People often say that Bitcoin is too risky since if it becomes too successful, and thus a threat to the state, the state will just ban it. After all, Franklin Roosevelt did this to gold in 1933 with Executive Order 6102 (text). This is how I myself got into Bitcoin. I saw its potential early on. I never had the stodgy Austrian “regression theorem” or physical commodity fetish hangup that led Austrians early on to argue that it is impossible for Bitcoin to become money. In fact, back in 2011, I wrote in an email:
(IN the bitcoin thing with digital currency, you can arbitrarily increase the granularity by adding more digits; in such a digital numeraire (which I confess I sort of think is the ideal money, in some sense, though not in a practical sense given some political and other problems), you never need to increase the supply at all (once it reaches its asymptotic maximum), because any supply truly is enough: you never face the granularity problem you guys allude to.1
The “political problems” I referred to was my belief that if Bitcoin were to gain steam and look like it might succeed, the state would sense this threat and stamp it out, much like FDR outlawed gold in 1933. This is why, on Aug. 15, 2012, I made a $100 bet with Vijay Boyapati that by the end of 2012 the price would be much lower than it was then. It was about $13.50 at the time. I said it would be less than $0.65 by Aug. 15, 2013, or one-twentieth its current price. By Feb. 2013 the price had almost tripled to $30 so it was clear I would lose the bet, so to cut my losses I paid Vijay $90 in 3 bitcoins purchased from Coinbase. From then on, I’ve been skeptical of criticisms of the danger of a state ban on Bitcoin, since it became clearer how slow and stupid the state can be in such matters, as it was too slow to ban Uber before it was too late.
Now Bitcoiners have advanced various arguments as to why it’s unlikely or even impossible, at this point, for the state to kill Bitcoin. (See, e.g. Vijay Boyapati’s article “The Bullish Case for Bitcoin” [soon to be a major motion picture]). For example, it’s too late, as in the case of Uber. Or there can be jurisdictional arbitrage–exchange just relocate to a friendlier regime. Plus, the Internet is global; just as China can outlaw Google inside its own borders but doesn’t kill Google, so any nation-state outlawing Bitcoin (as India and Turkey are threatening to do) will mainly hurt its own citizens, but not Bitcoin itself.
Probably the biggest state threat is the US given its size and power and the number of American Bitcoin HODLers. So: FDR seized the gold in 1933. Why can’t he just do that with Bitcoin, even if it only directly affects American bitcoiners? Well there is a key difference between Bitcoin and gold, and a key facet of the 1933 gold confiscations, that most people overlook, which mean that an American Bitcoin seizure is very unlikely, for reasons above and beyond those previously given by bitcoiners.
Section 4. Upon receipt of gold coin, gold bullion or gold certificates delivered to it in accordance with Sections 2 or 3, the Federal Reserve Bank or member bank will pay therefor an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States.
As Wikipedia explains,
Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve in exchange for $20.67 (equivalent to $408 in 2019) per troy ounce. Under the Trading with the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, a violation of the order was punishable by fine up to $10,000 (equivalent to $198,000 in 2019), up to ten years in prison, or both. … The price of gold from the Treasury for international transactions was then raised by the Gold Reserve Act to $35 an ounce (equivalent to $691 in 2019).
Now why did the state pay $20 fiat per gold ounce stolen from its citizens? Because it has to. The Fifth Amendment to the US Constitution provides:
No person shall … be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
What is “just compensation”? Basically, the fair market value of the property taken. As Wikipedia explains:
In United States v. 50 Acres of Land (1984), the Supreme Court wrote that “The Court has repeatedly held that just compensation normally is to be measured by “the market value of the property at the time of the taking contemporaneously paid in money.” Olson v. United States, 292 U.S. 246 (1934) … Deviation from this measure of just compensation has been required only “when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public”. United States v. Commodities Trading Corp., 339 U.S. 121, 123 (1950).
Now it is true that the state played around with the official ratios between gold and the dollar, from 1:20 to 1:35, and so on, until all this was repealed and the tie to gold was severed in the 1970s (I discuss some of this in KOL085 | The History, Meaning, and Future of Legal Tender). But because of the historical use of gold as money and its tie to the dollar, and its official exchange rate, when the gold was taken, and the Fifth Amendment required compensation, it was given—and at the prevailing legal exchange rate, which was apparently assumed to be a proxy for fair market value (even though the subsequent revaluation to 1:35 belies this assumption). Still, compensation was paid.
So what does this imply for a seizure of Bitcoin? Well, there can be little doubt that it would be considered “property” for purposes of the Fifth Amendment. After all it’s being subject to capital gains tax because it’s treated like an owned commodity.2
And since Bitcoin has never been part of the money system or recognized as money, and has no official exchange ratio, the state would have to pay fair market value, i.e. “the market value of the property at the time of the taking contemporaneously paid in money.” We can assume the FedGov, if it ever gets around to considering confiscation and prohibition of Bitcoin, will take several years to do so. It would only do so after Bitcoin’s price has reached levels so high as to finally set off the Klaxon horns in the halls of the congresscritters. Say, when its market cap reaches that of gold, about $10T, about 10x from now, or even more. Since that might happen in just a few years, we can only assume the price will have reached “alarming” (to the state) heights by the time it tried to act—say, a price of $1M or $10M per BTC has been reached.
Now I don’t know how much of Bitcoin is owned by Americans, but Americans certainly own more Bitcoins than people of any other country. Let’s say 20% of all Bitcoins are owned by Americans. That would mean 20% of a market cap of $20T or $200T, i.e., somewhere between $4Trillion and $40Trillion that the state would need to compensate. In any case, it would be damn expensive. And this could well make it unpopular and politically infeasible. Basically, the FedGov could hardly afford to outlaw Bitcoin.
A somewhat related excerpt from KOL085 | The History, Meaning, and Future of Legal Tender:
So getting to bitcoin here. What’s the implications for bitcoin? First, let’s step back and think what gold causes are. There are two types of monetary transactions that you can think about that are of relevance to legal tender. One is what’s called an executed, or maybe a contemporaneous transaction. For example, if I walk up to a merchant and I say I’d like to buy that newspaper. He says give me a dollar and I make the deal. It’s done right there. There are no future obligations on either party.
The second type is an executory contract, sometimes called executory contract. That’s one where there is an obligation in the future. So we have a contract now. I want you to build a house for me. And when you’re done building the house, I will pay you $500,000. That is an executory contract. At the end of the contract, the work done by the service provider, if he is not paid, he can sue in court to get the money he’s owed. The legal tender law kicks in only there because the obligation to pay him can be satisfied in whatever money the government declares to be legal tender.
So legal tender laws never have much of an effect on contemporaneous transactions because if you walk up to some guy and he wants the artificial price for his goods, you just refuse to pay and you walk away. You don’t do the deal. So legal tender laws only affect the second type of contract.
Now, as far as I’m aware, I think bitcoin, from what I’ve seen, is used mostly for the first type of contract right now. I’m not aware of a lot of gold clause contracts much less than I am aware of the practice of people entering into long term significant contracts with bitcoin clauses or denominated in bitcoins. Not even an employment contract but a longer term contract. Like let’s say a loan. I loan you a thousand bitcoins. You need to repay me 1100 bitcoins in a year. Something like that.
For bitcoin to emerge as a full-fledged money, seems to me, it needs to start being used for the second type of monetary transactions as well. And I suspect that it will as it gains steam. And when it does, the relevance of this legal tender discussion is that the state can do what it has done before with gold clauses. It could outlaw bitcoin clauses. It would have to find a way to define it so that it covers like coin and others as well, right, any kind of electronic currency. And then probably re-illegalize (outlaw) gold clauses while they’re at it. And then the other way with it. They could declare a fiat exchange rate. They could say one dollar is equal to one bitcoin. They could do something like that. They would legally overvalue the dollar; legally undervalue bitcoin.
- See Comments on Block and Barnett on the Optimum Quantity of Money. [↩]
- See, e.g. Bitcoin Is Officially a Commodity, According to U.S. Regulator; Tax Plan May Hurt Bitcoin; How to handle bitcoin gains on your taxes; SEC: US Securities Laws ‘May Apply’ to Token Sales; Federal Judge Rules Bitcoin Is Real Money. [↩]