Bitcoin is unique in that it is far more decentralized than the majority of web services we employ today. But is Bitcoin immune to government regulation? Bitcoin was designed to be a highly secure and decentralized system, but it is vital to remember that its most fundamental components are people, who are inherently unreliable and unpredictable.
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When people are asked whether the Bitcoin network can be regulated or not, they usually respond in a binary manner. On the one hand, some argue that anything can be governed. Others, on the other hand, believe that Bitcoin has irrevocably divorced money from the state. This essay aims to provide a better understanding of what Bitcoin regulation entails and what instruments authorities might use to curb its adoption.
For the purposes of this article, regulation refers to state-mandated legal restrictions. Laws, however, are not the only factors that shape society. Professor Lawrence Lessig proposes three further constraints that govern an individual’s conduct in what is known as the “pathetic dot theory.”
- The pricing and cost-opportunity devices are used by markets to control.
- Social norms are a complex set of behavior rules that are broadly recognized within a group (like tipping a server in a restaurant).
- Human behavior is hampered by geographical, technical, and biological constraints (like laws of physics preventing us from levitating or a web app preventing us from accessing an online service).
Each factor has the ability to influence the others, whether they do so consciously or unconsciously. Laws can limit deforestation (architecture), social norms can shape markets, and weather (architecture) can influence agricultural production and food prices.
When a law can not clearly target individuals, legislators turn to other forces to govern. This occurs when the government raises cigarette prices (market), forbids the use of certain terms on television to influence citizens’ behavior (social norms), or constructs concrete walls to establish pedestrian zones (architecture).
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Can legislation, on the other hand, always have an impact on architecture? Is it possible to make a virus vanish by legislation? Highly contagious viruses cannot be eradicated in today’s society because to a mix of biological (architecture), financial (market), and anti-restriction factors (social norms).
Bitcoin, like a virus, spreads worldwide (mutating as needed) and is dependent on the correct market incentives or socio-political momentum. Lawmakers can not stop Bitcoin from running or a virus from spreading, but they can employ legal limits to reduce the probability of certain negative outcomes.
Direct Enforcement Through Users
Bitcoin can be used as long as one has a phone and an internet connection. As a result, the effectiveness of direct enforcement is determined by the jurisdiction in which it occurs. In fact, Bitcoin acceptance may be limited in the short term only by a disproportionate restriction of individual liberty (underground peer-to-peer markets will probably emerge in the long run).
Furthermore, when money is involved, people are more willing to break the law. As a result, there have been numerous cases in the last decade in which software engineers, political activists, and criminals have utilized more or less sophisticated tactics to avoid official inspection of their bitcoin.
Enforcement Through Architecture
Though John Perry Barlow’s “Declaration of Cyberspace Independence” is still pertinent to certain people’s lives today, governments still have some power over the internet architecture. In fact, data flowing through devices passes through centralized bottlenecks that allow governments to shut down websites, identify anonymous individuals, and regulate online traffic.
Bitcoin is unique in that it is far more decentralized than the majority of web services we employ today. Changing the blockchain would be a Herculean undertaking for any authority, thanks to a powerful network of nodes and mining machines.
Bitcoin, on the other hand, relies on the internet infrastructure for node communication. This, in theory, allows legislators a regulatory point of entry into the technical infrastructure. Because Bitcoin transactions are not encrypted, internet service providers may apply unique techniques to identify them and decide whether or not to process them. Even if the most stringent security measures are implemented, experienced users will always be able to broadcast transactions to the network (including last resort options such as SMS and Morse code).
Another option is to focus on core developers. For at least two reasons, this is a horrible idea. First, if they were threatened, recognizable developers may simply vanish and continue their work under the radar. Second, because the Bitcoin community is based on broad consensus, even the most powerful developers would be unable to enact government-imposed changes.
Enforcement Through Market Incentives
Governments can provide strong market incentives to citizens in order to restrict Bitcoin adoption or preserve authority over money flows. The government of El Salvador, for example, offered $30 to every resident who installed the Chivo wallet, a custodial solution in which the government retains complete control over the cash.
Exchanges, liquidity providers, and other middlemen are the most common ways for governments to control Bitcoin right now. These new banks are able to provide enticing costs and attract the most unskilled users by complying with know your customer (KYC) and anti-money laundering (AML) laws. This has significant implications for the bitcoin supply’s fungibility and is likely one of the most serious threats to Bitcoin’s promise of individual self-sovereignty.
It is unclear if, when, or how governments will integrate central bank digital currencies (CBDCs) into their economies; yet, just as a government may encourage the use of its CBDC through economic incentives, it could also discourage bitcoin payments. Fees to access governmental services or municipal taxes, for example, may be lowered when paying with a government-issued digital currency, but bitcoin would be full price or even more costly. This is significant because, while CBDCs will have no effect on the network as a whole, they can stifle bitcoin adoption. Individuals have the freedom to choose whether or not to participate in a certain system, which is known as libertarian paternalism.
Enforcement Through Social Norms
It is indisputable that institutional skepticism influenced the public’s bad impression of Bitcoin. In fact, laws can try to influence public opinion in a number of ways. For example, prohibiting the use of Bitcoin-related terminology on television or organizing school programs focusing on the dangers of using bitcoin.
Policymakers might even take it a step further and push “bottom-up” efforts to change the Bitcoin code. A somewhat unusual coalition is attempting such a tactic, despite the fact that it is not supported by any public authority.
Bitcoin’s Main Vulnerability
Regulators ultimately realized that, just as no government believes it can totally eradicate a virus from its territory, the same holds true for the Bitcoin network, and their only option is to try to limit how it spreads. Governments will probably experiment with different combinations of the measures listed above to slow down the hyperbitcoinization process rather than risk their monetary power eroding.
Bitcoin was designed to be a highly secure and decentralized system, but it is vital to remember that its most fundamental components are people, who are inherently unreliable and unpredictable. Governments are not always ahead of the curve when it comes to technology, but they have a track record of successfully influencing human behavior.