Regulators can’t really ban Bitcoin

There are various aspects of the technology that make a total ban on Bitcoin impossible.

“You’d have to turn off the internet.” Hester Peirce, Commissioner of the US Securities and Exchange Commission, on the implementation of a Bitcoin ban.

Although Bitcoin’s market capitalization surpassed $ 1 trillion, statements from government agencies and business leaders continue to fuel speculation about a US ban on Bitcoin. US Treasury Secretary Janet Yellen has publicly criticized Bitcoin and other cryptocurrencies for their role in “illegal funding”. In the private sector, Ray Dalio, founder of the world’s largest hedge fund, has commented that Bitcoin could possibly be banned just as gold was in the 1930s. Jesse Powell, the CEO of Kraken, a US-based cryptocurrency exchange, has also warned that “there could be a crackdown” on digital assets.

Could the United States implement such a “crackdown” by joining countries like India, Nigeria and Turkey in implementing a Bitcoin ban? A total ban is certainly feasible, but the practical, legal, economic and political difficulties involved in implementing such a ban make it unlikely. Instead, we can expect the US to join other developed economies in further regulating Bitcoin. Regulators will face the challenge of creating laws that can be enforced without choking the new opportunities for economic growth that Bitcoin offers the countries that accept it.

Practical challenges

A basic understanding of blockchain technology underscores the practical challenges of a Bitcoin ban.

“Blockchain” describes a decentralized and distributed ledger that records the histories and transactions associated with digital assets. Bitcoin is a virtual asset that is accessed and recorded in such a blockchain.

The term “cryptocurrency” is a slight misnomer as Bitcoin is more like a decentralized network than a traditional currency that can be held or confiscated by a regulated custodian. Instead of holding physical “coins” or having access to an “account” with a regulated third party, a Bitcoin holder uses private keys to unlock digital assets recorded on the blockchain, which is managed by a decentralized and global computer network . These private keys are often represented in a series of words known as a “recovery phrase” that can be stored and used to access Bitcoin anywhere in the world with an Internet connection. Bitcoin cannot be confiscated any more than memories.

While the United States could criminalize possession of Bitcoin, it would be next to impossible to enforce such a ban. In particular, there would be no way for the government to seize Bitcoin from its global decentralized network. The government would not be able to capture recovery phrases that have been memorized by owners who refuse to disclose them or claim they have been lost or stolen. In addition, bans in other countries show that this step could be counterproductive. For example, when the Central Bank of Nigeria banned local financial institutions from serving cryptocurrency firms, buyers and sellers began using peer-to-peer trading platforms to trade Bitcoin at a premium in that country.

Legal challenges

Political speech, which has been part of the Bitcoin network since its inception, and the inherent associative nature of the Bitcoin network, even a ban on this asset would be subject to strong First Amendment challenges.

Bitcoin was created as a public network in which participants make immutable entries in an electronic ledger. While the most visible manifestation of these entries is the exchange of values, Bitcoin is more than just money. According to well-known Bitcoin proponent Andreas Antonopoulous: “When you say that Bitcoin is digital money, it is like saying that the internet is a fancy phone. It’s like saying the internet is all about email. Money is only the first application. “

In fact, the Bitcoin network has been used for political speech from the start. The first “Genesis” block (or the record of transactions) on the Bitcoin blockchain contained the following statement: “The Times 03 / Jan / 2009 Chancellor on the verge of the second bailout for banks.” On the day of his IPO on the Nasdaq ( IPO) had Coinbase a mining pool embed the following headline on the Bitcoin blockchain: “NYTimes March 10/21 House Gives Final Approval for Biden’s 1.9 Ton Pandemic Relief Bill.” Served by central banks and government agencies, cannot be censored and read by anyone with an internet connection. Unlike the occasional handwriting scribbled on a perishable paper dollar, political statements have been permanently and irretrievably engraved on the Bitcoin blockchain from the very beginning and during significant moments in its history.

The political speech Bitcoin has given since its inception as a networked association beyond the reach of centralized authorities should scrutinize any attempt at a ban. Since the First Amendment was largely applied to emerging new technologies, it is reasonable to expect similar broad application to blockchain technology itself. A particularly detailed discussion of why Bitcoin is talked about can be found here.

Opponents of a Bitcoin ban in the US would also have arguments in favor of due process under the Fourth, Fifth and Fourteenth Amendments to the US Constitution. The IRS classifies Bitcoin as property and therefore any ban would arguably constitute an unconstitutional seizure. The US government itself has seized and sold Bitcoin, further legitimizing its status as a constitutionally protected property. While the government could counter this argument by giving holders a window of time to convert their bitcoins into US dollars, the potential loss of hundreds of billions in net worth to individuals and public companies would hardly result in “fair compensation” being paid by Constitution.

Economic challenges

Even if the US government could legally ban Bitcoin, it would be economically unaffordable.

Much of the value of Bitcoin was created and held by US companies. For example, Tesla has $ 1.5 billion worth of Bitcoin.In addition, payment companies like Visa and PayPal are helping thousands of small businesses accept Bitcoin for goods and services. Although opponents can claim Bitcoin is used by terrorists and drug traffickers, blockchain analysis suggests that only a small and shrinking fraction of Bitcoin transactions are used for nefarious purposes.

Bitcoin’s numerous uses for storing value, authentication, and intellectual property sharing promise many new businesses, as did the Internet in the late 1990s and early 2000s. Any ban or overwhelming regulation by the US government would miss an opportunity to remain a world leader in new technologies.

Political Challenges

Just as Bitcoin has grown exponentially, so has its political influence. This influence, combined with practical, legal, and economic factors, will likely lead the U.S. government to create regulatory security rather than an outright ban on Bitcoin.

Companies and individuals with significant involvement already have significant political influence. According to Coindesk, Sam Bankman-Fried, the CEO of the cryptocurrency derivatives platform FTX, made the second largest donation to Joe Biden’s presidential campaign. Recently, Fidelity Investments, Square and Coinbase teamed up to create a Bitcoin trading group to influence policy makers.

As the number of Bitcoin users continues to grow rapidly, any attempted ban would meet not only opposition from the corporate lobby, but the wrath of an exponentially growing and passionate electorate. In fact, Coinbase, the largest US-based cryptocurrency exchange, reported about 56 million verified users in 2021, up from 35 million in 2020. Coinbase co-founder Fred Ehrsam tweeted that 10% of people now own cryptocurrencies in the United States. While the veracity of this claim may be debatable, it is undisputed that this rapidly growing group would exert significant political pressure in response to a proposed ban.

Conclusion

Until there is more regulatory clarity regarding Bitcoin, statements by some prominent government officials and business leaders will continue to fuel speculation about the imminent demise of this burgeoning asset. Although a complete ban would not be feasible for the reasons mentioned, further regulation is to be expected. If this regulation is tightly tailored to avoid suffocating the burgeoning Bitcoin economy, it could give the digital asset a newfound legitimacy, minimize its use for illegal purposes, and bring additional price stability.

This is a guest post by Stuart Russell. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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