A consistent thread about bitcoin has been that if it succeeds, it will inevitably invite government legislation and regulation to shut it down. This has been a backhanded critique of sorts advanced by investors like Ray Dalio who are “on bitcoin’s side”, but worry about its success attracting the attention of the state powers that be.
This isn’t an altogether surprising or irrational fear. We live centuries after the establishment of the nation-state as all-powerful welfare state, military, and taxation hub. It’s clear that state powers are often only reined in by “political” constraints (rather than physical or technical ones). Could governments shut down bitcoin if they wanted to?
This is probably a lot harder than one might think. Bitcoin is somewhat resilient to government crackdowns because of its origin, and the way the network is built. While states, if focused enough, could probably inflict some damage to bitcoin if it was a central state objective across the board, there are many factors for why a “government crackdown” on bitcoin is overrated for destroying the network.
1- It requires large-scale coordination among many different multilateral bodies and states
Since bitcoin is internationalized, it would require consent and coordination among almost every nation-state in order to effectively crack down on bitcoin. While the major world powers (such as the United States and China) have a bloc-like effect, and whereas there has been more coordination (often US-led) on issues such as climate change and corporate tax rates, when you look at issues as diverse as COVID-19 and the tit-for-tats of “strategic rivals” and Olympic boycotts — it is still difficult to see countries focusing on bitcoin in unison.
Large-scale coordination would be required to shut down the network in any meaningful way: otherwise, people could transact and support the bitcoin network in other nations or even in space. A slow nation-by-nation ban can affect the network: at an extreme, an unlikely state-led ban in the United States might choke off bitcoin from American-led financial systems and markets with near-total global reach. Yet, so long as bitcoin was trans-actable across other states, a “global ban” could not be accomplished nor a “government crackdown”.
2- There is no central node that states can really pressure
One of the most unique points about bitcoin is that there is no central leader figure to pin down. Satoshi’s disappearance, and Hal Finney’s untimely death, have led to a situation where there isn’t a “company CEO” or some other central leader to go after. While there are pressure points nation-states can use to pursue their objectives (for example, physical concentration of miners, key technical contributors still constrained by borders), there isn’t a central one, but rather a set of diffused ones. We saw this when the Chinese state banned bitcoin mining in its territory: did that spell the end of bitcoin? No: miners simply shifted their equipment elsewhere, and within a few months, hash rate was as high if not higher than what it was before.
States are not used to dealing with organizations like this: they are used to dealing with multinational corporations to a certain extent, but there are usually a set of central pressure points and leadership that a state can lean on to get that corporation to adhere to certain rules and regulations. That, due to bitcoin’s unique creation story, is very unlikely to happen with any attacks on the bitcoin network.
3- Code is speech
In the United States, code is regarded as “protected” speech — software source code which powers bitcoin is protected by the First Amendment. In order to attack the distribution of code that powers bitcoin, countries like the United States would have to fundamentally change themselves and subvert long-held covenants of limited powers and the rule of law. This is not impossible (bitcoin, over a decades and even centuries long time horizon is a bet that (some) technical constraints are better than purely political ones for maintaining rule of law) but would be very out of character, and probably politically untenable.
4- States can be induced by bitcoin for commercial and other reasons
The Internet may never have been encrypted at all — export controls were initially placed on encryption, and commercial uses were seen skeptically. However, states partially relented when the commercial possibility of the Internet became clear. Now encryption powers communications as well as online banking and e-commerce sales. This is not something states like: the Five Eyes and allied countries want to subvert end-to-end encryption and authoritarian states like the Chinese state either have backdoors or other mechanisms to promote social control. Yet it shows that, when faced with something that might threaten national security, the need for states to show GDP outcomes and to deliver wealth to their peoples might override their preferences in other areas.
As more and more countries adapt bitcoin in some fashion, this pressure will become larger until perhaps one day, we might see a bitcoin-friendly bloc of nations emerge similar to the Cairns Group for agriculture. Some will find that their domestic power-generation is more efficiently parsed through open-source bitcoin rather than supporting the fractional reserves of other countries. The more states are turned over to supporting the bitcoin network, the harder it will be for other states to attack it.
5- Bitcoin’s threat model has long included state-level powers
The way bitcoin is implemented makes it (more) prohibitive for any centralized collection of computers to disrupt the system.
With more than 170,000 PH/s of hash rate securing the system (as of the date of writing) from a coordinated 51% attack (where an attacker could take over the system and propogate invalid spends in order to down the system for legitimate users, or to benefit monetarily from it), a projected security budget of around $45-60mn a day, and enough stakeholders (from investors, code contributors, analytics firms, miners and businesses — and now governments — that accept bitcoin) who have placed their financial livelihoods on monitoring the chain such that bitcoin could be secure beyond its fundamental dynamics — bitcoin is large enough to warrant significant resources for any attack, resources that wouldn’t be available for just any nation-state, and which would have to be continually deployed in a way that would make it hard to obscure who the attacker was.
We live in a heady time where “magic Internet money” has suddenly become the concern of Clausewitz readers around the world. As bitcoin grows more prominent, the possibility that it attracts state powers to disrupt or fully coopt it grows — yet those who play some part in the network, either from investing, transacting or supporting its infrastructure, can rest assured that the system has some inherent properties that make it more resilient than you might expect to even the strongest of attacks.