Can the US government ban Bitcoin?
China banned bitcoin today - yet again. To be precise Chinese central bank declared all transactions involving crypto currencies which includes bitcoin to be illegal.
And bitcoin dropped overnight from $45,000 to $41,000. This was the seventh time that China has banned bitcoin or Crypto or something related to this. And yet bitcoin has exhibited its anti-fragile properties every time by bouncing back strongly.
In addition, famous American billionaire investor and hedge fund manager Ray Dalio, recently stated that he believes the US regulators will kill bitcoin.
There are others who disagreed with Ray’s opinion about regulators banning Bitcoin.
Therefore, in this article I consider the question - Can the US government ban Bitcoin?
If bitcoin is not successful then the government will not bother with banning bitcoin. This was also pointed out in this article. So the interesting scenario is when bitcoin continues to build on its success and becomes as successful if not more successful than gold - another commodity that bitcoin is compared with.
To answer this question, let’s consider gold.
How did the government ban ownership of gold?
Ownership of gold by individuals was banned in the United States for nearly 40 years in the 20th century. It all started with Executive Order (EO) 6102. President Roosevelt signed this EO on 4/5/1933.
This law forced US residents, both citizens and non-citizens residing in the US, to sell nearly all their gold bullion and coins to the US government at below market rates. The US residents they had to do it within a month - to be precise by 5/1/1933. A person who did not comply with this could be fined $10,000 or imprisoned for 10 years or could be subjected to both a fine and imprisonment.
Was this EO legal? Yes it was. Since this EO was based on the Emergency Banking Act of 1933 which Congress passed on 3/9/1933 - just a month before the EO was issued. This act gave the Treasury secretary the power to force all individuals and corps to hand over all their gold (coin, bullion, or certificates) to the government.
Many people disagreed with this EO and some of them fought this in courts too. But in all cases, the Supreme Court upheld all seizures of gold as constitutional.
Thus, ownership of gold was illegal in US for the residents of US until the 1970s. This was until President Ford changed the law.
Outlawing ownership of gold was not restricted to USA. UK government in 1966 banned its citizens from holding more than 4 gold or silver coins. Australia had a law in 1959 to allow gold to be seized from citizens.
So governments have been able to ban ownership of gold by the residents in the past. Can they do the same with bitcoin?
How can the US government confiscate Bitcoin?
It can be argued that the US government can pass regulation outlawing people from owning bitcoin in the same way they made it illegal for people to own gold.
Then the government can use the law to compel companies like Robinhood, Coinbase etc to transfer bitcoin to the government in return for US dollars. Note that these companies hold your bitcoin for you. So they control your bitcoin. And they have to comply with the law.
But this is not all the bitcoin. You also might control bitcoin directly through your wallets. For the bitcoin in your wallets, the government might analyze the addresses on the bitcoin blockchain to ensure compliance. This isn't straightforward but possible since all information on bitcoin blockchain is open.
And then the people who do not comply with transferring ownership of their bitcoin to the US government might be fined or jailed or both. Just like the people who refused to transfer gold to the US government were threatened with in the 1930s.
What happens if the US government bans Bitcoin?
So the government can pass regulation and force you to transfer your bitcoin to the government’s bitcoin address.
But then what? This is the interesting question that is not considered by many. I also failed to do so initially as you see from the tweet below.
In this case, with the government owning all the bitcoin of US citizens, the Bitcoin miners in the US will stop mining for bitcoin since they will be wasting their money.
But they have all this equipment and access to energy. So what might the miners do The miners will continue to do what they know well- mining. But it will not be bitcoin but a new crypto currency.
We can expect the miners to fork the Bitcoin blockchain and start a new blockchain with a new currency. And if this is also banned they can continue to fork the blockchain endlessly with the government playing the game of whack-a-mole while the miners keep the valuable coin.
To prevent this, the government has to ban mining? But enforcing this ban will be impossible both from a technical perspective and possibly from a legal perspective.
So what is it about bitcoin that is different compared to gold. Why is it that the government could ban private ownership of gold but cannot ban private ownership of bitcoin?
The advantage that bitcoin has over gold is that bitcoin leverages software. Software that can be reproduced easily while gold cannot be copied and reproduced.
Hence it seems to be pretty impossible for the US government to confiscate bitcoin owned by the citizens of the US.
And of course, many miners and citizens might also relocate to countries that are more friendly to bitcoin. Countries such as El Salvador that have made bitcoin as legal tender.