One of the most common questions I get from people who have heard about and are considering buying bitcoin, but have not yet, is this one: Why wouldn’t governments just outlaw and ban bitcoin? This blog post explores this idea, by shedding some light on the game theory behind bitcoin adoption. It discusses, why bitcoin can not be banned outright because of the nature of decentralized computer networks, and why bitcoin friendly jurisdictions will emerge as they already have in the past. Moreover, we explore that bitcoin is on a fundamental level nothing more than numbers and speech and as such protected by law in much of the western world.
Here’s the quick take, in a nutshell: Some governments will end up embracing bitcoin, and others won’t. Some might outright ban it. In the end of the day, it won’t matter, because Bitcoin is the better form of money. It is not ban-able and that’s why it will win in the long term irrespective of government action in your particular jurisdiction. Let’s explore all of that in detail:
Bitcoin itself cannot be banned
First and foremost, we must understand why bitcoin itself cannot be banned. It is a globally decentralized computer network sitting on top of the internet protocol. No single entity controls it. Due to the decentralized nature of the bitcoin network, the only way to truly destroy it, would be if all countries of the world came together and disabled their internet. Forever. How likely do you think this is? Think about what relies on internet infrastructure these days. Could you do your work without the internet? Most people couldn’t. The internet is entrenched in society so much so that disabling it worldwide forever would move us back to the dark ages. Ambulances won’t arrive at your home if you dial 911 without the internet. And it only takes one country to not ban the internet for bitcoin to survive.
Can you think of a time in history, where there is ever an agreement reached by all countries about anything at the same time? I cannot think of a single time, when all world leaders could agree on anything controversial and substantial. It would need a concerted effort like we’ve never seen before to abolish bitcoin, which is exceedingly unlikely.
What governments can try to ban
When it comes to access to bitcoin, the on and off ramps so to speak, it’s a little bit easier to try to ban bitcoin but that exercise is still futile in the end as you will see. How would that kind of “ban” work? In most countries, bitcoin is acquired through exchanges, where you can deposit your legacy currency and exchange it for bitcoin. Exchanges need access to the banking system for you to deposit your fiat currency. That access to the banking system can be banned by a government.
Meanwhile, because bitcoin is not ban-able, it will continue to operate in friendly jurisdictions. So, in essence, what governments can ban is access for themselves and their population to bitcoin. But any ban is only as good as its enforcement. Bitcoin the network will go on and peer to peer markets and grey markets emerge in countries, after they ban access to bitcoin. We know as much from Kenia and China. Both countries have banned access to bitcoin before (China for the 7th time recently!) and what happened afterwards was grey markets developed. People directly exchanged bitcoin between each other, without using exchanges. Moreover, a price premium develops in these jurisdictions as a result of the ban. Bitcoin becomes more valuable! In Kenia, per capita adoption has increased after the government ban so much so that it was that Kenya had the highest per capita adoption rate of bitcoin after the government ban. Think about what that means! All governments can do about bitcoin is to drive bitcoin underground, into the grey market.
Bitcoin Friendly countries
For every country hostile towards bitcoin, you will see bitcoin friendly countries emerge. The Central American country of El Salvador has made bitcoin legal tender recently under the forward thinking leadership of President Bukele. You can walk into a Starbucks in the capital San Salvador and buy a coffee with bitcoin on the transaction layer (which is known as the lightning layer). Same goes for Burgers at Burger King. Got bitcoin? Get goods! Residents can purchase any good or service in the country using the lightning network. The situation in El Salvador is, quite obviously, the complete opposite situation to a ban. The country has embraced the world money early.
A major reason for El Salvador to adopt bitcoin is a large American diaspora, which used to send money home via Western Union, copping high fees. Today, these people can use Twitters lightning network integration to send money back home to their families at next to no cost. There are many other countries relying heavily on remittances and all of them are excellent candidates to adopt lightning technology.
Thus, it is quite likely that other countries are going to follow suit in embracing the bitcoin network. There’s an incentive to do so. It’s cheaper for remittances, enabeling a boost in economic activity by saving on fees. Moreover, bitcoin is still small as a world money in terms of market size. It has the potential to grow much larger, ten fold to a hundred fold and it most likely will. Early adoption will be rewarded with increases in wealth if that comes to pass. Free and open societies adopting bitcoin early will prosper under a bitcoin standard which will make other countries also adopt bitcoin and a self-fulfilling adoption cycle will unfold. We can see this play out in the United States, where individual States are in direct competition with each other. Bitcoin friendly jurisdictions have emerged in the States of Wyoming, Texas and Florida.
The Game Theory of Nation State Adoption
With regards to bitcoin adoption, there is a game theory at play. Individuals like you and me are incentivized to figure out quickly what bitcoin is and adopt it early, because early adopters enjoy more favourable exchange rates, which has risen dramatically over time. The same is true for countries. El Salvador was the first country to figure out bitcoin and has adopted it as a result. Other similar countries are equally incentivised to understand bitcoin and are incentivised to follow suit. They likely will, and nation state adoption will likely spread, resulting in a self-fulfilling feedback mechanism.
The value proposition
One of the many value propositions of bitcoin is the separation of state and money. Bitcoin is a free market good and the state as no influence on it. Using bitcoin is permission-less: all that is required is an internet connection. Because of its permissionless nature, bitcoin is an inclusive financial network that allows anybody to participate in it. Because bitcoin exists outside the traditional financial system, it cannot be coerced, and your assets cannot be confiscated or frozen by a tyrannical government if you learn how to self-custody them.
Concern about a ban of bitcoin is then only relevant if you don’t really understand what bitcoin is or said in another way: If your government banned bitcoin, it would still be used as money. Nothing is different in the bitcoin network just because some bureaucrats somewhere decide that their existence is threatened by a computer network.
China admitted that bitcoin cannot be banned
China has recently admitted that bitcoin cannot be banned via their actions. They’ve done so by banning it for the 7th time in history (it might have been even more often, who can keep accurate count at this stage?). I’d argue, that the first ban was a sincere attempt at banning bitcoin and all subsequent ”bans” were in essence admissions by the Chinese government that their previously issued bans were insufficient. I have discussed above why a bitcoin ban cannot be enforced in practice. The most stringent law, after all is only as good as its practical enforcement. China has admitted as much through their actions.
The morality of a bitcoin ban and some legal reflections
Banning bitcoin is immoral, because Bitcoin is informational in nature. It is based on math and language. Banning bitcoin is akin to banning numbers or banning speech. Computer code has long been considered as speech. In the case Bernstein vs. United States, the United States Court of Appeals for the Ninth Circuit ruled in 1997, that computer code is considered speech and therefore protected by the first amendment to the constitution of the United States of America. In the words of the honourable Judge Patel:
“This court can find no meaningful difference between computer language, particularly high-level languages as defined above, and German or French. [...] Like music and mathematical equations, computer language is just that, language, and it communicates information either to a computer or to those who can read it.“
It is well established legal precedent, that computer code is speech in the United States legal system and, for that reason, bitcoin, the code and bitcoin the computer network should both be protected under the first amendment.
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