How cryptocurrency will cripple today’s governments – and they won’t see it coming

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Cryptocurrency will cripple governmental ability to collect taxes, and they won’t see it coming. When it’s already happened, expect major changes to take place in how society is organized on a large scale – but also expect governments to act in desperation to retain control.

As bitcoin launched in 2009, most early adopters saw its disruptive potential. While bitcoin has stalled for some time approaching a valid use of the term “stagnation”, cryptocurrency in a larger context is still just as disruptive. In 2011, I stated that bitcoin (cryptocurrency) will do to banks what e-mail did to the postal services. This is not just true, but it will be even more brutal to governments, and by extension, governmental services.

Now, governments love anything that smells like innovation, because it means jobs, this magic word that smells of magic unicorns to anybody in government. Therefore, people who like innovation are nurturing this bitcoin thing, this cryptocurrency thing, this ethereum thing (as if governments made a difference, but still). Lots of startups in tip-of-the-spear financial technology means that their government may get a head start over other governments. They have no idea that cryptocurrency will radically scale back the power of government, not just their own one, but also all those other governments over which it seeks a competitive edge.

Individual people in government can also love bitcoin because it gives them something to do. More specifically, it gives them something to regulate. Fortunately, other people in government see that this gives them something to do, which is to hold those government regulators with an overdeveloped sense of order somewhat in check. You’ll hear no shortage of wannabe regulators saying that “bitcoin is bad because it’s being used in crime and contraband trade!”, to which I usually respond, “well, bitcoin is a currency, so I mean you put it in relation to the US Dollar, which then… is not used in crime and contraband trade, is this the argument you’re using to support your position?”, at which point the discussion generally changes topic.

This completely disregards the observation that bitcoin and cryptocurrency were designed to not submit to regulation in the first place. Well, at least not governmental regulation. It is heavily regulated – but by its source code, and by its source code alone.

The reason this will cripple today’s governments — today’s idea of what a government is and does — is because today’s economy is built on one layer doing actual work and three layers of abstraction on top.

At the first and bottom layer of our economy are the individual people doing all the actual work.

The second layer on top of the first is the abstraction we call corporations, which is a way to organize our economy and optimize transaction costs.

The third layer on top of the second would be banks, which handle money for corporations and individual people in a middleman gatekeeper position.

Finally, the fourth layer is the government, which takes advantage of the banks’ gatekeeper position to siphon off taxes from money flows in order to fund itself and governmental services. In other words, layer four completely depends on layer three for its operations – or at least for the relative simplicity of funding its operations.

Now, what bitcoin and cryptocurrency do is make away with the banks – cutting them out of the loop entirely, making them redundant, obsolete, dinosaurified. This resulting absence of anything where banks used to be creates an air gap between the functional part of the economy – people and corporations – and governments who want funding.

The way governments want to tap all money flows in order to fund itself is not entirely unlike how the surveillance agencies want to tap all information flows in order to have an information advantage. In this way, the deployment of cryptocurrency is to tax collection what deployment of end-to-end encryption is to mass surveillance. The government can no longer reach into money flows and grab what it wants, but will be dependent on people actively sending it money. The government can’t point a gun at a computer and have it give up its money; you can only make a computer operator feel very sorry for not voluntarily producing the keys to that money. So the government is no longer able to collect taxes without the consent – even if coerced and forced consent – of the people being thus collected.

The deployment of cryptocurrency is to tax collection what deployment of end-to-end encryption is to mass surveillance.

Governments, and individual people in government, have no idea about this bigger picture. They’re far to wrapped up in things-as-usual to notice. They won’t see it coming until it’s already happened.

When this happens, there will be no shortage of people in government who suddenly want to regulate cryptocurrency – only to find out it will be as effective as regulating gravity. When this happens, government as we know it will be redefined from a coercive Colossus able to take what it wants and do what it wants into a construct that actually depends on people wanting to fund it. This will be a very interesting time to live in. While today’s governments will see themselves as getting crippled, I suspect most citizens will regard it as unquestionably healthy that governments will actually begin to depend on the approval of the people at large.

We’re just beginning to see the changes to society that the Internet brings. This is one of them.

(Note: I write cryptocurrency and not bitcoin on purpose here, just as I’d prefer proclaiming the success of social media over the success of Myspace.)

Syndicated Article
This article has previously appeared at Private Internet Access.

Rick Falkvinge

Rick is the founder of the first Pirate Party and a low-altitude motorcycle pilot. He works as Head of Privacy at the no-log VPN provider Private Internet Access; with his other 40 hours, he's developing an enterprise grade bitcoin wallet and HR system for activism.

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Discussion

  1. Thijs

    It’s not that simple. You’ll have to pay taxes, whether you like it or not. If you refuse they’ll come at your door and they may take your property or arrest you.

    1. Rick Falkvinge

      Yes, I make a note of this that they can’t just seize funds, but need to have the owner cooperate – even if under threat of violence.

      1. Anonymous

        If my government doesnt like me, it can revoke my citizenship and property rights. Even right now you are being coerced into paying taxes. How does blockchain change this dynamic?

  2. Name

    Governments collected taxes before there were large banks and everyone used cash, gold, and crops. They will still collect taxes after this situation happens, even with magical perfectly private monero being the medium of exchange. The ways they will do it will be different. Declared bills, increased customs duties and property taxes, requirements to register, requirements to pay in a certain currency and so on.

    Governments also show a willingness to do the ridiculous. They will do things like out spend all other miners to get control of a bitcoin network or completely ban all cyptocurrency usage over the internet via a great firewall.

  3. Anonymous

    Governments collected taxes before there were large banks and everyone used cash, gold, and crops. They will still collect taxes after this situation happens, even with magical perfectly private monero being the medium of exchange. The ways they will do it will be different. Declared bills, increased customs duties and property taxes, requirements to register, requirements to pay in a certain currency and so on.

    Governments also show a willingness to do the ridiculous. They will do things like out spend all other miners to get control of a bitcoin network or completely ban all cyptocurrency usage over the internet via a great firewall.

    1. Mahatma Muhjesbude

      Well, I’ve been ‘involved’ in the esoteric end of research regarding the future of currency in the world and its imminent replacement by digital currency for quite a while, specifically from the Liberty and Privacy aspect of all this.

      But there a critical point being missed that I wouldn’t mind having explained a ‘bit’ (P-intended) more in detail.

      Every body knows that the government and its sycophant banking co-conspirators are virtually ejaculating at the thought of going to a ‘cashless’ society replaced by digital currency. This is because the government would be able to discern everything you do with your ‘money’ assets in terms of purchases and transactions.

      This would eliminate virtually all Private below radar income transactions as we once knew them. Rudimentary ‘bartering’ notwithstanding, becaouse they’d simply make that illegal without a paper trail if necessary.

      The Death of personal privacy and having any kind of life besides Totalitarianism, aside for moment, all you have to do is ask yourself, if encryption would really work and prevent government and IRS from knowing to whom and for what every ‘bit’ of your money/assets goes…

      You have to ask yourself, WHY are governments and banks so eager to go to a digital cashless economy if there was ‘NO way’ they could ‘find out’ LMAO! anything and everything you did with your digital financial transactions. Like the NSA already does with all your email and phone correspondence and activity anytime they feel like it?

  4. Ohreally

    So if the government is short of funds and depends on people’s approval, doesn’t it mean that wealthy people have more influence over the government?
    Even if it is true that even ordinary people can contribute little and it accumulates to a large extent, doesn’t it mean that wooing wealthy individuals or corporations will be more effective?

  5. buglord

    the problem with cryptocurrency is it’s the online equivilant of cash, except it’s taxed on every transaction to keep itself alive, by its nature has to be tracable and it relies on distributed majority mining to collect that tax and for it to be profitable for them.
    * with cash, you can loose it but with the same effect as having burned it.
    * each transaction is taxed by miners meaning it’s more expensive to use than cash although maintains better range and anonymity (for the moment)
    * laws could be made so you could be arrested for not declaring your cryptocurrency wallets, given they’re also traceable means they can know who an employer pays, if the money goes somewhere unknown and has to be followed up on.
    * with miners often needing to make a profit on their mining with the tax, large companies or governments could make a concentrated effort to make mining unprofitable and reduce the number of distributed miners, after a while they could gain a majority advantage and collaborate to capture the currency for their own uses, be it increasing tax, changing value or adding more value for themselves.

  6. Anonymous

    “So the government is no longer able to collect taxes without the consent – even if coerced and forced consent – of the people being thus collected.”

    ‘Forced concent’ (in the sense of a peaceful person compelled to do something under the threat of violence) is not consent at all.

    1. Rick Falkvinge

      It is not, but I could find no word that matched better what I wanted to express.

  7. Anonymous

    “So the government is no longer able to collect taxes without the consent – even if coerced and forced consent – of the people being thus collected.”

    ‘Forced consent’ (in the sense of a peaceful person compelled to do something under the threat of violence) is not consent at all.

  8. Sven

    > the deployment of cryptocurrency is to tax collection what deployment of end-to-end encryption is to mass surveillance

    Reflection:

    The govt may still keep demanding taxes paid in their state currency. If not transaction taxes, then FIXED taxes such as head taxes, land taxes or house taxes. So there could still be demand for the state currency – people will need to aqcuire it in order to pay their taxes. Sure, cryptocurrencies may turn out to be disruptive, but I’m not convinced that they’ll be *that* disruptive. Looks like there’s gonna be some tax reforms needed, sure. But it’s not like taxation and state currencies will go down the drain, right?

    I’m thinking that governments will be able to maintain demand for the state currency, because people will need to acquire it in order to pay their taxes. People will even have to *work* to aqcuire state currency (in order to pay their taxes). Which means that the government can still use state currency to employ resources (you know, government spending on infrastructure, health, schooling, whatever), even in the presence of cryptocurrencies.

    I guess many people could also work (in the private sector) for cryptocoins, and then acquire state currency in the market (in order to pay their taxes). How does this work? Can people exchange state currencies to/from cryptocurrencies anonymously? If not, such transactions could be taxed too I guess.

    In any case.. nah, I’m not convinced cryptocurrencies will be just that disruptive.

  9. Anonymous

    Anything that relies on the power grid had better make some plans for doing everything different, because there are enough nut jobs out there that will not let it stand.
    That’s the elephant trying to hide in the strawberry patch by painting it’s toe nails red. It’s one of our top worst night mares. It is going to be hell. J. Clark

  10. Michael

    It’s well beyond taxes. Owning the “money” is owning the economy because it’s owning the mean of exchange, the actual gateway for transactions. Because people cannot effectively barter they need to use those pieces of paper the government prints with pictures of Franklin on them. That gives the government huge temptation and power to counterfeit these papers and use those counterfeits as if they represent real wealth created or stored somewhere. In simple words, they print QE “bills” out of thin air and use it to buy toil and sweat of productive people, or finance their crony friends (or voters) or launch destructive unneeded wars all over the globe. This massive counterfeit operation, (AKA endless debt) gives the government unlimited and corruptive powers. It also costs the owners of real wealth a huge constant dilution. BUT with crypto people can move their transactions (and savings) away from “fack money” to a chosen mean of exchange. How will the government then QE it’s way to debt financing?

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