Why Governments Fear Cryptocurrencies

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In the United States, while the separation of powers restricts the relative power between branches of government, it has failed to cap the growth (and subsequent power) of the institutions in relation to the people. Congress, holding the power of the purse, can elect to tax and spend at levels unrestricted by the Constitution. Today, the House passed a budget that will add $300B to the deficit over the next 2 years. It would seem the only way to maintain the government now that tax reform has passed (reducing the tax income the government can generate to allocate) is to ensure the economy sees massive growth, or force Congressmen to work on politically unpalatable spending cuts. As the Constitution was written, unfair taxation was fresh in the minds of colonists. Income taxes were never tabled for discussion, and a system of federalism was built to decentralize government to the state and local levels as much as possible.

Federalism is well reasoned; the larger the pool of people, the less consensus there will be on any given issue. Typically, however, there is consensus within small communities, where there is a tendency for residents to gravitate towards the ideas of their peers. The values we share in communities are based on local culture, income distributions, faith, and other shared life experiences. If the voters in Pasadena, California want marijuana to be legalized, while the voters of Denton, Texas do not, both can have their way, with a limited effect on the culture of their neighbors. As a result, drug enforcement funds could be diverted to an area like elderly care or local schools.

Even more importantly, residents can vote on the issues that will be most visible in their day to day lives, allowing them to quickly rectify policies of the past. If they strongly disagree with the local consensus, they can simply vote with their feet. Evolutionarily, these relatively small communities are the most important pieces of our lives. While we like to think that there is a moral equivalency to all lives, in our own lives, this is clearly untrue. Just as we would give a kidney to a sibling over a stranger, we will vote with our closest companions in mind. Voting to raise taxes on the faceless embodiment of greed and corruption is relatively easy compared to facing the ER doctor still struggling to pay off student loans at a local hospital. Distance and empathy are negatively correlated, and politicians weaponize this reality to paint a constant picture of “the other” for partisan points.

Entirely lacking proper incentive structures, the agencies within the federal government are constantly competing for funds, without even tracking outcomes. These agencies either directly control or regulate media, education, financial markets, healthcare… and the list goes on. As a result, we are powerless to refuse a system that always asks for more, while rarely delivering noticeable improvements in the localities we spend the bulk of our lives.

Don’t be fooled; these institutions realize they derive their power from the pot of money they manage. The centralization of power dilutes the power of an individual’s vote, while forcing their contributions remain at the will of distant representatives. If you don’t like it, you might be able to leave, but not with all your assets. The U.S. Federal Government won’t even allow citizens to board a plane with more than $10,000 in cash. They need to keep tabs of your/their money. You can, however, leave with $1m in Bitcoin in the wallet on your phone.  Like most ponzi schemes, the system collapses if too many people leave at once. That’s why banks can and will freeze access your own money when there’s a panic. If you break a law you were forced to follow, the government can sanction you by; freezing accounts, seizing assets, and forcing forfeiture of business.

Cryptocurrencies present a unique opportunity for people to work outside the scope of their government’s economic and political systems, by creating a network of a global nomads. Cryptocurrencies limit the effect that policies of a particular government can have on the value of an individual’s assets. On top of controlling the money supply, and access to money, government policies also dictate the value of our money. Dollars, backed by the “full faith and credit” of our government, are susceptible to the overreach of centralized government, manifested as poorly incentivized bureaucracies. Like the internet, cryptocurrencies are global platforms that reduce the distance between people and commerce. As this distance shrinks, so too, does a government’s ability to generate stable, ongoing tax revenue used to increase its size and scope.

The internet opened our eyes to the universality of the human condition, no matter how foreign. Where a government of the 1970’s could convince our populace that the people of Russia were enemy combatants, we now know that the citizenry is rarely to blame. Instead, governments and their representatives disagree on our behalf and without our full consent. The bulk of such repercussions, however, fall on everyday citizens. In Russia, following Vladimir Putin’s decision to annex Crimea, sanctions reduced the  monthly wages of Russian citizens by 8%. The take home pay of those living under the poverty level in Russia now sits at just $1.90/day. Russia’s Ruble has fallen in value (in relation to the US Dollar) by nearly 50% since 2014.

Moving to the crypto-ruble may be a clever ploy to avoid sanctions, but it also raises the question; “If the citizens of one world power can see the value of their assets fall by 50% as their wages fall 25% in the same period of time, how much faith should we put in government to act in the best interest of its citizens?”

With our national debt (105.6% GDP) nearing its all time high of 119% after WWII it’s hard to imagine that the true benefit of foreign interventions, bureaucratic overreach, and other government endeavors are set to outweigh their costs. The words of Thor Bjorgolfsson, (once the richest man in Iceland) come to mind; “As anyone who has studied the career of Donald Trump could tell you: Owe a bank $1 million, it's your problem; owe them $1 billion and it's theirs. They didn't say great. In fact, there were times they called up and yelled at me, but they had to work with me. Either we all get out or no one gets out.”

In the case of the United States, citizens (holding most of the country’s debt in treasury bonds) are the bank. While it remains to be seen “if we all get out or no one gets out”, an emergency stash of cryptocurrencies may someday be the best way to get out.

Mark kilaghbian