States vs Bitcoin : Clash of the Titans
First published in the newsletter 21 Millions on 30 December 2020.
Suppose bitcoin hits $ 200,000 in 2025, other safe havens grow but much less than it does, and there is no major consumer price inflation. How will states react? Many scenarios are of course possible but let us retain three of them, deliberately simplified and exaggerated for emphasis.
First scenario: “Total war”
States identify Bitcoin as an unacceptable existential threat and launch a general offensive against it.
Between 2021 and 2025, confidence in state currencies has collapsed as a result of hyper-expansionary monetary policies conducted in response to the covid crisis. The welfare states fear that they will no longer be able to finance their abysmal deficits by borrowing in fiat currencies. The monopoly on monetary issuance delegated to commercial banks, which they patiently developed and consolidated over centuries, and which took a major step forward in 1971 with the decorrelation of the dollar and gold, risks becoming insufficient to ensure their economic survival. Monetary policy could become totally inoperative. Encouraged by the banking sector and central banks which are undergoing the greatest disruption in their history, States consider that all means are legitimate to stop Bitcoin.
They launch a massive media campaign against its sins (terrorism, money laundering, pollution, etc.). Confident, they remember their success against XRP, wiped off the map within weeks. Bitcoin holders are now required to report their holdings and deposit them in banks. They are subject to confiscatory taxation not only on their capital gains but also on their crypto-assets. Draconian KYC/AML standards are imposed on all players in the crypto-economy, including miners. In some countries, mining, holding and trading are prohibited outright. Sometimes it is even forbidden to say the word “Bitcoin”. Identified fraudsters are subjected to cruel and edifying penalties.
“Central bank digital currencies” (CBDC) are being established everywhere, with notable advantages for the public authorities: better monitoring of privacy, automating taxation, abolishing cash, imposing an universal income, automating taxation, systematizing negative interest rates, artificially deflate the currency more melting and intensifying monetary stimulus.
The price of bitcoin is collapsing. If, unlike other cryptocurrencies, it does not reach zero, many think the game is over. Most of the companies in the sector go bankrupt. Much of the ecosystem falls into the black market. The mining industry relocates and rebuilds itself. A minority of toxic maximalists persist in buying bitcoin to support its price. The network continues to operate underground. State hostility is giving bitcoin the biggest free advertising campaign of all time. Very gradually, the Nakamoto token regains its function as a safe haven against monetary inflation and authoritarianism. Its price starts increasing again.
Governments are trying to coordinate to increase repression but are struggling to find the necessary unanimity. They plan to resort to another strategy: to return to sound monetary policies. They know this option would be more effective to stop Bitcoin but ultimately find it too painful for themselves: with sound money, they could no longer go into unlimited debt, and the necessary reforms are politically unthinkable.
Second scenario: “Adoption”
States believe they have more to gain by embracing Bitcoin than by opposing it.
They see that its protocol is open source, that transactions consist of messages publishable in any form, and that the mining industry is mobile. Democratic countries conclude that serious opposition to Bitcoin would require adopting a totalitarian regime. They are reluctant to take this step because their populations would be opposed to it : they no longer support the authoritarian abuses triggered by the covid crisis.
The crypto-industry, of which Bitcoin is the keystone, now represents several million jobs worldwide. About a billion people hold bitcoins, many of them in developing countries to protect their savings from inflation, corruption and political arbitrariness. The multiple large corporations, banks, hedge funds and pension funds that put billions of dollars into bitcoin between 2021 and 2025 are lobbying effectively for Bitcoin. For them, the latter is a new layer of the Internet on which immense economic activity is taking place. Finally, many politicians have acquired bitcoins and have no intention of giving up their earnings.
States therefore decide to facilitate, through regulatory and fiscal measures, the use of bitcoins in all spheres of the economy. Their goal even becomes to acquire as many as possible: they allow bitcoin tax payments, engage in mining, sell some of their assets for bitcoin, and encourage their central banks to hold bitcoin reserves. The first to adopt Bitcoin are small innovative countries. The next ones give in to FOMO and try to outbid each other in hyperbitcoinization. The US sees Bitcoin as its last hope of countering China’s monetary ambitions. The latter holds the same reasoning against Uncle Sam.
Fiat currencies are becoming unnecessary and are gradually going extinct. Stable coins, including Facebook’s (which has changed names four times in the meantime), suffer the same fate. Attempts by some central banks to issue CBDCs fail amidst widespread indifference. The Lightning Network brings Bitcoin to scale. The user experience progresses strongly. Smart contracts are generalized thanks to the RSK platform and the RGB protocol.
Globally, the adoption of bitcoin by governments fuels a meteoric rise in its price, which reaches unprecedented levels before stabilizing. Central banks are transformed into coworking centers for crypto-startupers. In Africa, the sunstitution of 40 national currencies by bitcoin favors unprecedented trade integration and economic development. All over the world, financialization, the over-indebted economy, overconsumption and overexploitation of natural resources disappear. Capitalism is profoundly transformed.
Third scenario: “Chaos”
This scenario borrows some components from each of the previous two. Various public authorities (states, regions, cities, etc.) are open to Bitcoin; others are doing everything to slow its progress.
Geopolitically, some states are finding, with Bitcoin, the opportunity to free themselves from the “exorbitant dollar privilege” that has remained alive despite the collapse of the Bretton Woods system. But the United States is mobilizing its immense military and political power to counter this trend.
States are experimenting with various options. They observe the practices of their neighbors, suddenly change their policies, form coalitions, etc. Internally, heated debates make it increasingly difficult for them to build lasting strategies. Many play it by ear, unable to take a clear position, torn between irreconcilable interests. Cunning politicians seduce the candid with proactive announcements and then make contradictory and incomprehensible decisions.
The situation is increasingly messy and unpredictable. Depending on their choices in favor or against Bitcoin, certain public and private actors reap immense economic and political gains; others suffer resounding disasters. Bitcoin holders, entrepreneurs and investors flee hostile countries in massive numbers and seek greener pastures. The price of bitcoin is battered by public policy reversals. Its volatility increases, to the delight of traders. This unstable equilibrium scenario becomes more and more extreme, erratic and violent.
Conclusion
Today, the third scenario seems to be taking hold for now. States can’t afford to let Bitcoin thrive … but they also can’t stop it. Responses to this aporia will vary. If Bitcoin is truly antifragile in Taleb’s sense, it will benefit from adversity to strengthen itself. How long will this unstable equilibrium last? It may gradually resolve itself into one of the other two scenarios (total war or adoption).
