How will governments operate in a world that has moved from fiat currencies to digital supercurrencies? This is a question I've been thinking about recently, and I wanted to think about what happens to governments by Bitcoin standards. The questions I have are: How will governments finance themselves? How do taxes work in the digital landscape, and how will governments respond to this dilemma?
How will governments finance themselves?
Most hardcore Bitcoin users probably don't care much about what happens to the government by Bitcoin standards. I dare say they want all governments to crash and burn. I sympathize with this point of view, but I am also a realist. The average person wants government because they have been conditioned to believe that it brings a sense of order and protects its citizens. I think it's the opposite, but that's not the majority opinion.
Governments of various sizes and configurations have been around for thousands of years and will likely continue to exist when a digital supercurrency is achieved. How, then, will governments be able to finance themselves when the ability to create money on a whim has been forever taken away from them?
In the West, governments primarily tax income as their main source of revenue because they have the ability to monitor most transactions through payment paths controlled by the Fed and banks, and through the threat of force and imprisonment. This has worked for them for a long time, but this will no longer be possible by Bitcoin standards.
The very nature of Bitcoin makes tracking the income of each economic participant almost impossible and extremely time consuming, especially when privacy tools like coins and Lightning are added to the mix. You can begin to understand why governments don't like Bitcoin, it robs them of their power.
Without the ability to impose arbitrary taxes on individuals, governments will be forced to develop methods to generate the revenues necessary to support themselves. More on that later.
Bitcoin economy of the future
Imagine a future where everyone buys and sells goods peer-to-peer using Bitcoin. This, hypothetically, would be a tax-free economy. Currently, there is no line of code in the Bitcoin protocol that can calculate sales tax when purchasing goods, and no Bitcoin users would consider creating something like that unless they wanted to be singled out and labeled as simple to the government.
I don't even know if that's technically possible, to be honest. No one likes paying taxes and will not shed tears over not having to pay them anymore. This creates another dilemma for governments around the world. If they cannot tax income and cannot effectively tax consumption, what alternatives do they have to support themselves?
There is no simple answer to this. I believe that our entire concept of what government is and how it relates to its people must shift radically from a top-down concept to a more decentralized customer service model. This is more in line with the libertarian worldview of what a state should be, where governments are voluntarily funded by their citizens rather than having to be funded through the barrel of a gun.
Under this model, governments would have to be much smaller than they are today, and they would have to consider revenues versus expenses, just as any business would. If governments are good financial stewards of their Bitcoin treasuries, citizens will be more likely to reward governments with continued support. This form of signal of support has a greater impact than a vote. The ability to withhold funding will make politicians more responsive to the people.
Elections can still be held because this will not change. Political parties must prove that they manage capital well, otherwise the government will not receive voluntary funding and will naturally fall from power in the next elections. This is the world I believe we should be working toward, because it will make the world a safer place for everyone.
How will governments respond to this emerging challenge?
While this may sound like music to our ears, politicians hate the idea of Bitcoin or having to answer to citizens. They have it pretty good now as it is. They get to tell people what to do, get good benefits, and get re-elected even if they break their promises – no wonder they never want to leave office.
In America, incumbents are re-elected by up to 90 percent. Did you know in the House of Representatives that the re-election rate of incumbents has never dropped below 85 percent? So, you only have 15% of the votes that will vote in the next election. Who doesn't like those possibilities? That's why nothing changes. We get the same people in office year after year because they know how to play the game and decorate the right palm, all thanks to the paper money printer.
If you want to see all the BS the federal government spends on its crumbling paper dollar, check out Citizens Against Government Waste. This will give you a good idea of the crap being financed in your name.
Do you think, after knowing this, that they would voluntarily give up all this power, prestige and influence? i don't think so. They will use different tricks to either get Bitcoin to their advantage or make it too cumbersome for people to use it.
I'm afraid Bitcoin users have already fallen into one of their traps with the Bitcoin ETF. I honestly believe this was the wrong move and could significantly slow down Bitcoin adoption in the US. I'm sorry to say it, but most people want speed and ease with anything in life, even Bitcoin.
Answer this question: Why do those with so little knowledge of Bitcoin learn the ins and outs of self-custody, and why is it important for them to be able to “own” Bitcoin in their retirement account? 9 out of 10 people will choose this option. As long as they see their retirement portfolio going up because of Bitcoin, they will happily stick with having big custodians like Blackrock hold their Bitcoin, without understanding how risky third-party custody of Bitcoin is.
At least we have a chance with Bitcoin to improve the world. Let's hope people will seize the opportunity to achieve true freedom.
This is a guest post by Robert Hall. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
