I would like you to consider for a moment a hypothetical scenario. I would like you to consider what would happen if the citizenry of a small nation State decided to make Bitcoins their de facto national currency.
Let us assume that Italy is kicked out of the Euro zone and returns to its own currency system. Given the fact that Italy is a massive welfare state that produces relatively little compared to what it consumes, we can surmise that any Italian national currency would not be long for this world. The Italian government would very rapidly inflate any national currency into oblivion in order to support its bloated welfare rolls and massive public sector.
If a developed nation, such as Italy, should undergo a collapse of its currency system, it seems reasonable to me that many Italians in private business may chose to adopt Bitcoins as a means of facilitating trade, as a storage of wealth and as a means to support the division of labor within their respective markets.
They may do this because classical money (gold) is not conducive to international trade. It must be physically delivered and stored, which takes time and resources. It would be logical to surmise that gold would play a role in the facilitation of trade during a period of fiat money hyper-inflation within Italy, but I think the inconveniences of gold as a trade facilitator are greater than those of Bitcoin. And because of this, the market may very well make Bitcoin the de facto currency. This is possible in a nation like Italy where the society has easy access to smart phones, the internet and computer resources. Clearly the lack of electronic resources in nations like Somalia, Zimbabwe and Haiti make it unlikely that Bitcoin could make in-roads there, but this is not the case with Italy. Further, gold can be easily confiscated by authorities and people must take great pains to hide it if they wished to keep their holdings entirely private. In short, gold can be confiscated, stolen and it is cumbersome to trade with. Gold can not be shipped across an electronic wire.
Now let us consider what the ramifications of such behavior would be.
With Bitcoins, a violent looting regime could not know how much money any one person may have. This poses a problem for tax collectors. Most coercive tax collection that is done these days takes the form of bank asset confiscations. If you don’t pay your taxes, the tax man will simply confiscate your bank accounts, put a lien on various properties that you may own, and force your employer to extract money from your paycheck. Further, tax collection requires that the State be able to audit transactions and follow an audit trail to see how much business any individual has actually conducted.
These methods become obsolete in the face of a crypto-currency like Bitcoin. The State would have to resort to direct violence to collect the money it requires to fund itself. This is because the State would not be able to pry into bank accounts to see how much money any one person may have. The State would not be able to lean on banks, forcing them to report transactions above a certain amount. The State would not be able to lean on investment brokers, forcing them to disclose how much interest their clients may have earned. The State would not be able to confiscate bank accounts, because there would be no bank accounts. The State could not confiscate money from anyone because the State would have no way of knowing how many coin wallets a person had or where they were stored. Even if they compelled a person to hand over some coins by threatening force, they would have no way of knowing if the person had other wallets hidden way with even more money in them. The State could not track financial transactions, and auditors would have no way of knowing how much business any company may have done off the books because there would be no record of bank transactions to follow.
In short, if people wanted to keep their own money, they certainly could. The State would only get the money that people wanted the State to have. It would turn Italy into a de facto voluntarist nation State. How long could a modern coercively funded State last in the face of people using a currency that could not be tracked or confiscated? - Not long, I surmise.
Let us continue hypothesizing about what would be the broader ramifications of this. Let us suppose that the coercively funded Italian nation State collapses under the weight of its own violent looting and dissolves. Without a tax base to loot, no other nation has any incentive to dominate the region militarily. What would an invading nation get? Resources? Why not just trade for them? Why waste the money invading some place if you still have to pay people to take the resources that you could have gotten for cheaper by simply trading for them in the first place? In terms of economic calculation, an invasion, without the ability to tax resources from the public, is a losing proposition. Further, in our modern age with the internet, it would be difficult for other nations to legitimize their invasion without provoking a reaction from the rest of the world.
So let us assume that the Italian nation State has collapsed and no other nation sees any economic benefit to imposing a military rule over the smoking hulk of ruin and despair that was formerly called Italy. Further, let us assume that the remaining private industry of the region has all agreed to conduct trade in Bitcoins.
At this stage, we would have an entirely economically free zone of trade and commerce that is not violently controlled by any singular State, along with a population whose currency is completely “un-lootable” by any State actors or private thieves.
Police would cease to exist, to be replaced by private security agencies. State courts would cease to exist, to be replaced by private commercial courts, in the vein of lex mercatoria. International trade would be subject to commercial common law. All social services would necessarily become voluntarily funded private entities. Banking would simply become a match making service between lenders and borrowers, there would be no central bank imposing interest rates or controlling the money supply. An Italian banking web site under these conditions might even look similar to match.com! Since money could not be looted, thieves and organized crime would face the same problems robbing people that the State would face. Crime would nearly disappear from the region entirely because all people would be forced to work in private markets or starve. The Italian mafia could not collect its “protection” fees from businesses any more than the State could. People who engaged in violet crime would face reputation issues and would have no way of obtaining legitimate work or welfare should they engage in bad behavior. Violent criminals would naturally be forced out of the region.
We know that completely tax free zones that have no regulatory State are very attractive locations for private businesses. Here we would have an educated first world populace that is ready and willing to work. Do you think Coca-Cola might like to sell these people some soft drinks? Do you think Coca-Cola might like to establish a corporate office there where it could keep its earnings tax free and do business without any regulatory oversight? They would be fools if they didn’t see opportunity there. Certainly if Coke didn’t move in, another soft drink vendor would. And that is the point. Once an economically and politically free zone is created, it will act like a vacuum, sucking in private businesses from across the globe. I mention Coke because they have already seen opportunity in Somalia for the very same reasons I just mentioned.
Let us suppose that this economically free zone frightens western imperialist powers like the United States, and so the US and similar nations enact laws to prohibit US business from conducting trade in Bitcoins. Since Bitcoin is an international currency that has no borders, it seems to me that it would be a simple matter for corporations to do business with a subsidiary in Mexico who then does business with Italy, and then transfers money to Mexico, which is then transferred back to America. There would be no way to prevent this unless all the nations of the world actively prevented this from occurring, which is clearly an unlikely scenario.
Further, if people in Italy want Coke, they could certainly get Coke from a private supplier somewhere in the world. Even if the corporate offices of Coke actively prohibited the sale of Coke in Italy by their own subsidiaries, some enterprising entrepreneur would simply buy Coke products wholesale and resell them in Italy outside of Coke’s ability to control them. And since all police would be private, Coke could not lean on any State authority to prohibit them from doing so. Obviously my Coke example applies to all industry.
From this vantage point, we can see that the spread of Bitcoin would escalate. Surrounding nations that wished to do business with the Italians would be motivated to conduct their own business in Bitcoins. We can see that Bitcoin is already spreading like wildfire among internet merchants today. Every day another merchant comes online who is willing to accept payment for goods or services in Bitcoin. How many more would be willing to do so when an entire region uses Bitcoins as their primary currency?
Consider that the value Bitcoin has today comes exclusively from people’s willingness to buy and sell products in exchange for it. The more goods and services that people are willing to exchange for it, the more value the coins will have. In other words, the more users of Bitcoins, the more they will be in demand; and hence, the more value they will have. I don’t know about you, but I would rather hold an appreciating currency that is free from inflation taxes than one that constantly loses value over time. While Bitcoin prices are volatile at the moment, the more users of the currency, the less volatility the currency will experience and the more value each coin will represent. This ultimately turns into a functional application Thiers’ Law. Good money will drive out bad money when exchange rates and taxation can not be controlled by law. Consider that inflation is a form of taxation, and that the application of legal tender laws are used to enforce taxation. With Bitcoins, taxation can be avoided entirely which renders legal tender laws pointless.
One region in the world where Bitcoins become the dominate currency would topple the fascist control grid of modern banking and violently funded nation States around the globe. It could not be contained without a coordinated global action to ban it, which is something I find highly unlikely. Even a coordinated global action by violent nation States could not ultimately keep it at bay for long. The economic incentives for trade are just too strong. Nation States could not prevent Bitcoins from being used any more than they can successfully ban the use of illicit drugs.
In the end, they would all fall.