Why governments are afraid of Bitcoin, and what they can do about it
One of the most used, and most powerful, tools that governments deploy to influence the economy is the supply of money. There are additional complexities such as the independence of reserve banks, the managing of reserve ratios, and the setting of interest rates instead of straight money printing, but let’s not nit-pick.
Governments want to influence the economy because they benefit politically when it’s seen as “healthy” (GDP growth is often mistaken as a 1:1 translation to healthy, which is a limited metric to describe such a complex system).
By borrowing newly created money in order to have more fiscal stimulus, governments create a future debt which needs to be paid. Luckily for them, they are able to benefit from the devaluation of the currency that the debt is denominated in. Unlucky for those of us who would like to hold that currency as a store of value. Even an interest-bearing account cannot protect you from this devaluation of your savings, plus you take on the added risk that the bank may one day default.
When I say that governments are afraid of Bitcoin, I specifically mean Bitcoin, and not blockchain. Many governments, and banks, are embracing blockchain technology in order to make small advances in improving operational efficiency. Some governments are even planning to launch their own cryptocurrency, to make electronic transactions easier (and importantly for them, more traceable i.e. taxable). But, let’s be clear: if that currency is not decentralised (meaning government doesn’t have total control over it technically and legally) and is not mathematically limited in supply, then it will just be a mere technological improvement over fiat. Governments will still be able to make more of it, and it will still be backed by debt — i.e. it will have the same inflation and default risks as fiat.
Bitcoin represents the first time that any human with access to the internet is able to store their wealth in a secure way that cannot be tampered with by any third party (critically, their own government). They will be able to own something that is valued by millions of other people (someday, billions), in every part of the world. As more people begin to do this, the Bitcoin network grows, and the total amount of Bitcoin starts to increasingly reflect the total amount of wealth in the world. The repercussions for governments’ ability to influence the economy are, in the parlance of Donald Trump, very bad:
- How do you encourage spending, and stimulate the economy, with a deflationary currency?
- How do you control capital flows for an asset that exists everywhere and anywhere?
- What if one day when you want to borrow, the currency you borrow in is deflationary (i.e. the amount you’ve borrowed increases by more than just interest)?
Governments may embrace blockchain technology, but many (who do not respect the financial freedom of their citizens) will eventually fight against Bitcoin as it begins to threaten their influence. Unfortunately for them, it’s a fight they won’t win. One day, Bitcoin will be responsible for changing how governments attempt to manage an economy, and may even change the way our economies work by fundamentally shifting behaviour from spending toward saving (sorry, Keynesians). Governments should mitigate the future difficulty of trying to work against this change:
- Hedge the value of your current assets and begin to hold Bitcoin on the state balance sheet.
- De-leverage public debt, and begin to protect the value of your currency — you may delay the change long enough to enjoy the status quo a while more.
