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Is Bitcoin immune to government regulation?

by Jesse Colzani via Bitcoin Magazine

Law, markets, architecture, and social norms are forces that constrain individuals’ behavior. Can governments take advantage of these to regulate Bitcoin?

When asked whether the Bitcoin network can be regulated or not, people tend to answer in a binary way:

  • Everything can be regulated.
  • Bitcoin has already irreversibly separated money from the state.

What does Bitcoin regulation depend on and what are the tools that regulators can reasonably use to limit its adoption?

Regulation is considered as state-mandated legal restrictions. But laws are not the only forces shaping society. In what is often referred to as the “pathetic dot theory,” Professor Lawrence Lessig identifies three other forces that constrain the action of an individual:

  • Markets regulate through the device of price and cost-opportunity.
  • Social norms represent an intricate set of standards of behavior that are widely accepted within a community (like tipping a server in a restaurant).
  • Architecture includes geographical, technological, and biological barriers to human behavior (like laws of physics preventing us from levitating).

Each force can — intentionally or not — influence other ones. Laws can limit deforestation (architecture), social norms can shape markets, and weather (architecture) can affect agricultural production and food prices.

When a law cannot directly target individuals, lawmakers look to regulate other forces. For example, when the government causes the price of cigarettes to increase (market), or when it prohibits the use of specific words on TV to influence citizens’ behavior (social norms).

But can laws always influence architecture, or make a virus disappear? In today’s world, highly contagious viruses cannot be eradicated due to a combination of biological reasons (architecture), financial constraints (market), and hostility to restrictions (social norms).

Like a virus, Bitcoin spreads globally (mutating when necessary) and depends on the right market incentives or socio-political momentum. Lawmakers can’t shut down Bitcoin nor can they eradicate a virus, but they can use legal restrictions to mitigate the risk of specific undesired outcomes.

DIRECT ENFORCEMENT THROUGH USERS

As long as one has a phone and an internet connection, they will be able to use Bitcoin. The efficacy of direct enforcement therefore depends on the jurisdiction where it takes place. In fact, only a disproportionate restriction of individual freedom might limit Bitcoin adoption in the short term (underground peer-to-peer markets will probably emerge in the long run).

Also, individuals tend to be more willing to violate laws when their money is at stake.

ENFORCEMENT THROUGH ARCHITECTURE

Governments generally exercise a certain degree of control over the internet architecture. In fact, the data that flows through devices goes through centralized bottlenecks that make it possible for public authorities to shut down websites, identify anonymous users, and control online traffic.

Bitcoin is different because it’s significantly more decentralized than most web applications. Changing the blockchain would be a challenging task, thanks to a strong network of nodes and mining rigs.

At the same time, Bitcoin relies on the internet infrastructure for nodes to communicate. In theory, this gives lawmakers a regulatory access point over the technical infrastructure. 

Another solution would be to target core developers. This is a bad idea for at least two reasons:

  • If threatened, identifiable developers could easily disappear and continue their work anonymously.
  • Because the Bitcoin community relies on wide consensus, even the most influential developers wouldn’t be able to push government-imposed changes into the code.

ENFORCEMENT THROUGH MARKET INCENTIVES

Governments can offer their citizens compelling market incentives to slow Bitcoin adoption or maintain control over the money flows. 

The most popular way governments currently attempt to regulate Bitcoin is through exchanges, liquidity providers and other intermediaries. By complying with know your customer (KYC) and anti-money laundering (AML) regulations, new banks are able to offer compelling prices and attract the most inexperienced users. This has important consequences for the fungibility of the Bitcoin supply and probably constitutes one of the greatest threats to Bitcoin’s promise of individual self-sovereignty.

It is not clear if, when, and how governments will introduce central bank digital currencies (CBDCs) into their economies, but just like a government could promote the use of its CBDC through economic incentives, it could disincentivize Bitcoin payments.

ENFORCEMENT THROUGH SOCIAL NORMS

Laws can attempt to shape the public’s perception in a variety of ways. For example, banning Bitcoin-related words on TV or establishing school programs that focus on the risks of using bitcoin.

Policymakers could even go a step further and promote “bottom-up” campaigns as an attempt to change the Bitcoin code. Although not backed by any public authority, a rather unconventional coalition is attempting such a strategy.

BITCOIN’S MAIN VULNERABILITY

Just like we can assume that no government thinks it can completely eliminate a virus from its country, regulators finally understood that the same applies to the Bitcoin network, and their best option is to try limiting the way it spreads. Rather than taking the risk of watching their monetary power slowly erode, governments will likely experiment with different combinations of the tools described above to slow down the hyperbitcoinization process.

Bitcoin was engineered to be an extremely secure and decentralized system, but one needs to remember that its most important components are humans, which can be unreliable and unpredictable. Governments are not always ahead of the curve on understanding technology, but they do have a successful track record in driving human behavior.

Read the full article here.

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Bitcoin Magazine

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