Can bitcoin survive governments’ monopoly on coercion?

If governments want your cryptocurrency they will come for it, says Merryn Somerset Webb.

The UK was not prepared for the Covid-19 pandemic. We aren’t prepared for much else in the way of crisis either: there are, for example, no plans in place should solar flares knock out our electricity supplies, or should terrorists attack us with anthrax.

So said Dominic Cummings when he gave evidence to a Commons committee earlier this week. Both of the latter events might seem unlikely – but a year ago so did being ordered to stay in your houses indefinitely while Cummings and Boris Johnson bickered about Matt Hancock’s integrity.

There isn’t much we can do about how the government prepares for crisis. We can, however, think about how we prepare – how we protect ourselves from pandemics, solar flares and, of course, governments’ behaviour. For lots of people these days, one part of the answer is cryptocurrencies, and bitcoin in particular.

We try to be open minded on this (I even hold some small part of a bitcoin myself), but the one pro-bitcoin argument we have never quite been able to accept is that a cryptocurrency can ever operate in a separate realm from global governments. It can’t. If at any point governments feel there is any real monetary threat from cryptos, we said, holders will fast find out what sovereign means.

Governments have a firm monopoly on coercion: if they would like, say, your bitcoin key, a full record of your crypto transactions or perhaps 40% of your bitcoin itself in a one-off wealth tax, they will have it.

There’s been plenty of hints that this is the case over the last few weeks: the US Treasury (irritated about the risk of tax evasion) has suggested that all crypto transfers worth more than $10,000 will have to reported to the tax authorities in future; China has effectively banned financial institutions from accepting or exchanging cryptos; and the European Central Bank has made its feelings clear by noting bitcoin’s “exorbitant carbon footprint” and use for various “illicit” activities.

Non-state-sponsored cryptos (state-sponsored ones are coming) may have some value or not (the Bank of England’s governor Andrew Bailey is very clear that they have “no intrinsic value”). But they are not actually currencies.

So they probably aren’t something to rely on for holding their value (or exchangeability) in a crisis.

What is (a basement full of canned food and gas masks aside)? We’d still go with gold. Central banks hold a lot of gold: they have an interest in making cryptos valueless – they have no interest in making gold valueless.

This will take some time to play out. But while we watch and wait, we are at least moving away from the Covid-19 crisis. With that in mind it’s time to take another look at EU markets: some countries have finally got a grip on vaccinations to the extent that they can begin to reopen properly.

It may also be the time for investors to think explore how to take advantage of the green revolution. The levels of grandstanding about this have been much accelerated by Covid-19, as have the share prices of many of the firms operating in the area. But that doesn’t mean there isn’t a way in.

The key thing to remember here: creating “clean” energy involves using a lot of pretty grubby metals. Have a look at some of those operating in Latin America: James McKeigue reckons you can still get in before the crowds.

Recommended

Cryptocurrency roundup: authorities tighten the screw
Bitcoin & crypto

Cryptocurrency roundup: authorities tighten the screw

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
21 Jan 2022
Stockmarket crash: is the “superbubble” heading for a “superbust”?
Stockmarkets

Stockmarket crash: is the “superbubble” heading for a “superbust”?

America's Nasdaq stock index is down by more than 10% after soaring to all-time highs in a "superbubble". Are we about to see a "superbust" stockmarke…
21 Jan 2022
Inflation: now we really have something to worry about
Inflation

Inflation: now we really have something to worry about

We’ve been worrying about a sharp rise in inflation for years, says Merryn Somerset Webb – now, we finally have something to worry about.
21 Jan 2022
Share tips of the week – 21 January
Share tips

Share tips of the week – 21 January

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022