One Hundred Sixty Reasons Governments Will Not Stop Bitcoin!
Among the many benefits to anyone getting involved with Bitcoin is the education they get about the current fiat money system. I can very quickly gauge the economic knowledge of a new Bitcoin conversant by their reaction to the reality that all of what most people consider as money today was created out of thin air. But even beyond that issue the reader needs to realize that in most jurisdictions money today exists mostly in digital form on computer hard drives, in their memory and in balance sheets and accounting programs. You have “money” only because a bank’s software says you do.
There are (not an exact count) 160 Central Banks1 in the world each creating their own currency in their respective nations. Included in that number are some groups of countries (Europe, Caribbean, African etc.) where a number of countries have banded together to create multi-national currencies such as the Euro. They all create different proportions of paper and digital currencies. Obviously it is more expensive and slower to create, distribute and use paper currency than digital currency.
The current “backed-by-nothing” digital money (that can be created on a whim by making a database entry) was not the original plan of the Central Bankers (at least I don’t believe so). Originally, the paper money we have were promises to pay and were each redeemable for lawful money2. Since they were redeemable for lawful money they could NOT, themselves, have been lawful money!3 But through acceptance and usage by the general public the paper notes became “as good as” money in the public eyes. Then, with the blessing of the masses, the Central Banks and the governments began the printing of “money” with only the slightest expectation of ever having to redeem them for lawful money. The final blow institutionalizing un-backed paper currency (in the U.S.) was when Richard Nixon, in 1971, “closed the gold window” (which ended foreign nations from redeeming their paper for gold4). It also led to the creation of the dollar backed by Middle East oil (called the “petro-dollar”).
That system (the Central bank, fiat money system) spread to most other countries and has evolved to one where 160 independent central banks can create as much “money” (which , again, is a combination of either paper and/or digital money) as they can basically get away with. It is a system where the worry by the central banks of “getting caught” means nothing more than price inflation within the borders of the offending central bank. That penalty is not uniform within their borders, however, and, as Nixon pointed out in his speech announcing the close of the gold window5, mostly affects imported goods (if you listen to his speech, notice that he is calling the Federal Reserve Note a “dollar”. It was the F.R.N. that was devalued and was in default). But with each of those 160 jurisdictions mentioned having varying proportions of paper fiat and digital fiat it also means jurisdictions with high percentages of digital money can inflate at much more rapid rates than those with high percentages of paper fiat. A big problem of the current global fiat system is that it does not spread inflation equally between the jurisdictions. Those with mostly digital money can inflate far more rapidly than those with mostly paper currency.
It is obvious that Bitcoin is causing those independent Central Banks to pause a bit and consider Bitcoin as a problem to be squashed. I believe Bitcoin will come to be seen as a new option to control inflation and capital flight that they did not have previously and, so, they will want to embrace it. In support of this idea, consider Bitcoin from the Central Banker’s perspective. To fully appreciate the options that Bitcoin presents to them, you have to fully embrace the reality that they have an unlimited ability to create money. If you don’t fully understand or refuse to accept the reality that the money they create comes from nothing then it won’t be possible for you to put yourself into their shoes.
Since there 160 central banks, there are 160 competitors that each operate differently. There all attempt to acquire and build reserves. Here in the U.S. for example, there is quite a lot of “smoke and mirrors” afforded the Federal Reserve System. They are a private corporation but have the appearance of being a government agency. They work closely (almost conjoined) with the U.S. Department of the Treasury. And neither the Federal Reserve nor the Exchange Stabilization Fund of the Treasury (provisioned to maintain the stability of “the dollar’) have ever had a meaningful audit. Yet, the U.S. Federal Reserve Note became the world’s reserve currency and those 160 central banks started saving F.R.N.s.
So here is the fictional scenario that any of those central Banks could each independently start to pursue: Suppose they just start buying Bitcoin with either their own fiat currencies or with the F.R.N? They would have no real need for “profits” (since they already have unlimited money creation abilities) and, instead, they would be each trying to build reserves of Bitcoin to have it as another “reserve currency”. While they can decide to add any resource they like to their balance sheet, I am supposing that sooner or later some (if not all) will start wanting to add Bitcoin to their balance sheets. And Bitcoin is, itself, designed to be “pseudo-anonymous” which means even institutions can secretly acquire Bitcoin and could be doing so now.
Bitcoin could thus enable an exodus by any of the various governments from fiat central bank currencies which all suffer under global dominance by the US (and possibly from pending Chinese dominance with their gold-backed currency). The Bitcoin blockchain (which is the global ledger needed to verify and make transactions) is now available from satellites6 so each and any sovereign can transact without the risk the Internet might pose. The benefits of the purchase of Bitcoin within a country could come in three ways. The first relates to the usual effect of money creation, which is price inflation. If the government’s investment into Bitcoin was timely then their balance sheet would benefit. The second benefit occurs among the population as price inflation (mostly from higher import prices) hits their own population and their own citizens attempt to flee the fiat currency. As they do, Bitcoin would gradually replace the fiat for their citizens as well. The third result would be protection against capital flight. When a central bank over indulges in money creation, the inflation causes the population to try to protect their purchasing power. One method commonly used is to invest in more stable assets both inside or outside the country. If Bitcoin is commonly available within the country then it starts to trade at a premium within that country. The Bitcoin price increases but the fiat money always stays within the border. The Central Banks can control the rate and speed of the transition. To incentivize faster migration, a central bank would help fuel faster flight from the currency by more money printing, slower inflation would cause slower flight.
When Bitcoin showed up very unexpectedly and unwelcomed, it was at the very time China had begun a launch of a system to return to a gold backed fiat currency administered by their Central Bank. They thought Bitcoin would be a direct competitor to their currency. That thought it was fueling capital flight. China is not happy with Bitcoin and that is likely why they have made these moves to try and thwart it. The real effect was that the price of Bitcoin skyrocketted in China when the government clamped down on it. The transactions were between one Chinese person and another so the Yuan exchanged for the Bitcoin stayed right there.
Conclusion: I started the article with a full disclosure that it was all fiction. I also stated it’s purpose was to present a scenario why governments may be in favor and supportive of Bitcoin rather than wanting to close it down. Are the various governments going to look more favorably on Bitcoin if it doesn’t cause capital flight? Do they want to put all their eggs in the fiat and central bank basket or would they rather keep their options open by leaving Bitcoin alone (legislatively that is). If they decide to give Bitcoin a free reign then what would they have to lose by buying some with money they create from thin air or with dollar reserves that are depreciating with the end of the petrodollar? When the same forces that drove the rise of the petrodollar (i.e. demand) start applying to Bitcoin then we are likely to see Bitcoin rise to astronomical levels.