Why isn’t Bitcoin banned everywhere?

When I first heard of Bitcoin, it sounded like something out of a dystopian sci-fi novel. Digital, cryptographic, uncensorable money? It seemed such a radical idea, it couldn’t possibly belong in this decade.

But if it didif Bitcoin were to go mainstreamI was convinced it would lead to a massive geopolitical disruption, shifting the power relations between governments and their citizens. It would mean investing into Bitcoin would be like funding a revolutionary army. It would be so subversive, only a few crazy people would be willing to do it.

Of course, I was wrong about every part of that.

Grandmothers now own Bitcoin. And with a few notable exceptions (namely China and India), world governments have been surprisingly welcoming toward cryptocurrencies. Bitcoin is legal almost everywhere.

There’s been a lot of tumult on the regulatory front lately. But amidst the frenetic crypto news cycle, it’s easy to lose sight of how weird it is that Bitcoin is legal at all. Obviously it’s good that it isbut we should be surprised this happened!

Bitcoin was supposed to be the enemy of governments. It was supposed to destroy the state’s monopoly on monetary policy, it was supposed to be a battering ram against the banks and financial surveillance. Indeed, Bitcoin was supposed to erect nothing less than an uncensorable shadow financial system.

So why have governments ushered Bitcoin through the front door?

Three explanations

I’ve been thinking about this question a lot lately, because I feel it demands answering. I’ve come up with three potential explanations.

The first is that “all innovation is good innovation.”

Perhaps governments recognize the inevitable growth of blockchain technology and don’t want to stem innovation too early via overregulation. This is plausible: you still hear the echoes of “blockchain not Bitcoin” within the halls of industry, and blockchain idealism has become safe cocktail party conversation.

But this explanation falls short. First of all, we already have blockchains. Further Bitcoin development isn’t likely to contribute to enterprise blockchain deployments. If the purpose of letting Bitcoin flourish was to usher in the age of enterprise blockchains, its job is already done.

Perhaps governments are pattern-matching blockchains with the Internet. A wait-and-see approach to internet regulation was clearly instrumental to its flourishing, and perhaps governments intend to do the same here. But governments have also fought tooth and nail against end-to-end encryption, P2P filesharing, privacy technologies like Tor, and financial networks that enable tax evasion (see e-gold and global financial surveillance policies like FATCA). If Bitcoin threatens the power of financial surveillance, then it would be considered far more dangerous than any of these prior technologies.

In light of these examples, “all innovation is good innovation” doesn’t adequately explain the lax attitudes of governments.

The second possibility is that governments are too dumb to recognize Bitcoin as the snake that will eventually bite them.

Governments can certainly sometimes be reactive and short-sighted. But I don’t think this one is correct. By and large, the strongest world governments are thorough and ruthless at identifying and neutralizing threats to their power.

Furthermore, Bitcoin’s proponents have historically had very little political influence. Bitcoin’s past has been marred by associations with criminality, dark markets, and digital anarchy. This is precisely the kind of thing that governments would put in the “illegal internet shenanigans” bucket.

Neither of these explanations are satisfying. So that leads me to the third and perhaps most radical possibility:

Bitcoin is not actually a threat to sovereigns.

I’ve become increasingly convinced of this. In fact, Bitcoin might just be the most sovereign-friendly cryptocurrency.

Hear me out. I think there are three main reasons why this is true.

Bitcoin doesn’t offer true anonymity

Bitcoin is often described as an anonymous cryptocurrency, but this is incorrect. Bitcoin is actually pseudonymous. The distinction is crucial: under a cryptographic pseudonym, your behavior can still be tracked.

How is this done? It starts with the fiat onramps, where an exchange collects information on you through their KYC process. This information that is often shared with other exchanges when investigating suspicious activity. Even once take your Bitcoin onto the mainnet, your activity can still be tracked. Heuristics and clustering analysis are often used to identify exchanges, mixers, and other common blockchain services you use. Supernodes connect to large swathes of the Bitcoin network and correlate transactions with their originating IPs. Even with meticulous opsec and address rotation (which most people don’t do), if you ever want to turn your Bitcoin back into fiat, that offramp is just as highly regulated. Often you will be turned away if your Bitcoin appears tainted by signs of illegal activity.

This is more than hypothetical. Exchanges have significant insight into the flows of Bitcoinenough to successfully deter hacks, stolen funds, and regularly file suspicious activity reports (as all US exchanges are required to). We saw this with the Mueller Probe and with analysis of the Mt. Gox hack. Companies like Chainalysis provide surveillance services to law enforcement and various three-letter agencies, reportedly earning more than $5.7M in 2018 via government contracts.

For the average person, this is probably not a big deal. Most cryptocurrency users aren’t doing anything illegal and needn’t worry they’re being targeted for surveillance. But consider: how is this any different from other systems we use? Most people feel their cell phone conversations are private. But in the back of their heads, they know that their phones could be tapped or their phone provider subpoenaed. We take solace that this surveillance is unlikely and usually requires a significant legal threshold. And yet, we know not to be surprised if someday our phone calls are replayed before a jury of our peers. Bitcoin falls into the same security model.

One could even argue that Bitcoin is less private than using an overseas banking system. The U.S. has limited insight into what happens in unfriendly banking jurisdictions. But everything on the blockchain is visible all the time. What a gift it would be to the US if every foreign financial institution made their transactions public on a blockchain!

To the uncritical eye, Bitcoin’s pseudonymity looks like a radical step forward in economic privacy. But a facade of privacy is more dangerous than no privacy at all. The more safe and empowered citizens are convinced they are, the more the state is free to accrue real power over them. This is the first reason Bitcoin is sovereign-friendly.

Haseeb Qureshi