Some people who are anti-bitcoin will argue that the government will shut down bitcoin. Other pro-Bitcoin folks argue that is impossible. Of course these arguments could (and have been) made in a more subtle fashion, but those are the two camps when painted in broad strokes.
Governments Could Pass Legislation Making Bitcoin Illegal
The governments could easily pass legislation to make owning and mining Bitcoin illegal.
The US government has made basic things like alcohol and gold illegal in the past. Drugs like marijuana are still illegal at the Federal level in the US. So the US government has made various things it doesn’t like illegal in the past.
Making highly demanded products illegal doesn’t eliminate them. The black market steps in to supply the demand.
The war on drugs has been a colossal failure. Despite being illegal people with the limited resources and influence of your average high school student can still get marijuana. People in prison can and do still get illegal drugs. If the government can’t keep drugs out of prisons they will never keep them out of the country.
Even the most ardent statist would probably admit that alcohol prohibition was unsuccessful.
I’m not actually certain how successful the banning of gold was as a result of President FDR’s tyrannical Executive Order 6102, which attempted “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”. It would be hard to judge because it would require people coming forward and admitting they violated an executive order for over 35 years. But I suspect there was significant non-compliance.
So prohibition of various things hasn’t worked well in the past. As long as there is demand for something a certain percentage of people who demand it will find a way to get it.
Despite the questionable efficacy of legislation governments certainly could make Bitcoin illegal. But would they?
The US Government will go after BTC if it is deemed a threat to the Dollar
The United States government could certainly pass legislation to make Bitcoin illegal. But I think they would only do this if BTC was viewed as a serious threat to the dollar.
The US government has (according to some) invaded countries and destroyed them for planning go off the petro-dollar and adopt a gold backed currency.
The ability of the US government to borrow in dollars and then create new deposits with which to pay back those dollars is a huge benefit and source of power. This is enabled (without rampant rising prices) because the US dollar is used for trade throughout the world and is held by foreign entities and governments as a reserve currency.
Bitcoin isn’t really a threat to the dollar right now. Sending BTC is slow, expensive, and Bitcoin can only handle about 20,000 transactions per hour. Unless this changes I don’t think Bitcoin will ever be used as money. If trade starts to happen in Bitcoin or oil begins to be priced in Bitcoin then the US government will likely view Bitcoin as a threat.
But right now Bitcoin has several advantages for the government. First, it is highly traceable since all Bitcoin transactions are public. I’m sure tying a person to a Bitcoin address is difficult but it can and has been done. Secondly, the meteoric rise in price and volume of trading means lots of taxable transactions and revenue for the IRS.
But if Bitcoin was a serious threat to the dollar the US government would try to stop it. The first step might be taxing and regulating it significantly. The United States is in the early stages of this first step. The next step might be making it illegal. A final step would be attacking it directly.
But making goods or actions illegal doesn’t make them go away, it just drives that activity underground. That doesn’t mean that government edicts banning something don’t have implications or impacts.
What might be the impacts of making cryptocurrencies like Bitcoin illegal?
The Impacts of Illegal Bitcoin
US Based Exchanges Would Disappear
Coinbase.com is the largest US-based cryptocurrency exchange. It would no longer exist or it would be forced to relocate to a jurisdiction where Bitcoin was legal and they would likely ban and block US customers. Current assets could be seized or forced to be turned over to the government.
Onramps and Offramps would be Reduced
There is a need for onramps and offramps between Bitcoin, government issued currency and real goods and services. Illegal Bitcoin would make it harder to convert Bitcoin and other cryptocurrencies from fiat and vice versa. Die hard Bitcoin enthusiasts might dream of a world in which transactions are conducted in Bitcoin and government fiat is not involved, but based on the current Bitcoin protocol that isn’t possible.
Additional technology like wrapped Bitcoin, which does exist, would be needed to make Bitcoin viable as money. However, this erodes some of the decentralized benefits of Bitcoin, as it requires a trusted custodian. But I digress.
Banks would refuse transfer fiat to known cryptocurrency exchanges. You wouldn’t be able to link your bank account to Coinbase for example. You wouldn’t be able to easily sell cryptocurrencies and transfer the proceeds back into your bank.
Apple and Google would ban all cryptocurrency related apps on their stores.
In order to get Bitcoin you would need to mine it, or find someone who already holds Bitcoin willing to exchange it for something you have. So there would need to be “back alley” exchanges. If one of these deals were to go south, there would be no legal recourse. Of course if you’re exchanging Bitcoin for goods and services with a friend or relative it might work out just fine.
The free market could step in to provide escrow services and some of the illegal exchanges might be trustworthy. Doubtless there would be more sketchy “pirate” exchanges but those might be the target of denial of service attacks conducted by governments. Trading on a “pirate” exchange would require trust in people willing to break the law. The number of exchanges that disappear with client funds or get hacked would likely go up.
Assembly, importing, selling and possession of Bitcoin ASIC Hardware would be Illegal
You can’t successfully mine bitcoin using a basic PC anymore. You also can’t successfully mine bitcoin using even a computer equipped with advanced graphics cards. Mining bitcoin requires ASIC (Application-specific integrated circuit) hardware and a lot of electricity. Owning or possessing this hardware would be made illegal.
People suspected of mining Bitcoins could also have their power usage monitored, similar to how law enforcement will look at the electricity consumption and temperature of houses to try to determine if marijuana is being grown indoors.
I’m sure this would not stop some people from illegally mining Bitcoin, but I do believe it would reduce the amount of miners in the US.
Larger Corporations Would Not Own Bitcoin
Tesla announced they purchased $1.5 Billion in Bitcoin back in January of 2021. This would be illegal and so a company like Tesla would almost certainly not do it. Companies found in violation would be fined, have the Bitcoins seized or would be prevented from doing business in the United States, one of the largest economies in the world. The US could also bully non-US companies into shunning bitcoin like they do with foreign companies who try to transact with countries the US has sanctioned.
ISPs Might be Required to Block Access to Bitcoin related Sites
This would be an inconvenience and would only stop more casual users. VPNs could be used to get around such censorship and so I don’t think effort to stop Bitcoin would be very effective. However, it would make it somewhat more difficult or slower to connect to nodes, or transact in Bitcoin. Barriers to entry, particularly for less tech savvy users, would be negative for Bitcoin.
Bitcoin addresses would be tracked
I know governments already track Bitcoin wallet addresses used or suspected of being used for illegal activity. Bitcoin is pseudonymous and somewhat decentralized but it isn’t anonymous. All Bitcoin transactions are available for anyone to view.
Government agencies in charge of enforcing a Bitcoin ban would no doubt spend a lot of time tracing large Bitcoin transactions on the network and attempting to determine who controls those addresses.
This is a complicated effort but given enough time and resources it could be done. This would be a challenging effort no doubt and the Bitcoin community would likely try to do coin mixing or work to make the network anonymous.
So those are some possible results I see unfolding if Bitcoin was made illegal. But just making Bitcoin illegal is only a phase 2 approach. Government could go even further and attempt to attack Bitcoin directly.
The Impacts of a Bitcoin Attack
A 51% Attack
If an entity or group controls 51% or more of the mining/hashing power of a network like Bitcoin they could prevent new transactions from taking place or being confirmed, they could mine empty blocks in which no transactions were processed or they could double spend their Bitcoins.
The US Government is willing to spend tens of billions of dollars on the war on drugs each year. They are definitely willing to spend more than that to defend US dollar hegemony if Bitcoin was a threat.
The NSA could build bitcoin mining data centers and launch a 51% attack on the Bitcoin network and they would be willing to spend Billions of dollars to do so. This would be challenging as it would require ASIC hardware and a lot of electricity.
According to this website an attack would cost $716,072 per hour. This would be about $6.2 billion per year.
The US government spent $29.4 billion on the war on drugs in 2018, so $6.2 billion is chump change. The attack would not need to be done for an entire year. They could do the attack for a few months, or a few hours each day, just to disrupt the network and cause chaos and tank the price.
A 51% Attack by the Chinese Communist Party (CCP)
Would the United States devote the money to launching a 51% attack on Bitcoin? I think so if it was a threat to the dollar. But I don’t know how likely that is.
A 51% attack on the Bitcoin network is perhaps most likely to come from the Chinese Communist Party (CCP). The hashing power and cheap electricity are already in China: 65% of Global Bitcoin Hashrate is Concentrated in China. Even if that number overestimates Chinese hashing power by 14% it is sill enough. An October 2018 study wrote, “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China.”
A more recent estimate predicts 65% of the Bitcoin Hashrate is concentrated in China. By my own determination of country designation, in conjunction with data from https://www.blockchain.com/charts/pools, Chinese affiliated mining pools account for at least 55% but perhaps up to 62.5% of the last 587 blocks mined (as of 28 February 2021).
That doesn’t sound very decentralized.
The Chinese Communist Party (CCP) could infiltrate the Bitcoin mining organizations in their country in a more clandestine manner or they could seize the Bitcoin hashing power directly. They wouldn’t need to build a new data center or account for new electricity needs, the hashing power and electricity generation is already there.
Electricity in China is very inexpensive compared to nearly all the rest of the world.
The Chinese Communist Party has no problem using cheap, dirty coal to generate 68% of its electricity. As an aside China accounts for 30% of global CO2 emissions. However, some of the power also comes from the abundant and inexpensive hydroelectric power found in certain Chinese regions.
What would motivate the CCP to attack Bitcoin? If it was a threat to their power in some way. Perhaps if it was being used to circumvent their taxes, regulations, capital controls or is just viewed as a threat to their centralized communist ideology. If enough organizations in the west held Bitcoin it might behoove the CCP to destabilize BTC to cause economic disruption for their enemies.
I’m sure the Bitcoin community would come together to try to work around this attack, but it could be highly disruptive. Such an attack doesn’t need to destroy the Bitcoin network forever, it just needs to shake the confidence of enough Bitcoin holders to get them to sell and dissuade enough would be Bitcoin buyers and thus tank the price.
I Don’t think the Government Can Kill Bitcoin But It Can Significantly Maim It
I don’t see much motivation for the US government to make Bitcoin illegal as it isn’t a threat to the dollar. But if it did and they made BTC illegal it would probably reduce the number Bitcoin users by taking away onramps and offramps and prosecuting people found in violation of the law.
Like the war on drugs or prohibition of alcohol I don’t think the government can kill bitcoin just by making it illegal. Through an attack government could cripple Bitcoin and leave it in a semi-comatose state in an out of the way convalescent facility where only a few devoted friends come to visit.
The CCP could be in the best position to successfully attack bitcoin due to their inexpensive electricity and that the majority of hashing power already existing within their jurisdiction.
At a minimum such an attack on Bitcoin would surely result in a price collapse. Would Bitcoin be able to recover? I don’t know. Bitcoin has survived various other incidents and selloffs only to make new highs. So far the HODLers have been well rewarded. But understanding the risks posed by a high concentration of Bitcoin miners in China is important for those who own Bitcoin.