Bitcoin also means the separation of state and money. What governments can do to control the impending “Bitcoin reform”. Scenarios of a Bitcoin future.
Governments have not had to cope with serious competition for the state currency monopoly for a long time. After US President Nixon officially closed the gold standard chapter in 1971, hopes of a hard currency were dashed. Since then, the state monopoly on money production seems to have been carved in stone. Bitcoin has become very popular in many aspects of life nowadays, from bitcoin games like bitcoin dice to bitcoin credit cards like this one.
Money monopoly benefits governments and harms savers
Now it is well known that monopolists profit from their position: In the case of the money monopoly, governments can generate so-called seigniorage. In short, this is the net profit from the money creation process. In concrete terms, central banks skim off interest on money lent – and freshly printed – when they lend it to commercial banks.
This is no secret so far. However, it is less common for the money creation process to take place at the expense of savers. After all, every printed euro increases the amount of money in circulation, and this is referred to as inflation.
For governments, which as a rule are close to the money tap of the central banks, this is a bearable evil. After all, inflation promotes a credit-financed economy and, in addition to taxes, debt is the No. 1 public financing measure. I had already written about the Cantillon effect in issue two of the column.
Accordingly, the idea of a return to an inflexible hard money system is likely to be unattractive to governments. Satoshi Nakamoto understood this and designed Bitcoin in such a way that the system would be optimized to resist state attacks. In other words, Bitcoin makes it possible – for the first time in history – to separate state and money.
Anyone who feels reminded of the Reformation here is not so wrong; Bitcoin OG Tuur Demeester recently dedicated an 18-page report to the “Bitcoin Reformation”.
Governments have not had to cope with serious competition for the state currency monopoly for a long time. After US President Nixon officially closed the gold standard chapter in 1971, hopes for a hard currency were dashed. Since then, the state monopoly on money production seems to have been carved in stone.
What do we do now?
Regulation in one way or another seems appropriate in view of the threat of the loss of the currency monopoly from the perspective of governments. Different jurisdictions take different paths. India, for example, has been threatening for some time with a bill that would make the possession of BTCs a punishable offence. The draft with the martial title “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019” leaves no doubt as to the Indian government’s repressive attitude towards Bitcoin & Co.
But if one can learn one thing from decades of failed drug policies, it is that goods to which people attribute value cannot simply be banned. The most likely outcome of a Bitcoin Ban: the establishment of a flourishing black market that functions without the regulatory supervision of the authorities.
Rational legislators know that. So the question is not how to ban Bitcoin, but how states can keep the regulatory upper hand.
Already today there are laws that favour the national currency. We are talking about legal tender laws, i.e. laws that prescribe the state currency as a so-called legal tender. In other words: In Germany, traders are obliged to accept the euro as a means of payment. Although they are free to accept gold, silver, Bitcoin, cigarettes or a handshake as means of payment when concluding a contract, they cannot refuse to accept the euro.
If merchants accept Bitcoin, for example, they face a completely different problem: tax disadvantages. Because: If the value of the euro rises to a comparison asset, such as gold or foreign exchange, there is no tax liability. Different with Bitcoin. Those who make real profits on trading with Bitcoin are liable to tax (apart from the one-year holding period).
The world is full of bad money
Laws thus offer a certain protection against the displacement of state currencies. As long as the quality of the money is good enough, one can assume that the laws are sufficient. But a look at South America shows what happens when currencies depreciate massively. In Venezuela, people resort to almost archaic means of payment: cigarettes.
- In Argentina, the US dollar is slowly but surely beginning to displace the national currency, the peso.
- Typically, the disadvantages of fiat money are most apparent where it is worst.
- Similar developments seem quite unlikely in Germany and Europe with an inflation rate of (officially) two percent. The money is good enough and the change seems too cumbersome.
What happens when Bitcoin catches fire?
But as soon as the reasons are felt to be sufficient, hyperbitcoinization no longer seems to be a fantasy in Western democracies either. In view of the growing dissatisfaction with the ECB’s extremely expansive monetary policy, a scenario of growing Bitcoin adaptation is also conceivable here in Germany. In other words, as soon as the opportunity costs of owning Bitcoin are small enough, the euro will have a problem, because then neither tax disadvantages nor regulations on legal means of payment will prevent the crypto currency no. 1 from spreading.
As authors such as Saifedean Ammous or Max Raskin of New York University show, BTC could serve as a kind of control mechanism for monetary policy in the run-up to such a scenario. It is well known that competition stimulates business. At least that would be a start.