What Should the Relationship Between Bitcoin and the Government Be?
This article is a reprint of "What Should the Relationship Between Bitcoin and the Government Be?" which was contributed to the Libertarian Association's official journal, "Libertarian" (Vol. 12, September 2024).
The text follows below.
Author: K.S.
Bitcoin (BTC) has become a major issue in the lead-up to the 2024 US presidential election. Republican candidate Donald Trump expressed his support for Bitcoin in February 2024, and after taking the stage at the Bitcoin Conference in July, he proposed adding Bitcoin to the strategic reserve, marking Bitcoin's entry into a dimension of active government involvement that is different from anything seen before. Although the Democratic Biden administration initially appeared poised to strengthen regulations on crypto assets, including Bitcoin, it has begun to be questioned on its stance toward crypto assets following Trump's offensive. The approval of the Ethereum ETF in July, which was considered far from being authorized, should also be seen as a sign of the Democratic administration's changing attitude toward crypto assets.
The market has fostered an optimistic mood toward Bitcoin, fueled by views of a Trump advantage such as "if Trump" or "almost Trump," and the Bitcoin price fluctuates as it reacts to the remarks of presidential candidates. On the other hand, Arthur Hayes (2024) [1], founder of the crypto asset exchange BitMEX, points out that the Trump camp's expression of support for Bitcoin is merely an election strategy and that there is a possibility that he will change his attitude after being elected. Of course, it has not been decided that the next president will be Mr. Trump, and the possibility of Democratic candidate Kamala Harris, who is seen as more left-leaning than Mr. Biden, being elected is also increasing. In that case, her policy toward crypto assets would surely be quite different from that of Mr. Trump.
In any case, as the 2024 US presidential election approaches, we have reached a stage where we must seriously consider the question: What should the relationship between Bitcoin and the government be? The school of thought that has most seriously addressed such questions is undoubtedly Austrian economics. Therefore, in this article, I would like to consider the question of what the relationship between Bitcoin and the government should be, based on the philosophical background that supports Bitcoin from the perspective of Austrian economics.
First, in my opinion, the reasons why Austrian economics supports Bitcoin can be organized into the following three points: 1. Bitcoin operates in a free market. 2. There is a set limit on the number of Bitcoins issued. 3. The risk from arbitrary intermediaries in Bitcoin is small. Let's look at these one by one.
1. Bitcoin operates in a free market. The mechanism supporting Bitcoin is extremely free-market oriented. First, miners who produce Bitcoin participate in fierce competition, investing computational resources in search of answers to advanced cryptographic problems. Furthermore, users of the Bitcoin network add fees for transactions (remittances, payments), and when the network is congested, setting a high fee gives miners an incentive to prioritize recording that transaction in a block. Also, looking outside the network, Bitcoin can be exchanged for legal tender and other assets at manned and unmanned exchanges (CEX, DEX) that operate 24 hours a day, 365 days a year. Since crypto assets can be bought and sold even when the stock market is closed, there was a scene in April 2024 where crypto assets were sold off preferentially for risk-off purposes when tensions between Israel and Iran rose. In this way, Bitcoin and its surrounding environment are extremely compatible with the free market. On the other hand, Austrian economics has a school of thought that highly values the free market. In contrast to Keynesianism, which actively affirms government intervention in the market during recessions, Austrian economics values the autonomy of the market and points out that government intervention in the market only distorts market mechanisms, hinders the proper allocation of resources, and results in deeper and more prolonged recessions. As seen in the socialist economic calculation debate started by Mises and Hayek's critique of constructivism, it is also critical of socialist systems that do not allow price mechanisms to work and where a few elites can design systems omnipotently in advance, that is, systems that do not trust the free market. Therefore, it is no wonder that Austrian economics, which actively defends the free market, supports Bitcoin, which adopts a free-market mechanism.
2. There is a set limit on the number of Bitcoins issued. Satoshi Nakamoto, who "designed" Bitcoin, set the total supply of Bitcoin, that is, the upper limit of the number of coins issued, at 21 million. As of July 2024, more than 90% of that has already been issued, and it is expected that issuance will end around the year 2140 if it continues at the current pace. I put "designed" in brackets because I was concerned about the reader's misunderstanding that Bitcoin itself might fall under the scope of Hayek's critique of constructivism mentioned above, but that critique does not apply. This will be a bit long, but let's discuss this point first.
First, those who have not agreed to the Bitcoin protocol (rules) do not need to use the Bitcoin network. No one is forced to use Bitcoin. This point is decisively different from legal tender such as the dollar or yen, which the state forces citizens to use for payments and tax payments. Furthermore, if the specifications of Bitcoin do not meet your approval, you can hard fork Bitcoin and create your own blockchain. Bitcoin Cash (BCH), created in 2017, is a prime example. However, whether the new chain or system you create will be accepted by people is an entirely different matter. Hayek proposed the concept of spontaneous order. According to Masaki Nakamasa (2011) [2], spontaneous order is "an order that has emerged as a consequence of the evolution of 'rules' that has progressed over many years." In other words, it is not completely artificial or completely natural; it refers to systems, customs, traditions, etc., that are products of human beings but are not necessarily consciously adopted by them. A free market where people gather and form without anyone deciding the location is the prime example. Although Bitcoin was initially the product of a person named Satoshi Nakamoto, it can be said to be a spontaneous order that has been developed by many people over nearly 15 years and whose ecosystem has evolved. However, it cannot be said that the current form of Bitcoin will continue forever. It must change along with Bitcoin and the "evolution of rules" that support it. In any case, Bitcoin is not a model of constructivism; on the contrary, it can even be considered to be extremely consistent with Hayek's concept of spontaneous order.
Now, returning to the main subject, I would like to consider what the fact that there is a set limit on the number of Bitcoins issued means for Austrian economics. Austrian economics values the autonomy of the market. It is also a position that opposes government intervention in the market. In modern times, it has become the norm for governments to issue government bonds for fiscal spending, for central banks to underwrite those bonds, and for the money supply to be increased. Such an increase in currency is nothing more than an arbitrary intervention in the market by the government and central bank, and it significantly undermines the stability of currency value. On the other hand, under the gold standard, the central bank is obligated to exchange the convertible banknotes it issues for gold. To prevent the outflow of gold from its own country, the government is forced to operate disciplined fiscal policy. Therefore, while currency value is stabilized, arbitrary intervention in the market by the government and central bank is suppressed, and the autonomy of the market is maintained. With this background, Austrian economics actively affirms the gold standard.
The feature of Bitcoin that there is a set limit on the number of coins issued is reminiscent of the gold standard, where the amount of currency issued is constrained by the amount of physical gold. Saifadean Ammous (2018) [3] introduced the concept of the "Bitcoin Standard" and actively defended Bitcoin from the standpoint of Austrian economics. The reason why Bitcoin, which has a set limit on the number of coins issued and cannot be controlled by the government, is supported by Austrian economics is precisely because it is thought that Bitcoin contributes significantly to guaranteeing the autonomy of the market. Historically, the gold standard headed toward collapse starting with European countries participating in World War I abandoning the gold standard to finance war expenses through the issuance of government bonds. After the war, inflation progressed, and because it became difficult to return to the gold standard at the parity level before the departure, countries abandoned the gold standard and shifted to the managed currency system that exists today. This provides important implications for thinking about the relationship between Bitcoin and the government. I will examine this point in detail later.
3. The risk from arbitrary intermediaries in Bitcoin is small. In many modern payments, there are intermediaries. For example, banks, credit card companies, and payment service providers. These intermediaries mediate payments from one person to another, but as a result, the authority of intermediaries in payments is increasing. The intervention of credit card companies in the purchase of sexual content and the setting of travel rules by crypto asset exchanges in the name of anti-money laundering measures are likely manifestations of this. In a system where the authority of intermediaries in payments is great, there is a possibility that intended payments cannot be made smoothly due to the arbitrary judgment of the intermediaries. In a system where there are no intermediaries in payments, such as cash (coins, banknotes), such intermediary risk can be eliminated. In Bitcoin, the roles of intermediaries are played by miners who approve user transactions and are responsible for recording them in blocks, and nodes that verify the blocks recorded by miners. Miners participate in fierce competition to earn mining rewards, and because they need to earn mining rewards without losing to other miners, it is difficult for incentives to work in a direction contrary to the intentions of users making transactions. Also, there are many miners and nodes with low barriers to entry, and they are geographically dispersed, so the risk of a single point of failure is small. From these points, it can be evaluated that the risk from arbitrary intermediaries in Bitcoin is small. How does Austrian economics think about this point? To repeat, Austrian economics trusts the autonomy, efficiency, and transparency of the free market and welcomes an environment with little centralized regulation or interference. This is because such an environment promotes entrepreneurship and innovation. As mentioned earlier, while many modern payment services are strengthening regulation by intermediaries, Bitcoin as a mechanism is unlikely to be subject to payment restrictions by arbitrary intermediaries. It can be said that it exactly matches the nature of money that Austrian economics seeks.
Well, so far I have looked at the philosophical background that supports Bitcoin from the perspective of Austrian economics, divided into three reasons. Namely, 1. Bitcoin operates in a free market. 2. There is a set limit on the number of Bitcoins issued. 3. The risk from arbitrary intermediaries in Bitcoin is small. Therefore, when thinking about the ideal relationship between Bitcoin and the government, based on the position of Austrian economics, it is primarily important that the elements indicated in these reasons are maintained and not undermined. Following reason 1, it is important that the government does not intervene in the free ecosystem consisting of miners, nodes, remitters, developers, etc., and that it relaxes regulations on markets for buying and selling Bitcoin and crypto asset exchanges, and removes taxes on buying and selling. Looking back at the history of the prohibition of gold ownership by US citizens under Executive Order 6102 in 1933, the possibility that Bitcoin ownership will be prohibited in the future cannot be denied. Such arbitrary government intervention in the market should be firmly opposed. Following reason 2, it is a threat for the government to put pressure on the Bitcoin ecosystem and force changes to autonomously set rules, such as changing the upper limit on the number of coins issued. Even if the "best" chain in some sense survives through market forces in the long run, such government attempts in the short run will only result in unnecessary market disruption. Following reason 3, the government's introduction of a notification or licensing system for the operation of miners and nodes would enable government censorship and increase the risk from arbitrary intermediaries by making only those who follow the government's will the intermediaries of the Bitcoin network. It is predicted that the amount of electricity consumed for mining will increase more and more in the future, but there is a high probability that the government will advertise that mining is a challenge to "stable power supply" and, by extension, "national security," regardless of the facts, and move toward such regulations. Such regulations should be firmly opposed.
The arguments naturally derived from reasons 1 to 3 are as stated above, but finally, I would like to examine some policies that the government may actually implement depending on future developments. In this article, I will take up the following three issues.
a. What about government ownership and strategic preparation of Bitcoin?
b. What about making Bitcoin legal tender?
c. What should a Bitcoin Standard, that is, a Bitcoin-based society, be like?
a. What about government ownership and strategic preparation of Bitcoin?
US presidential candidate Donald Trump advocated for government ownership and strategic preparation of Bitcoin at the Bitcoin Conference where he took the stage in July 2024. This is to promote mining as an industry and "make America great again." Such pledges by Mr. Trump are positive from the perspective of further popularization of Bitcoin, but negative from the perspective of government intervention in the Bitcoin market. If the Bitcoin once purchased is sold in the future, it will exert great selling pressure on the market. In the long run, it may hinder healthy market growth. On the other hand, Mr. Trump claims to protect property rights, privacy, economic freedom, freedom of speech, the right to self-custody, and the freedom to mine. If government involvement in Bitcoin strengthens, it is natural and essential that these rights and freedoms be guaranteed. However, there is no guarantee that these rights and freedoms will be maintained by the government in the future. If an administration that does not understand Bitcoin and rights and freedoms appears, they will be destroyed very easily. In conclusion, while taking a friendly stance toward Bitcoin in the form of ownership and strategic preparation by the government may be defensible with the guarantee of rights and freedoms as a minimum necessary condition, it is considered that, in principle, leaving Bitcoin to an arbitrary and fickle government is likely to have a negative effect.
b. What about making Bitcoin legal tender?
Countries known to have already made Bitcoin legal tender include El Salvador and the Central African Republic. In both countries, Bitcoin is added to other currencies such as the US dollar, which are already established as legal tender. Making Bitcoin legal tender is positive from the perspective of further popularization of Bitcoin. On the other hand, if we think about forcing citizens to use only Bitcoin as legal tender, for example, it means depriving citizens of the freedom to choose their currency freely. Bitcoin is preferred because, for example, its currency value is more stable than other legal tender, and for the government to impose a decision over the heads of such individual preferences will conversely make the market inefficient. Compared to individuals, the government's movements are slow, and if it is prohibited to switch to another currency when Bitcoin loses value, citizens will lose much of their property. And such arguments are thrown not only at Bitcoin but also at existing legal tender systems. If it is impossible to switch to another currency when the Japanese yen loses value, citizens will lose much of their property. In other words, the debate over whether or not to make Bitcoin legal tender will inevitably raise serious questions about the existence of existing legal tender systems. In the first place, the very idea of leaving the choice of currency to human reason rather than spontaneous order is a mistake. Therefore, if asked what about making Bitcoin legal tender, it can be said that it is acceptable as long as it contributes to the spread of Bitcoin, but it is far healthier to abolish the legal tender system in the first place and leave currency to spontaneous order.
c. What should a Bitcoin Standard, that is, a Bitcoin-based society, be like?
A gold-based society was an attempt to link a certain amount of gold to a currency unit and make gold the standard for economic calculation. Therefore, here I define a Bitcoin Standard, a Bitcoin-based society, as a society that uses a certain amount of Bitcoin as the standard for economic calculation. What is important here is the existence of "banks." Austrian economics actively affirms the gold standard, but the reason why the attempt at the gold standard failed about 100 years ago was ultimately the government power that had grown bloated due to war and the existence of a central bank that managed gold centrally. Because the central bank managed gold centrally, when the government stopped the exchange of convertible banknotes for gold, citizens had no means left to resist it and get their gold back. Therefore, when thinking about the coming Bitcoin Standard society, the following points are important. In other words, relying on something like a "bank" that deposits Bitcoin there and manages it centrally is highly likely to reproduce the failure of the gold standard. It may not be called a "bank" now. In any case, as the motto "Not your keys, not your coins" suggests, you should manage your private keys yourself. Gold had inconveniences in being physically divided and used, but Bitcoin can be divided down to 1 satoshi (10 to the power of -8 Bitcoin), and handling it is no different. A Bitcoin Standard society is a society established by individuals or sufficiently decentralized entities managing Bitcoin themselves.
References:
[1]https://cryptohayes.medium.com/hot-chick-429b97a72a41
[2]Masaki Nakamasa, "Learn from Hayek Now: Intellectual History as <Strategy>" (Shunju-sha, 2011)
[3]Saifadean Ammous, translated by Teruko Neriki, "The Bitcoin Standard: The Decentralized Alternative to Central Banking" (Minerva Shobo, 2021). The subtitle of the original book is "The Decentralized Alternative to Central Banking," and it expresses Bitcoin more directly as a substitute for the central banking system.
[4]Andrew M. Bailey, Bradley Rettler and Craig Warmke, “Resistance Money: A Philosophical Case for Bitcoin” (Routledge, 2024) (Not yet translated into Japanese)