Can bitcoin survive governments’ monopoly on coercion?

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

Bitcoin and pound notes
Bitcoin: not a great crisis hedge
(Image credit: © iStockphotos)

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.

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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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.