This is a solid argument against the libertarian utility of cryptocurrency in a high state capacity place. If you already live in a failed state or kleptocracy (say Venezuela or Russia), the tradeoff is quite different, and you might then think that you're better off trying to protect your own cryptocurrency, since the government is not going to be much help protecting your bank account. And of course states can change type over time, so even if your country is high state capacity now, you might want to hold some crypto as a hedge against its becoming a failed state or kleptocracy.
There's an interesting comparison here with gun rights. In a high state capacity, high social trust place, you don't need a gun to protect you from private criminals because the government is pretty good at doing that, and a gun will not do you much good if that government turns oppressive. So the libertarian utility of guns is mostly for people who live in places with high crime and ineffective police protection, or want to hedge against the place where they live becoming like that. There are obvious differences too: the externalities of gun ownership are quite different and the intra-national variation in protection from crime is much larger than the variation in protection of bank accounts. But this analogy may explain both why interest in cryptocurrency and guns tend to correlate, and why enthusiasts of both tend to place more hope in them than is warranted.
The government won't turn oppressive on its own people because there's a high cost involved (who has the guns? can I walk outside without fear of being assassinated? etc.). The win-win strategy of increasing prosperity (protecting us/stealing from others) then taxing it is a safer course of action. Everyone hopes they never need to make an insurance claim but we all recognize the benefit of having insurance, aka hedges.
Yup, it's a sort of tail risk insurance and this probably is part of why "prepper" types generally, who make a hobby out of insuring against tail risks, tend to like both crypto and guns. What I find interesting is that prepper types do not seem more averse to regular non-tail-ish risks than others, i.e. aversion to tail and non-tail risks seem somewhat anti correlated.
Perhaps it's because retail insurance has a pretty decent track record of handling regular risk whereas governments have a mixed track record of handling tail risk. They're the ones creating that risk in many circumstances.
Arnold, I like your analysis but I think most governments are kleptocracies and the relevant issue is how bad they are at protecting a majority/minority of their population. In "normal" times they are not too bad at protecting a large majority but in shocking times government priorities change and the protected majority soon becomes much smaller. BTW, this is what has been going on in Chile since the 2019 outbreak; stay tuned: this afternoon Congress may approve either its own project or a project prepared last night by the executive in their struggle for power (both projects are about how much money to take out of the private system of pensions and under what conditions at a time in which the President, the Congress, and the Constitutional Convention are ready to discuss a new, public system of pensions).
Wow! Shots fired Sunday and today! Well, it's a good thing we human beings have mortality, especially for strongly held convictions such as “Nope: too old and too law-abiding to feel like I belong here.” / "Crypto-boy: “Nanny-nanny boo-boo..." But only this one conviction, Arnold. Lord knows there are plenty of ideas ossified in my 'ol noggin that probably wouldn't be useful to future generations, especially compared to yours!
"Law-abiding" has quite a different connotation these days, doesn't it? When you stack policy disasters on top of outright immoral activity performed on behalf of the public good ("high state capacity") over the last two or three decades, "law abiding" just translates to "submission to those in power". It has nothing to do with actual law, because those who claim to uphold it couldn't care less about holding each other accountable.
Bitcoin wasn't created to break any laws. It was a direct response to laws being broken by the law upholders. I'll take an immutable public ledger with a level playing field any day over the current system which tenuously depends on our ability to guarantee energy supplies and surreptitiously robs wealth away from the working class.
> A great thing about using B in the United States is that the government is really good at protecting it.
Is it? I like your definitions because you it seems like you could actually define inflation as the condition where the government no longer protects the value of its currency.
How much of the shift to C and A can be seen as a reaction to the US government no longer being really good at protecting B?
I think the Bitcoin folks would argue that it protects against the inflation you noted everybody detests so much. This might be true, but does it do so better than other financial vehicles that offer protection against inflation, like commodities, real estate, etc? It would seem to me the answer is not really, but maybe they know something I don't.
I suppose that a key empirical question is whether persons readily can hide their cryptocurrency assets and transactions from government surveillance.
Markets in illicit behaviors generally have required corruption of government officials.
If cryptocurrency is adjacent to illicit markets, then cryptocurrency will be a currency of corruption to protect illicit markets, and will depend on corruption to elude confiscation.
Friendly (though maybe useless!) amendment: you could call "B" "book-keeping". I think even before the advent of computers, a lot of money existed only as ledger entries.
I think there's a different use case for crypto (hypocrisy alert: I own none). This happened with the Canadian truckers and has happened in some civil forfeiture cases. You are suddenly denied access to all of your accounts. If you have crypto, and the key wasn't available to the government, at least you have a backup stash somewhere.
So, it's not a case of your scenario, where the money holder has EVERYTHING in crypto to keep the government from getting anything. It's a case of having SOMETHING in crypto, so that the government can't take everything at once. There would still be challenges to pay with that crypto -- say, for your electric bill -- without it impinging with A or B in a way the government can obstruct.
Also, a mattress full of Benjamins might be a better alternative.
In your cautionary scenario, the government needs some way of knowing how much wealth (or income) Crypto-boy (or any of the various individuals under its control) possesses. If he gets his income in cryptocurrency and his wealth is mostly in encrypted form and he does not call attention to himself with an opulent lifestyle, he might evade taxes/fines. But, as you say, if he is defrauded, he is probably out of luck.
This is a solid argument against the libertarian utility of cryptocurrency in a high state capacity place. If you already live in a failed state or kleptocracy (say Venezuela or Russia), the tradeoff is quite different, and you might then think that you're better off trying to protect your own cryptocurrency, since the government is not going to be much help protecting your bank account. And of course states can change type over time, so even if your country is high state capacity now, you might want to hold some crypto as a hedge against its becoming a failed state or kleptocracy.
There's an interesting comparison here with gun rights. In a high state capacity, high social trust place, you don't need a gun to protect you from private criminals because the government is pretty good at doing that, and a gun will not do you much good if that government turns oppressive. So the libertarian utility of guns is mostly for people who live in places with high crime and ineffective police protection, or want to hedge against the place where they live becoming like that. There are obvious differences too: the externalities of gun ownership are quite different and the intra-national variation in protection from crime is much larger than the variation in protection of bank accounts. But this analogy may explain both why interest in cryptocurrency and guns tend to correlate, and why enthusiasts of both tend to place more hope in them than is warranted.
The government won't turn oppressive on its own people because there's a high cost involved (who has the guns? can I walk outside without fear of being assassinated? etc.). The win-win strategy of increasing prosperity (protecting us/stealing from others) then taxing it is a safer course of action. Everyone hopes they never need to make an insurance claim but we all recognize the benefit of having insurance, aka hedges.
Yup, it's a sort of tail risk insurance and this probably is part of why "prepper" types generally, who make a hobby out of insuring against tail risks, tend to like both crypto and guns. What I find interesting is that prepper types do not seem more averse to regular non-tail-ish risks than others, i.e. aversion to tail and non-tail risks seem somewhat anti correlated.
Perhaps it's because retail insurance has a pretty decent track record of handling regular risk whereas governments have a mixed track record of handling tail risk. They're the ones creating that risk in many circumstances.
Arnold, I like your analysis but I think most governments are kleptocracies and the relevant issue is how bad they are at protecting a majority/minority of their population. In "normal" times they are not too bad at protecting a large majority but in shocking times government priorities change and the protected majority soon becomes much smaller. BTW, this is what has been going on in Chile since the 2019 outbreak; stay tuned: this afternoon Congress may approve either its own project or a project prepared last night by the executive in their struggle for power (both projects are about how much money to take out of the private system of pensions and under what conditions at a time in which the President, the Congress, and the Constitutional Convention are ready to discuss a new, public system of pensions).
Wow! Shots fired Sunday and today! Well, it's a good thing we human beings have mortality, especially for strongly held convictions such as “Nope: too old and too law-abiding to feel like I belong here.” / "Crypto-boy: “Nanny-nanny boo-boo..." But only this one conviction, Arnold. Lord knows there are plenty of ideas ossified in my 'ol noggin that probably wouldn't be useful to future generations, especially compared to yours!
"Law-abiding" has quite a different connotation these days, doesn't it? When you stack policy disasters on top of outright immoral activity performed on behalf of the public good ("high state capacity") over the last two or three decades, "law abiding" just translates to "submission to those in power". It has nothing to do with actual law, because those who claim to uphold it couldn't care less about holding each other accountable.
Bitcoin wasn't created to break any laws. It was a direct response to laws being broken by the law upholders. I'll take an immutable public ledger with a level playing field any day over the current system which tenuously depends on our ability to guarantee energy supplies and surreptitiously robs wealth away from the working class.
> A great thing about using B in the United States is that the government is really good at protecting it.
Is it? I like your definitions because you it seems like you could actually define inflation as the condition where the government no longer protects the value of its currency.
How much of the shift to C and A can be seen as a reaction to the US government no longer being really good at protecting B?
I think the Bitcoin folks would argue that it protects against the inflation you noted everybody detests so much. This might be true, but does it do so better than other financial vehicles that offer protection against inflation, like commodities, real estate, etc? It would seem to me the answer is not really, but maybe they know something I don't.
I suppose that a key empirical question is whether persons readily can hide their cryptocurrency assets and transactions from government surveillance.
Markets in illicit behaviors generally have required corruption of government officials.
If cryptocurrency is adjacent to illicit markets, then cryptocurrency will be a currency of corruption to protect illicit markets, and will depend on corruption to elude confiscation.
Friendly (though maybe useless!) amendment: you could call "B" "book-keeping". I think even before the advent of computers, a lot of money existed only as ledger entries.
I think there's a different use case for crypto (hypocrisy alert: I own none). This happened with the Canadian truckers and has happened in some civil forfeiture cases. You are suddenly denied access to all of your accounts. If you have crypto, and the key wasn't available to the government, at least you have a backup stash somewhere.
So, it's not a case of your scenario, where the money holder has EVERYTHING in crypto to keep the government from getting anything. It's a case of having SOMETHING in crypto, so that the government can't take everything at once. There would still be challenges to pay with that crypto -- say, for your electric bill -- without it impinging with A or B in a way the government can obstruct.
Also, a mattress full of Benjamins might be a better alternative.
In your cautionary scenario, the government needs some way of knowing how much wealth (or income) Crypto-boy (or any of the various individuals under its control) possesses. If he gets his income in cryptocurrency and his wealth is mostly in encrypted form and he does not call attention to himself with an opulent lifestyle, he might evade taxes/fines. But, as you say, if he is defrauded, he is probably out of luck.
Knowledge between your ears is also a form of capital and wealth ("human capital") and the government has problems stealing that asset.
Brilliant summary. Great way of thinking about various political approaches to the safety and distribution of individual possessions. Thanks for this.