Government Failure Makes Bitcoin Succeed

Bitcoin, the premier cybercurrency, is at an all-time high in price and an all-time low in volatility. In a new article, Bitcoin: Order without Law in the Digital Age, Kyle Roche and I compare Bitcoin to fiat money and show why and how it may succeed in the long run in becoming a currency relied on by millions. In this post, we focus on the flaws in fiat currency that may enable Bitcoin’s success. In the next we will describe how Bitcoin is succeeding.

In 1924, Georg Friedrich Knapp, the father of monetary theory, wrote that “[t]he soul of currency is not in the material of the pieces, but in the legal ordinances which regulate their use.” The state must instill confidence through law that its currency will retain value. And it is the uneasy relation between a state and its currency that gives Bitcoin the opportunity to grow. Citizens in some nations rightly distrust their currencies, precisely because they have little confidence in the legal ordinances and institutions, like central banks, that regulate their use.  For instance, in the recent past nations, like Argentina and China, have undermined the value of their currencies and yet also tried to prevent citizens from using other more stable and reliable currencies to maintain the value of their assets.

Bitcoin provides many people in monetarily oppressive regimes with a better alternative.Bitcoin is encrypted, making seizure by government, difficult, if not impossible. It is minted by algorithm, not by any physical process that can be easily captured by agents of the state. Those responsible for keeping the ledger of Bitcoin’s transactions can do so from any jurisdiction, making it hard for individual nations to shut it down.  The algorithm also limits the minting of new Bitcoins, thus making it impossible for the state to artificially inflate the currency.

If Bitcoin succeeds as currency, it will do so by climbing rungs left open by frailties of fiat money in the nations of the world. It is already gaining strength and stability by competing successfully against monetarily oppressive regimes and performing payment functions for the poor that bank regulations have made difficult. But as it gains in price and stability, it becomes more attractive as a store of value, and can climb other currency rungs, because good currencies too are subject to inbuilt political and legal risks.

For instance, even the dollar,  probably the world’s best currency,  cannot avoid the  danger that that the Federal Reserve or indeed the United States government more generally will pursue objectives other than maintaining its value.  In the paper, we show in fact that Federal Reserve has legal objectives other than maintaining the value of the currency. Moreover, Congress can always change those objectives. Thus, if Bitcoin gains market share and stability by competing against weak currencies, it may at some point become sufficiently stable and widely used to compete against a reserve currency like the dollar.

In the next post, we will discuss the mechanisms that permit Bitcoin to be trustworthy and even more importantly present evidence that it is gaining in price and stability when compared to other stores of value.

John O. McGinnis

John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His book Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the coauthor with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.

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  1. gabe says

    Any date on the number of *poor* people who a) have access to Bitcoin, b) make regular use of it (presupposes some computer sophistication / access), c) and considering it’s rise in value, how is it that these *poor* people can afford even one coin – or what is the fractional holding of the typical poor Bitcoin holder?

  2. Scott Amorian says

    This will all work itself out eventually. Meanwhile I’m more concerned about solar electrical storms that could destroy a heck of a lot of computers and computer records. Back in the 1800’s an electrical storm destroy a lot of Britain’s telegraph network. I can’t imagine the damage such a storm would do to everything computer related. Where would your bitcoins go if something like this happened?

    Too bad minerals such as silver and gold aren’t legal tender.

    I still don’t like bitcoins. They are a bit unstable. But as Mcguinnis points out in many countries bitcoins are more stable than national money, so economics tells us that people in those situations will move to bitcoin.

    Chinese programmers play a major role in the bitcoin biz. They probably don’t trust their government with money.

  3. gabe says

    “Chinese programmers play a major role in the bitcoin biz. They probably don’t trust their government with money. ”

    What is scarier is IF Chinese programmers were to be EMPLOYED by the Chinese government.
    Now, THAT would be scary!

    BTW: Scott, you seem “up” on this. Is there any data on the number of poor who actually own bitcoins – or some fraction of one?

    Just curious!

  4. Scott Amorian says

    I’m not up on that, sorry Gabe.

    Here is something I find more interesting than bitcoins though that our legal guys may be interested in. The technology behind bitcoin is being used to control and track documents such as contracts. More on that here:

    The article mentions Estonia and provides a link. Estonia uses blockchain, the technology behind bitcoin, to provide national IDs for all of its citizens. Non-Estonians can buy an Estonian national ID too making them “satellite” Estonians.

    Yes! You heard me right! For the low, low price of $41.00, you too can become an Estonian citizen. Impress your friends. Lead the way in becoming a digital member of the EU in a brave new world. Get your digitally signed Estonian citizen’s ID today. Operators are standing by.

    • gabe says

      Shsssshh! Not so loud! We don’t want Chuck Schumer, Nancy pelosi and the gang hearing about this. The next thing you know, they will introduce legislation in Congress designed to get around The Trumpster’s attempt to limit immigration. For only $41 (donation to the Democrat party) you, too, can become a *documented* American!

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