Bitcoin, Speculation, and Legal Tender Laws

Note: I took Banking Law, and received one of only two As, at Georgetown University Law Center under Prof. Daniel Tarullo who, from 2009 to 2017, was a Governor of the Federal Reserve Board.

Bitcoin is currently at $43,389.

And everything you need to know about Bitcoin is contained in that one sentence.  In other words, beyond its cost, there is nothing interesting about Bitcoin (or any other electronic “currency”).

Oh, there are interesting facts about where it comes from (and the monumental waste in “producing” it), as well as the utility of block chain technology (which is actually independent of electronic currencies).  But there is nothing interesting about a Bitcoin itself, which is just a seemingly random string of bits.  This isn’t true of gold or silver or wine or emeralds or cars or real estate.  Sure, one of my rental houses might have a market value of $150,000, but there are lots of interesting facts about it other than its “exchange rate” in dollars.  For example, it provides my tenant shelter, modern plumbing, electric conveniences, a big back yard, etc.  And we can debate all day about the intrinsic value of gold, but it is a good electrical conductor and people like wearing it as jewelry.  At least it does something. 

In sharp contrast, Bitcoin doesn’t do anything.  And it’s not because it’s a string of bits.  Hell, software is just a string of bits and so is the information in your favorite movie or Netflix show.  Unlike these, 1BTC is literally a useless string of bits that is simply recognized as “one Bitcoin” by the open-source Bitcoin algorithm.  Its only value is that ascribed by those who own it and/or want it.

“OK, so what?” asks the enthusiast.  “That’s also true of fiat money like the U.S. dollar.”

My three-word answer: LEGAL TENDER LAWS.

Look, there are a thousand reasons to hate Bitcoin, so I’m not going to mention any of them except the one that no one else seems to be talking about – namely, the fact that governments extract wealth from their citizens in the form of taxation, and taxes will always be payable in the governments’ chosen currency.

There is a common fear among Bitcoin enthusiasts that the government will eventually act to shut down electronic currencies.  Sure, that’s a possibility, but that’s not the main problem with Bitcoin.  The real problem – which almost no one seems to realize – is that the government is never going to accept Bitcoin in payment for taxes.  There is no government on Earth that accepts Bitcoin as payment or as legal tender.  Why?  Because accepting payment in an alternative currency devalues their own state-sanctioned currency.  Historically, there are a few shitty rogue governments that have been so incompetent with their own monopoly over currency issuance that their economies are either effectively or legally dollarized.  Zimbabwe springs to mind with its moronic (and fascinating!) $100 trillion bills.  Within the states and territories of the United States, the U.S. dollar is legal tender, which means that all debts, particularly debts to local, state, and federal governments, are payable in this currency and nothing else. 

You cannot pay your New York property taxes in British Pounds.  You must pay it in U.S. dollars or else the state will foreclose on your property.  If you happen to have a bunch of British Pounds, luckily there are 67 million people on an island across the Atlantic who need British Pounds to pay their property taxes to their government.  The meeting of supply with demand creates an exchange rate.  You cannot pay your U.S. income taxes in Indian Rupees.  If you happen to find yourself awash in Rupees, there are 1.4 billion people who need Rupees to pay taxes to their government, and the resulting currency market will allow you to exchange your Rupees for Dollars so you can pay your income tax bill.  The government has a monopoly on the use of force, and it will ultimately use that force to collect taxes on income, sales, property, value-added, etc.

So let’s say you use 2BTC, which you bought ten years ago for a nickel (or whatever) to buy a Tesla automobile, as Tesla apparently plans to start accepting it in payment.  Under the Internal Revenue Code, that is a realization event that makes you liable for taxes on $86,778 in gains.  But you cannot pay this tax in Bitcoin, nor will you ever be able to.  (The Federal Reserve owns the planet.  OK, it sort of shares it with a few other central banks, like the Bank of England, the European Central Bank, etc.)  And since no other government forces its citizens to pay taxes in Bitcoin, there is no “exchange rate” for Bitcoin.  To pay your taxes, you have to get U.S. dollars either by earning them or selling more Bitcoin, which means that the value of Bitcoin must always be denominated in some other country’s currency.

In other words, because Bitcoin is not and never will be legal tender in any country, it will never stand on its own.  The question will always – always, always, always, always, always – be “How much is Bitcoin today?” 

And that’s a problem... an insurmountable problem for Bitcoin enthusiasts.  When you are about to make a purchase in a store in Paris, the clerk doesn’t have to ask, “How much is the Euro today?”  In fact, to most Europeans, that question wouldn’t even make sense.  After all, 1 Euro is 1 Euro!  The store clerk does not need to look up the “value” of the Euro in terms of other currencies or commodities.  She doesn’t care.  She knows she needs Euros to pay her rent, her bills, and – most importantly – her taxes.  But Bitcoin is different.  A price will NEVER be fixed in Bitcoin... every transaction involving Bitcoin will ultimately involve some person or computer asking the question, “How much is Bitcoin today?”

I don’t want Bitcoin because it has no intrinsic value or use.  Governments don’t want Bitcoin because it devalues their monopoly on currency issuance.  And here’s the thing.  Even Bitcoin owners and enthusiasts don’t want Bitcoin. 

“Andrew, shut up.  Of course they do – that’s why they bought it!” 

Wrong.  They bought it because they think others want it.  (Conversely: if they did not think others wanted it, then no one would buy it.)

I used to collect old U.S. coins because I thought they were fascinating and I loved the history.  When I would share my collection with other numismatists, occasionally one of us would say something like, “Can you believe how much this coin is worth?!”  But that wasn’t the focus of our conversation.  We talked about minting, and history, and coin material and condition, and fascinating mint errors like double-struck coins, etc.  The point is that there was substance to the conversation because we actually enjoyed and valued and appreciated the asset, with “dollar exchange rate” a secondary consideration.

Not so with Bitcoin.  After countless conversations with Bitcoin enthusiasts (who tend to show up in droves at Libertarian conventions), I have learned that conversations revolve almost entirely around these two general topics:

* “The price of Bitcoin is $_____... can you believe it?!”  (Sometimes it’s way up, sometimes it’s way down – the only apparent consistency in the Bitcoin price is its volatility.)

* “Death to the Dollar (or Pound or Yen or Transnistrian Ruble)!”

In other words, even Bitcoin owners and enthusiasts don’t value Bitcoin per se – of course they don’t!  It’s just a useless string of bits!  Rather, they value it in terms of its selling price in dollars.

Let that sink in.  Bitcoin enthusiasts hate the U.S. dollar so much that they purchase a useless string of bits whose value – as judged by their own conversations – is determined by the number of those hated U.S. dollars they can sell it for.  That is madness.

The last thing I want to mention is speculation.  If I can pick a booger and manage, through suave argumentation, to convince a handful of people that it is worth a million dollars – is it actually worth a million dollars?  Value is a very subjective thing and the phrase “market value” only has meaning in an efficient and rational market.  The fact that Bitcoin is at $43,389 is exciting to a lot of people.  There are people who will pay this amount and more for 1BTC.  There may very well be people who, under the right conditions, would pay $1 million for 1BTC.  Just keep in mind that it is pure speculation.  Unlike a tulip, which at least offers the tiny subjective value of being easy on the eyes, Bitcoin’s only “value” is its price as denominated in fiat currencies.

And as much as one might despise the U.S. dollar for its lack of intrinsic value, it at least has the ability to prevent IRS agents from confiscating one's property.  Bitcoin cannot do that.  It cannot do anything.

Bitcoin is currently at $43,389.

And that’s all there is to say.