The saying “the government will ban Bitcoin” is one of the most frequently used elements of FUD. This is something that every Bitcoiner struggles with intellectually during their journey down the Bitcoin rabbit hole. This is a reason frequently cited by Bitcoin skeptics for their reluctance to consider pursuing further education. Fortunately, many excellent writers have written extensively debunk this piece of FUD. Bitcoiners often point out the logistical challenges, high resource costs, complexities of game theory, and the implausibility of any state attempt to ban Bitcoin. While Bitcoiners hail these writings as compelling evidence of the inevitable advent of hyperbitcoinization, the logical question that arises from it is often ignored or hastily dismissed: If the government’s ability to ban Bitcoin is limited, what strategies alternatives it could employ to undermine or co-opt the network. ?
What if, instead of a direct ban on Bitcoin, the State employed subtle and indirect strategies to manipulate it, or even co-opt it, ultimately achieving the same objective: rendering it ineffective or, worse, making it a tool for controlling the state? Bitcoin poses an existential threat to the state’s monetary monopoly. To be more precise, it is Bitcoin’s attributes of decentralization, self-sovereignty, censorship resistance and pseudonymity that challenge state control over individual freedoms. What if, rather than outright banning Bitcoin, the State could neutralize its disruptive properties by integrating and endorsing it? What if the government could mine Bitcoin?The number is rising” (NGU) technology to enforce its goals and undermine the very philosophy that defines Bitcoin today?
The first users of Bitcoin were pioneers driven by their convictions. For many of these early adopters, Bitcoin encapsulates their ideological principles derived from the cypherpunk movement and free market anarchism. They saw technology as the fulfillment of their dreams of emancipation from government surveillance and achieving financial independence. Over time, the reasons for joining the network shifted from ideological to practical motivations. A growing number of users have turned to Bitcoin purely for pragmatic purposes, primarily viewing it as a superior monetary asset for economic activity compared to contemporary fiat currencies. Additionally, the lure of potential exponential growth in purchasing power (NGU) has become a significant draw for many newcomers, sparking curiosity and speculation about when such growth might occur. As the Bitcoin network grows, the ideological motivations of users will naturally diminish, giving way to a greater focus on the search for an improved, healthier currency rather than a strong emphasis on the separation of money government control to preserve individual freedoms. This pragmatic change reveals a vulnerability that the state could exploit to influence the network. To elaborate, separating money from the state allows Bitcoin to operate independently, ensuring no direct government intervention and emphasizing financial autonomy and user privacy. This strategic approach aims to completely remove currency from centralized authority, thereby strengthening individual freedom. Conversely, state adoption of Bitcoin involves the government recognizing and integrating Bitcoin into its existing financial structure, potentially instituting regulations while retaining some control over individual freedoms.
The ultimate advantage of the state lies in what is called ratchet effect— a social mechanism used to diminish individual freedoms during crises by implementing supposedly temporary measures of authority that often persist long after the crisis has ended. This technique serves as a model for the uncontrolled growth of state power. Recently, conflict in the Middle East has prompted FinCEN to seek to expand its powers under the PATRIOT Act. Their goal was to enforce strict regulations and effectively ban privacy tools in the Bitcoin space, all with the goal of stripping users of their ability to secure their privacy within the network. Despite the lack of substantial evidence linking Bitcoin to the financing of nefarious activities in this particular case, the state’s intentions have become transparent. It currently remains uncertain whether these measures will be fully implemented. However, the sad reality remains: the groundwork has been laid, and a similar program could easily resurface in the next crisis. Throughout history, one thing remains clear: the state only needs a crisis of catastrophic proportions to rally overwhelming public support. In doing so, the State could endeavor to divide the network into two factions: a white market and a black market Bitcoin. These actions could provide state institutions and entities with the regulatory clarity needed to adopt the network in a politically viable manner. As “institutions finally arrive” ready to invest their capital, this is sure to trigger a significant price spike, fueling the frenzy around NGU. At this point it will become clear who wants to separate the state’s money and who wants better money for the state.
If the state wanted to divide and take control of the network, what additional goals could it pursue? One of these goals would involve the ossification of the network. To be honest, the discussion around the ossification of the Bitcoin network is complex, philosophical and very controversial. In my opinion, this would be a targeted outcome sought by the state. The economic reality of scaling poses significant and potentially insurmountable technical hurdles for long-term self-custody. As the network solidifies earlier, the need for custody intensifies among an increasing number of network participants. Increased custody facilitates the state’s ability to impose censorship, even for people who still hold their private keys. Any company seeking to operate under state jurisdiction must comply with censorship requirements, regardless of its proclaimed ideology. Consider a scenario in which privacy tools are banned due to a crisis, leading the state to establish a sanctioned registry of approved addresses (users). Every business in the economy would be required to follow state guidelines to operate legally. Even for individuals holding their keys, compliance with state mandates and censorship would become imperative to participating in legal economic exchange. This shows how the state could censor the Bitcoin network, not directly at the protocol level, but indirectly through the enforcement of societal regulations.
If the state sought to solidify the network, what strategies could it employ to socially encourage this outcome? For starters, it could work to make the consensus upgrade process resource-intensive and controversial. There is a school of thought suggesting that the lack of a formal upgrade protocol in Bitcoin is an advantage, preventing potential manipulation of the system by attackers. While this notion is interesting, it also adds complexity and risk to coordinating upgrades between users and miners. Due to the lack of a formal upgrade protocol, network participants such as node operators and miners do not have a clear method to signal their support for specific upgrades. Consider this example scenario: I support BIP 119 and would easily and programmatically upgrade my node if a set percentage of the overall hash rate or nodes in the network also signaled their intention to coordinate an upgrade. However, without an upgrade protocol in place, accurately quantifying market sentiment regarding possible upgrades relies solely on social signals, which are difficult to measure accurately. This increases the risk associated with any upgrade because it risks fragmenting the network. Relying solely on social signals for upgrades as the network grows will accelerate ossification, which will happen sooner rather than later.
Putting the threads of this thought experiment together paints a rather bleak picture of Bitcoin’s potential future. To be clear, this thought experiment does not chart a definitive path for what lies ahead. However, the reality remains: a significant portion of state power is closely tied to the stability of its fiat currency. As interventionist policies continually erode the value of fiat currency, the state, grappling with an existential threat, will strive fiercely to maintain its façade of authority. This will involve increased efforts to shape public perception and the use of draconian measures to maintain control. During crises, the state historically manufactures consent, and in its desperation even co-opting Bitcoin to serve as a tool of state control could become a feasible outcome. We shouldn’t be so quick to applaud state adoption of Bitcoin if it comes with strings attached.
Rather than easy acceptance, we need to closely examine state adoption of Bitcoin to ensure it does not betray the founding principles. The tempting carrot of mainstream approval and Number Go Up could conceal the stick of attempted centralized control. If mainstreaming Bitcoin requires compromising some aspect of its censorship resistance or peer-to-peer structure, we should categorically refuse, regardless of the supposed financial benefits. In the midst of such critical circumstances, it becomes crucial to not only withdraw our consent, but to actively participate in non-violent civil disobedience while rallying behind developers committed to making the tools at our disposal more accessible to everyday individuals. This multifaceted approach constitutes an essential line of action in times of emergency. The war against state capture is a battle on many fronts and every individual plays a role in shaping the future of Bitcoin. With each passing day, the resilience and antifragility of Bitcoin are increasingly permeating mainstream society. But without tireless vigilance to maintain its ideological vision, the Bitcoin our grandchildren inherit could be unrecognizable – neutered and leashed, robbed of its liberating potential through regulatory capture. We must be unwavering guardians, uncompromising against those who would erode its emancipatory promise. Even if the path is difficult, our principles today can guarantee financial sovereignty for generations to come. Let us carry the torch of individual freedom so that its light may one day shine on a just world, where Bitcoin fulfills its purpose as independent, peer-to-peer money for all, without censorship or authoritarian control. Our actions today shape the economic emancipation of tomorrow.
This is a guest post from Michel Matulef. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.