Jan Skoyles asks how much power governments can have over non-fiat currencies when they are unable to directly control demand and supply.
We all know by now what bitcoin is, I’m not going to explain again save reminding everyone that the beauty of it is that it is a decentralized, finite currency.
However, just because a government or central bank does not control its supply does not mean they cannot control the mediums through which it is exchanged.
While developments at the US Senate appeared to be a particular tipping point for the authorities’ acceptance of the digital currency, it is news from China which has recently wielded the most power over the bitcoin price.
Earlier this morning the biggest bitcoin exchange in China, BTC China, was forced to stop accepting yuan deposits. The price of bitcoin tumbled by 30% from yesterday’s daily high, adding more depth to the lows it has recently been experiencing.
The move comes following a meeting between the People’s Bank of China and ten of the country’s largest third-party payment providers. The central bank ordered them to stop processing digital currency transactions.
While BTC China will continue to facilitate bitcoin and other (non yuan) currency deposits and renminbi denominated withdrawals the announcement has clearly spooked many bitcoin holders who had perhaps not considered that a lack of control of the supply of money does not mean a lack of control entirely.
The same problem is reflected when it comes to physical, sound money – i.e. gold and silver. Will Bancroft previously mentioned past efforts to digitise gold payments. While the facility was embraced by those looking to pay using gold, governments weren’t so happy. Unable to directly affect the value of the gold they instead made it illegal to offer such services.
Unlike with gold, the Chinese authorities appear to have a love-hate relationship with bitcoin. At the beginning of the month the PBOC, along with four major banks, acted to ban financial institutions from processing payments connected to bitcoin services. The central bank cautioned against bitcoin’s role in money laundering and its concerns over protecting citizens. However, they did not ban citizens from exchanging bitcoins.
At present, the majority of bitcoin users (and the mainstream) still associate bitcoin as a commodity rather than a currency. Despite all the talk of it being a currency. You rarely hear people say ‘I have 10 bitcoins’ but instead, ‘I have $5,000 worth of bitcoin.’ This is because, while the opportunities are growing, the majority of people are still unable to live day-to-day on bitcoin. Many still need to ‘cash-in’ their digital currency every now and then so they can spend it wherever they like.
As long as this is still happening bitcoin exchanges and other bitcoin related companies will still need to use bank accounts so as to have somewhere to store the dollar/euro/pounds etc. that people wish to exchange their bitcoin for.
Governments are aware of this, just as much that they are aware banks need government. This is where the central authority can control bitcoin.
This will obviously change to a large extent as more companies accept bitcoin and you can order your online grocery shop using bitcoin and perhaps pay your medical bills. But there will still be the opportunity for governments to control how bitcoin is used.
Taxes, as much as you disagree with them, will always need to be paid. Those companies providing groceries for bitcoin or the doctor doing your angioplasty for bitcoin, still need to pay tax. They will still somehow need to exchange that bitcoin for the same currency that they pay their taxes in. The only way to do this is through financial institutions but they’re being prevented from doing so by the government who they need.
I have little doubt that the bitcoin community will find a way to overcome such issues. They may well lobby for governments to change how taxes are paid. In several US states one is now allowed to pay in gold and silver.
The above is not designed to provide an argument as to why bitcoin won’t work, but instead to alert readers to the fact that a decentralized currency does not mean it is out of the reach of government.