Cryptocurrencies And The State

Recently I was asked, “What are your thoughts on (attempting) or using cryptocurrencies to circumvent governmental dictates? Is it effective? What affect does it have on society?” The person asking included a link to an article on how Iran’s policymakers are using bitcoin to evade U.S.-led financial sanctions. My answer didn’t fit in the space provided, and I thought it might be of some general interest, so I’m posting it here. Also, I should make it clear that I’m responding in a personal capacity and not an institutional one, because as you’ll soon see, I can’t realistically go anywhere near this topic without my answer being steeped in my ideological views.

Government is like a pothole: go around it if you can, go through it if you must, but never let it stop you from reaching your destination. To that end, I’m less interested in high profile examples like whether the Ayatollahs can evade U.S.-led sanctions, and more interested in what lower profile individuals who want to maintain as much freedom as possible can do in a world where theirs is a decidedly minority opinion.

I want cryptocurrencies to be ideal for this, sure, but that desire leads to the danger of wishful thinking. Bitcoin itself clearly is not ideal or else none of us would ever have heard of Ross Ulbricht. As I’ve said elsewhere when people have suggested that Bitcoin is a haven for money laundering (which thankfully I’m seeing less and less often), I expect any system that uses a public ledger is a poor choice for such transactions, because even though accounts are not attached to names, sooner or later interfacing with the legacy banking system means some accounts have connections with real world identities, and from there the ledger is nothing more than a giant game of Sudoku that large law enforcement agencies are well positioned to solve.

That leaves privacy coins. While those might do a better job of protecting the financial privacy of those who remain within that self-contained system, there’s still the same problem of interfacing with the legacy financial system. This sort of thing has been an issue for a long time. Twenty years ago I was Director of Information Systems for e-gold, the original digital gold currency. We had the same dream of building a replacement financial system that would allow people to live more freely. Back then I referred to this as the “grocery store problem”: how does one with a balance in an alternative financial system use it for day to day needs, like buying things at the grocery store? Does that need render privacy coins less useful for their stated purpose?

I understand that if critical mass were reached in such a system that value wouldn’t have to leave it, and that if it were useful as a self-contained economy that this could change matters considerably. So perhaps the ultimate question here is how a privacy coin could reach that critical mass. I do know that the matter is trickier than it may seem, having heard for a quarter of a century now from crypto-anarchists and cypherpunks that encryption will “starve the beast” by facilitating consequence-free tax resistance. So… any suggestions? I’m all ears!