I don’t think this is a case of incompetence. From the state’s point of view, a regulation of this kind isn’t a problem — it’s a solution.
The state isn’t aiming to have “regulatory clarity” (whatever that means), or to ensure consumer protection or to curb money laundering. The aim is to scare coders and businesses in the Bitcoin ecosystem into adopting bitcoin in an approved manner, via surveilled venues from which there won’t be any escape, and to siphon off the value that bitcoin will generate in the coming year, both from exchange-held IOU bitcoin and from sovereign bitcoiners.
Siphoning Off Bitcoin Value Gains
According to a recent survey conducted by NYDIG, about 46 million Americans, or 17% of the US adult population, “own” bitcoin; it’s unclear how many of these simply have an account on Coinbase instead of truly holding bitcoin, but let’s assume that at least half of them hold their own keys (a very optimistic assumption). This would mean that less than 10% of the U.S. adult population hold any bitcoin.
If we further assume that bitcoin is going to keep on winning against fiat as a supreme store of value, it’s only natural that the majority of the American population will look to gain some sort of exposure to bitcoin in the coming years. And the way that this precoiner majority gets exposure is what’s at stake today. The state still has the chance to drive the majority into compliant walled gardens. It’s kind of similar to legalizing cannabis via regulated dispensaries, where everything is done in a regulated, recorded and thoroughly taxed manner.
The truth is that the majority of the population will be satisfied with having some exposure to bitcoin’s price, without having anything to do with Bitcoin the protocol. Most won’t even mind very much when the withdrawal process is greatly limited or disabled “for user safety.” The small minority of cypherpunk bitcoiners will be subject to prosecution, because they will always be in violation of the law — by running their node or mining without following the technically infeasible KYC requirements, or by developing or using an anonymous open source wallet.
Thus the state can siphon off most of the value that bitcoin will generate in the coming years.
Once the majority is captured in compliant walled gardens and the minority can be prosecuted at will, it’s pretty straightforward:
Bitcoin on exchanges will be subject to an annual unrealized capital gains tax. This may sound outrageous now, but there are ways to propagandize this into acceptance. We are currently heading into the greatest economic recession since the Great Depression. Everyone will be asked to do “their share” — and taxing half of the annual gain (in fiat terms) won’t be viewed as such a great sacrifice. The tax would be automatically deducted from the user’s account balance.
Bitcoin held by sovereign hodlers would be subject to civil asset forfeiture — a process already widely used in the war on drugs and cheered on by good citizens. Everyone can choose to follow the law, after all.
The End Game Is To Own As Much Bitcoin As Possible
It’s fully plausible that people in the government understand the end game that hodlers play. Some might even be well-versed in the writings of Saifedean Ammous, Vijay Boyapati or Robert Breedlove. They know they have to do something, while also knowing that banning bitcoin is a fool’s errand. Embracing bitcoin in a compliant manner and scaring away people from a sovereign approach is the one shot the state has at surviving hyperbitcoinization.
The winning scenario for the state isn’t to ban bitcoin, but rather confiscating as much of it as possible and controlling the flow of the remainder. This doesn’t mean that all nation-states will do this; some will rather seek to attract Bitcoiners fleeing from those predatory regimes. It’s important to stay vigilant, hold your own keys, care about your privacy and be open to a scenario where relocation may be necessary in future.
This is a guest post by Josef Tětek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.