Misconception: Governments Will 'Shut Down' Bitcoin
The Bitcoin Network: decentralized, resilient, ban-resistant
The misconceptions that Bitcoin is bad for the environment and that it’s used mainly by criminals likely scares a lot of people away. However, the biggest concern for me when I first started looking into Bitcoin was that governments would ban it. Bitcoin is a threat to the existing financial system — which is run by powerful people who are vested in keeping the status quo. If Bitcoin were to become a legitimate threat, they would simply ban it, right? The answer to this question is complex.
I suppose the statement “governments can ban Bitcoin” isn’t technically false, because some governments have taken regulatory action against Bitcoin already. What I’ll cover in this article is why it would nearly impossible, certainly unfeasible, to entirely shut down the Bitcoin network.
A few ideas that are important to understanding this topic include:
A handful of governments have already banned Bitcoin; we’ll review the implications
The U.S. has banned gold in the past; the effect on gold was not what you might think
Bitcoin is used simultaneously to refer to bitcoin the asset and Bitcoin the network; I’m going to focus on Bitcoin the network and what makes it so resilient
“The idea that somehow bitcoin can be banned by governments is the final stage of grief, right before acceptance. The consequence of the statement is an admission that bitcoin “works.” In fact, it posits that bitcoin works so well that it will threaten the incumbent government-run monopolies on money in which case governments will regulate it out of existence to eliminate the threat.” — Parker Lewis
Past and Present Bitcoin Bans
In tackling any misconception, I like to start with the point counter to the one I’m trying to make. Balancing out my bias toward Bitcoin with some of its common criticisms — the logical ones at least — helps me argue the pro-Bitcoin side.
With that said, Bitcoin has a long and turbulent history with regulation. Below is a brief summary of some of the different Bitcoin bans enacted across the world:
Pakistan: it is illegal for businesses, banks, and other entities to trade cryptocurrencies; however, Pakistan does have state-sponsored Bitcoin mining
Nigeria: the central bank declared that regulated institutions are banned from transacting in cryptocurrency
Turkey: instituted a ban on all cryptocurrency payments
India: banned banks and financial institutions from dealing with digital currencies in the past, recently a law proposed very strict punishment for individuals holding cryptocurrencies, and now apparently considering making crypto an official, regulated asset-class
China: so many bans, hard to keep track; from banning ICO’s to crackdowns on banks, exchanges, and now mining, China has thrown the regulatory kitchen sink at Bitcoin
Regulation regarding Bitcoin started in 2013. Today, in the United States, it is legally considered property. Other places around the world are taking a hostile approach. It’s not surprising that different places treat this emerging asset class differently, but what might be surprising is the way bans have affected Bitcoin’s use and its price.
None of the above bans are coming from small countries. In terms of population, China and India are by far the largest countries in the world. Pakistan is 5th, Nigeria is 7th, and Turkey is larger than any of the EU5. The total combined population for these 5 countries alone is over 3.3 billion1. That’s more than 40% of the world’s population operating under some kind of Bitcoin ban. And yet, the network functions seamlessly.
Here are a couple of examples of how Bitcoin has adapted to unfriendly regulation:
Per a 2020 survey conducted by Statista, about one-third of Nigerians used/owned cryptocurrency, so the ban referenced above must have really hurt Bitcoin’s use within the country, right? Not exactly. Nigerians turned (even more so) to peer-to-peer payments with a 27%2 increase in P2P use. For Nigerians, Bitcoin fills a need and they were not going to let their central bank take that away from them.
Over the last few months, government officials in China have announced Bitcoin mining bans across some of its provinces where mining is most prevalent. This has resulted in a major drop in Bitcoin’s hash rate (total computational power, used as a measure of the strength of the network) dating back to mid-May. Bitcoin’s price is also down from all-time highs seen in April. However, this has not stopped the network from functioning smoothly. Between mid-May and mid-July, there has been over 2.5 trillion USD worth of value transacted via the Bitcoin network and that computational power shut down in China is being redistributed to places like the United States, Canada, and other locations in Central Asia as we speak.
Despite resistance from powerful regulators, the Bitcoin network continues to grow: new users continue to come onto the network, hash rate has already seen a nice rebound since it hit a recent low in late June, and it continues to function daily — all around the globe — as a permissionless medium of exchange and store of value.
It’s worth noting that in many places around the world Bitcoin is at best unregulated — it is not explicitly illegal, but there is also a lack of regulation or legal commentary on digital assets in general.
U.S. Gold Ban
The examples in the prior section illustrate the many ways governments have tried to ban Bitcoin. None of them have been all that effective locally and, worldwide, Bitcoin has carried on without a hitch. But are there any other examples throughout history that might shed light on this topic? There are. The one I want to touch on is the U.S. gold ban of 1933.
The ‘Gold Standard’ was a prosperous time globally ranging from the 1870s to the outbreak of the first world war, in 1914. Many global powers came off the Gold Standard in 1914 to fund the war, opting for government-controlled currency they could print beyond their gold reserves. In the years immediately succeeding 1914, inflation ran rampant across Europe and the U.S., but that’s a history lesson for another time.
Just 20 years after the creation of the federal reserve, under an executive order of sitting president FDR, owning gold was criminalized in the United States. Punishment ranged from a hefty fine to 10 years in prison (or both). The answer to the question — why did the U.S. ban gold — will vary depending on who you ask, but it was clear by this point that the government became accustomed to spending beyond its means and it was willing to take drastic steps to protect its ability to do so.
What I want to focus on in this section is not why the U.S. government banned gold, but rather what was the result was on gold’s price and whether the ban was truly enforced or not.
As a quick aside, if gold was not functional money, then there would have been nothing to ban. The same argument can be made for Bitcoin. Any critic who simultaneously claims that Bitcoin has no practical use cases and that governments will ban it is contradicting himself.
I grabbed the below chart from a Lyn Alden article (data originally sourced from Robert Shiller and Aswath Damodaran). The data illustrates how returns on paper assets, which many people’s savings were forced into as a result of the gold ban, were negative when adjusted for inflation from the mid-30s to the mid-70s.
During this same timeframe, gold held its purchasing power and ultimately exploded in price throughout the 70s:
In 1971, President Nixon announced the U.S. would no longer convert dollars to gold at a fixed value — gold’s price rose from $40.62/ounce to $97.39/ounce in 1973
In 1974, President Ford repealed FDR’s executive order banning the ownership of gold — gold’s price jumped to $154/ounce that year and ended the decade at just over $300/ounce3
So the gold ban didn’t tank gold’s price. Gold actually outperformed keeping money in the bank and sovereign bonds throughout the life of the ban. Even if the price wasn’t tanked by the ban, people who didn’t voluntarily turn in their gold must’ve been punished, right?
There is no evidence of a widespread search and seizure for individuals still holding gold throughout the time it was banned. Many law-abiding citizens surrendered their gold, but actual instances of confiscation seemed mostly limited to criminal prosecutions and large-scale gold transactions4. A couple of very important details are that this happened in the middle of the Great Depression and that the dollar was still pegged to gold during this time, so there was a huge incentive for the government to seize gold in an effort to boost its gold reserves. The same situation does not exist today with gold, and certainly not with Bitcoin.
One argument for why Bitcoin would actually be easier to confiscate than gold is the government would not need to go door to door to seize its citizens’ Bitcoin. They could virtually confiscate these digital assets. It’s far from that simple. If a cryptocurrency exchange or any other regulated institution holds the private keys to your Bitcoin, then regulatory capture is certainly a risk. If you hold your own private keys and properly store your Bitcoin, then, like with physical gold, it would be extremely difficult to confiscate.
The State of Bitcoin Today
Aside from confiscating individual’s Bitcoin, there are concerns that governments will — in one way or another — try to shut down the Bitcoin network. Before we talk about properties of the Bitcoin network that make it difficult (if not impossible) to shut down, let’s check in on the state of Bitcoin today:
A market cap of over $600 billion dollars
Pro-Bitcoin politicians pushing for crypto-friendly legislation include, but are not limited to, Senator Cynthia Lumis in Wyoming, Representative Warren Davidson in Ohio, Mayor Francis Suarez in Miami, and Democratic mayoral primary winner in New York, Eric Adams
The oldest bank in the United States and largest custody bank in the world — BNY Melon — will allow its clients to hold, transfer, and issue digital currencies7
Payments companies like Visa and Mastercard have launched credit cards that reward users in Bitcoin and are making plans to settle payments using cryptocurrency
Peer-to-peer payments apps like Venmo and Cashapp can be used to buy and sell Bitcoin, laying the groundwork to spend crypto at merchants as well
Publicly traded companies like MicroStrategy, Tesla, Square, and Coinbase have put Bitcoin on their balance sheet
At some Starbucks and Home Depot retail locations, as well as online at Overstock.com and Etsy, you can actually spend your Bitcoin
$600 billion dollars is no small sum. People have put some serious money into this thing. The thought they would just roll over and give up their investment is irrational, even if a force as powerful as the federal government was to ban it. In addition, the outlash from everyday citizens, institutions, and state and local politicians would certainly serve as a deterrent.
No Single Point of Failure
Bitcoin is an asset, a monetary network, and more importantly, Bitcoin is a movement. People buy, hold, trade, and use Bitcoin for any number of reasons. Some use it because they don’t have access to a stable currency. Some use it as a hedge against inflation. Some use it just to make money. Some use it to take back their financial sovereignty. It certainly is money, but it’s more than just that.
“Nothing is more powerful than an idea whose time has come.” - Victor Hugo
Bitcoin is a peer-to-peer payments network, running on open-source code, governed by consensus protocols — not by leaders. It is an opt-in network. People are choosing to use Bitcoin over their local, government-controlled currency. Bitcoin is entirely permissionless and borderless. Anybody can participate at any time, making it truly decentralized.
Bitcoin transactions are broadcast to a transparent ledger — the blockchain — to be validated by nodes and miners.
Miners are rewarded for confirming transactions, securing the blockchain, and participating in the fair distribution of new Bitcoins. There is a huge economic element to Bitcoin mining. They invest money into mining hardware with hopes of yielding Bitcoin. They are incentivized to play by the rules because the nodes are there to keep them in check.
Nodes are cheap, so (just about) anybody can set one up. Nodes work to validate transactions, but they also keep a record of the blockchain and dictate/enforce the consensus protocol (a.k.a the rules). Due to its design, malicious attacks on the Bitcoin network are not feasible. Any miner or any Bitcoin user who doesn’t adhere to the rules established by the network will not have their transactions validated by the nodes (and you’d think everyone running a node owns/uses Bitcoin themselves or there’d be no need to run a node).
This isn’t a how does the Bitcoin network work article, so I won’t go into any further depth on the inner workings. Admittedly, it’s not an area of expertise for me anyway.
But what I want to illustrate here is this — in a way, nobody and everybody govern Bitcoin at the same time. Given mining involves solving a math problem, it can be done anywhere. Given nodes are cheap and only require an internet connection, anyone can run one, wherever there’s internet. The network propagates itself. Using Bitcoin in any capacity incentives you to run a node. Miners and node operators secure the network and make it extremely difficult to attack.
It would take a global, coordinated attack on Bitcoin miners, exchanges, and node operators to make a serious attempt at shutting down the network. The resources required would be astronomical. The harmony of this coordination among competing global powers would be unachievable.
“You would have to shut down the internet.” - SEC Commissioner, Hester Piece, on banning Bitcoin
People have criticized Bitcoin for its lack of order and its lack of leadership, but it is those very reasons that Bitcoin continues to grow despite a wide range of external threats. Aside from the societal and political backlash that would result, Bitcoin’s lack of a single point of failure, due to its decentralized nature, is why I don’t worry too much about Bitcoin bans.
A Bitcoin Ban in the U.S.
Bitcoin’s decentralized nature makes it extremely difficult to attack on a global scale. The coordination required is not only unfeasible but nearly impossible. So let’s reframe the argument. Other countries have banned Bitcoin, why not the United States?
There are a variety of reasons why a Bitcoin ban in the U.S. would be difficult to enact. All of the reasons stated previously about the state of Bitcoin and the outlash that would ensure, as well as the decentralized and resilient nature of the network apply here as well. However, there’s a few specifics relating to the design of the United States that would complicate things:
There is some precedent that software code is protected as free speech under the first amendment. Further, Bitcoin’s blockchain network has actually in the past (and can in the future) etched political statements into its blocks. This furthers the likelihood of first amendment protection
Another protection Bitcoin has lies in the fact that is currently considered property in the U.S. There certainly would be legal challenges with the government trying to seize the private property of millions of its citizens
The individual States are sovereign; if states see something as against the constitution they have the ability to nullify that action (like Colorado did with marijuana); any pro-Bitcoin state has some tools at its disposal to resist an anti-Bitcoin federal government
Bitcoin-friendly legislation already represents a large single-issue voting topic; with its growing userbase and growing prominence in American and global commerce, this should only grow over time; I’d expect more and more politicians to leverage Bitcoin-friendly rhetoric to attract votes from a disproportionately young voter base
“The act of banning bitcoin would require preventing open source software code from being run and preventing digital signatures (created by cryptographic keys) from being broadcast on the internet. And it would have to be coordinated across numerous jurisdictions, except there is no way to know where the keys actually reside or to prevent more nodes from popping up in different jurisdictions. Setting aside the constitutional issues, it would be technically infeasible to enforce a ban of bitcoin in any meaningful way.” — Parker Lewis
My Take: Governments Should Embrace Bitcoin
The statement “governments should embrace Bitcoin” assumes that the government's primary motives align with the best interests of its citizens. We all know that often isn’t the case. Adopting Bitcoin as legal tender would effectively be ceding control of monetary policy. If control is the only thing the government wants, it likely will do whatever it can to either ban or at least heavily regulate Bitcoin. But what is the opportunity cost of being anti-Bitcoin?
Places like Miami, Wyoming, and El Salvador are embracing Bitcoin as a way to attract talent, investment, and innovation. Cities and states — as well as countries — are in constant competition for capital (both monetary and human). Bitcoin-friendly legislation doesn’t need to be anything more than a power grab.
What if politicians took the below stance in response to an opponent calling for a Bitcoin ban
As of 2019, there were 2,185,008 incarcerated people in the U.S. At an average of $60,000/year, that is over $131 billion dollars per year spent on housing criminals8. Do we really want our tax dollars going towards housing more non-violent criminals? If owning Bitcoin was a crime, it would certainly be a victimless one. Money spent persecuting Bitcoin users could be used to go after dangerous criminals, providing schools sufficient funding, or any number of different uses that would actually benefit society.
“It costs $60,000 a year to house a criminal. If you’d put $60,000 into Bitcoin 6 years ago, I mean look at the opportunity cost . . . There’s opportunity cost to putting people in a cage, you could fund schools.” — Trace Mayer
That sounds like part of a future political platform to me.
And that wraps up the discussion around banning Bitcoin. Thanks so much for tuning in. This is a really complex topic, but it’s incredibly important to understand. The bans referenced earlier in this article certainly won’t be the last. As Bitcoin grows, more and more politicians are likely to try and attack it via strict regulation. Luckily, Bitcoin is resilient.
Remember to subscribe if you don't want to miss out on future newsletters. You can check out the Why We Bitcoin archive for previous posts and follow me on Twitter for more takes on all things Bitcoin.
Continue to scroll down if you’re interested in content that has helped me learn about this topic and for a brief preview of future topics.
3 Things to Read:
Unchained Capital: Bitcoin Cannot Be Banned by Parker Lewis
Bitcoin Magazine: Why You Shouldn’t Be Worries About A Bitcoin Ban by Rob Price
HashrateIndex: China Banned Bitcoin Mining—What Happens Now? by Colin Harper
3 Things to Listen to:
Bitcoin Audible: Can Governments Stop Bitcoin? [Alex Gladstein]
Stephan Livera Podcast: Safidean Ammous - How governments could kill Bitcoin and Bitcoin scenarios
Over the next couple of weeks, I’m going to tackle multiple misconceptions per newsletter and keep it fairly surface-level for each. Admittedly, I’m still getting up to speed on some of the technical aspects of Bitcoin and the remaining topics in my ‘misconceptions series’ could go far beyond my technical knowledge. Still, addressing the misconceptions that Bitcoin is too slow or is not secure are topics I’d be remiss not to cover.
Gold price data source: https://nma.org/wp-content/uploads/2016/09/historic_gold_prices_1833_pres.pdf
Bitcoin users source: https://www.buybitcoinworldwide.com/how-many-bitcoin-users/
Transaction value measured in $USD; source: https://www.blockchain.com/charts/estimated-transaction-volume-usd
U.S. prisoners source: www.sentencingproject.org