Vigna and Casey rightly reject claims by some bitcoin enthusiasts that bitcoin shouldn’t be, or can’t be, regulated. It can and will be, and indeed already is subject to regulation in many jurisdictions, as the authors document. But they can’t help arguing that bitcoin poses a challenge to government.
Anyone who remembers the 1990s will recall the argument that the Internet poses a challenge to government. The argument then was that the government would not be able to censor people because of the decentralized structure of the Internet. Freedom would flourish, despots would fail. You can’t turn the Internet off; nor can you change its rules.
But the government can go after the “joints” of the Internet—the ISPs, the search engines, the social media sites, and they do. Authoritarian governments have discovered that the Internet provides a valuable means for social control. Ordinary people don’t take all the precautions that are theoretically possible, benefit from the convenience of large intermediaries, and in this way make themselves vulnerable to legal sanctions if they use the Internet to break the law, or–in authoritarian countries–merely criticize the government.
The same will surely be true for bitcoin. Ordinary people are not going to use “dark wallets.” They will turn to the institutions that they trust—yes, banks, or brand-name Internet companies like PayPal and Google—and the government will use these institutions as levers for regulating, just as it has for other types of Internet usage.
The authors suggest that bitcoin took hold in the wake of the financial crisis. Because people could no longer trust “money,” they would put their trust in bitcoins. If people really thought this, they made a serious error. The financial crisis was not caused by fiat money (or, as the authors insist on putting it, “centralization,” meaning the Fed). It was caused by bad investments; and one can just as easily make bad investments with bitcoins as with dollars.
Financial crises would occur in a bitcoin-based financial system just as they did under the gold standard. Centralization (in the government) is needed to address financial crises; so if bitcoin makes centralization impossible, we would be in deep trouble. Fortunately, it does not. As I argued earlier, a bitcoin-based financial system would operate through banks and other intermediaries, and the government would regulate bitcoin by regulating them, just as the government regulates Internet users by regulating ISPs, search engines, and social media sites.
Moreover, as the authors point out, bitcoin investors have already realized that bitcoin will become more stable, trustworthy, and hence profitable if the government regulates it. As money pours into the system, the pressure for regulation will increase rather than diminish.