Why Governments Can Regulate Bitcoin, but Not Control It

This article is an excerpt from the Shortform book guide to "The Bitcoin Standard" by Saifedean Ammous. Shortform has the world's best summaries and analyses of books you should be reading.

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Can governments control bitcoin? What are some ways governments are currently regulating bitcoin?

The bitcoin network is designed in such a way that it’s impossible to control by a single overseeing authority. However, governments can regulate the use of bitcoin.

Here’s why bitcoin is beyond government control and how governments can regulate bitcoin.

Can Governments Contol Bitcoin?

Ammous explains that the decentralized architecture of the bitcoin network is what makes it impossible for any government to control: The system is designed so that every transaction has to be verified and approved by a majority of the network.

Consequently, anyone who wanted to alter how bitcoin works (for example, to increase the supply of bitcoins, or to disallow certain transactions) would have to control a majority of the network. But no single country, let alone any government agency, has control over enough of the network to make changes. This ensures that bitcoin will continue to operate the same way (and with the same controls on its supply) regardless of the wishes of national governments.

As Ammous states, governments can’t alter the way the bitcoin network operates. However, they can regulate bitcoin. In the United States, bitcoins are considered to be a type of financial security and thus are regulated by the Securities Exchange Commission. As such, people who receive bitcoin payments must pay income tax on the bitcoin’s dollar value at the time of receipt. If they later sell them, they must also pay capital gains tax on the sale if the dollar value of bitcoins increased while they held them.

Meanwhile, China, Egypt, Iraq, and several other countries prohibit their citizens from owning bitcoins or operating computers on the bitcoin network. These prohibitions may prove difficult to enforce, but the risk of facing criminal charges for using bitcoin will certainly reduce usage and demand for bitcoins in these countries.

In principle, if too many countries prohibit bitcoin, the remaining network might become so concentrated in one or a few countries that its decentralized structure would be compromised. If those countries then passed laws requiring those operating bitcoin servers to implement new protocols, they could control the supply or other facets of bitcoin.

And in any case, Ammous’s vision for a bitcoin Standard isn’t likely to become a reality unless a majority of governments come to embrace it. Right now, some countries, like the US, may be moving slowly in that direction. But others, such as China, are clearly moving away from it.

Why Governments Can Regulate Bitcoin, but Not Control It