Bitcoin will be banned. So what?

Bitcoin - Regulation - Crackdown - China - US Regulators - Exit

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Bitcoin was banned, is banned, and will be banned, so what? The current debate about a fear of a Bitcoin ban is, in my opinion, missing the elephant in the room. Bitcoin is getting regulated, and the banning threat is a strategy for people to accept the new regulation.

Bitcoin is already banned in several countries in the Middle East, including Egypt, Algeria, and Morocco. In Asia, China promised a crackdown on Chinese mining activities, which today represents two-third of bitcoin's hashpower while India wants to introduce a law to ban cryptocurrency trading. Whether it is a complete ban or a more subtle attack by reducing the mining resources or the ability to trade, bitcoin seems under attack.

Elsewhere, crypto is, however, a booming industry. In the US, startups have raised billions, attract millions of customers, and a regulatory framework is emerging. Thanks to this friendly environment, public companies such as Microstrategy or Square are confident enough to hold respectively $425m and $50m worth of Bitcoin on their balance sheet. Many individuals, from billionaire hedge fund managers like Paul Tudor or Stanley Druckenmiller to telco tycoon are buying Bitcoin. Regulators show goodwill, and today there is a Bitcoin Trust that is registered with the SEC while an exchange has even received a banking charter. What a sharp contrast with the banning bitcoin narrative!

Regulation isn't binary. In my opinion, we are only noticing the premise of bitcoin's regulation. In this global game theory, some governments will heavily regulate bitcoin while others will enact a more permissive framework to foster innovation and growth. In Asia, for instance, while China and Japan were enacting stricter bitcoin regulations, Singapore was becoming a crypto heaven. It openly welcomed entrepreneurs who have since created billions worth of value. Bitcoin regulation might play out like the regulation of the internet today.

I guess that the bitcoin network itself won't end up being regulated because it's both difficult to achieve and unnecessary. It's tough to control a worldwide distributed computer network. Thanks to its characteristics of openness, censorship-resistant the consensus layer will probably stay free from government regulations like TCP/IP is today. The regulation will occur at the application level.

Applications built on top of the protocol will be regulated like financial services are. I expect every exchange and wallets to comply with AML/KYC regulation while fully collaborating with tax authorities. We are already noticing that with a vocal libertarian advocate who resolves to comply with US regulations. This is the first step towards a world where every bitcoin transaction over few hundred dollars will have to be declared. Please consider that today most of the bitcoins available are held in exchanges or cold storage providers who are, for most of them, fully compliant. In that sense, Bitcoin is already regulated, and the centralization of coin storage makes control even more straightforward. An underlying question is: who is seeking this regulation apart from the government?

Pretty much everyone. Indeed, this future is very far away from the cypherpunk's ideas of an internet-native currency for sovereigns individuals. Like with the beginning of the internet, the bitcoin protocol is developed by hackers and activists who convey strong ideological beliefs about privacy and openness and who are not aligned with the government's will, to say the least. But after the hackers come to the business guys who build applications for mainstream customers with a different set of beliefs. I expect companies to ask for strong regulation for multiple reasons ranging from the necessity of a stable legal framework to develop their activity to collude with the government to protect their business. For instance, I won't be surprised if US companies lobby the US regulator to shutdown unregulated exchanges domiciled in tax heavens. Of course, the US will take action to ensure the domination of US crypto companies and reduce money laundering and tax evasion worldwide. The call for regulation will not come just from companies. Every bitcoin user wants a legal framework to back its investment.

Again, this is far from Bitcoin's original idea, but I expect most people to be happy with that. Why? Because it's a condition for the price to moon and so the sustainability of the network itself. Early bitcoin adopters will dismiss this regulation wave but will be more than happy when 1 BTC will be worth $500k. I understand that regulation is scary, especially in its potential of slowing down innovation. However, it is a necessary evil in the world we live in, and we can hope that competition across jurisdictions will allow the best regulations to emerge for the bitcoin ecosystem to continue developing.

The original libertarian's ideas behind Bitcoin will stay in the margins as it is today with the internet. What is important is the preservation of the option to exit. Tools exist today if you want to transfer information privately, but software such as FreeBSD, Tails, PGP, Signal are far from being mainstream. Thus, we can expect the same pattern to emerge for the private transfer of wealth with non KYC wallet, coin mixer, etc. The possibility to exit is significant because it creates boundaries to what is possible to enforce and thus creates an equilibrium. 

All that to say, the emergence of Bitcoin regulations is inevitable and is a sign of coming mass adoption by mainstream users.

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