in fiat-based assets
- Those that hold fiat for savings
- Those with retirement entitlements
Mining by governments is a slow burn. It’s an honest way to earn bitcoin, helps the network by making it more secure, and if done by many different nations, distributes the mining hashpower, making it more difficult for one actor to get 51% of the total.
The problem with acquiring bitcoin through mining is that it is very competitive, takes time, and there are only 2 million bitcoin left to be mined. A nation that has, say 10% of the mining power of the world will earn 10% of the block reward on average. Currently, 900 bitcoin are mined per day, and so this nation would earn 90 bitcoin per day.
The 2 million bitcoin figure is a calculated and predetermined number. It's the issuance of new bitcoin over the next 100 years, but most of those 2 million bitcoin are created over the next 12 years. It’s game on for those last 2 million bitcoin. It is MUCH harder to acquire 2 million bitcoin through purchasing on the open market, because MOST of the bitcoin are not for sale, at any fiat price. Many bitcoiners are holding until the day fiat dies, including myself.
In summary, I do think governments will come for bitcoin, either to hurt it, or to get more. Whatever they do, bitcoin is going to be fine. YOU may not be though. Get your coins off exchanges and learn how to do this, to protect yourself. Ask for help or learn online. Visit my website (armantheparman.com) which is dedicated to teaching people how to hold their own coins. Don’t leave them in a giant honeypot for your government to take in one swoop. Make them come after each person, one by one. Make it difficult.