In the eyes of Bitcoin fans, they are like the American revolutionaries, a rag-taggle army up against established powers. Of course, in this story line, the might of King George is defeated, but nobody knows how this Bitcoin story will play out. In this note we look at Bitcoin from the point of view of King George (how regulators in different countries view Bitcoin). We have some sympathy for King George. The rag-taggle army cannot even agree on what Bitcoin is (Currency? Asset? Payment Rail?). The Bitcoin community has no equivalent of George Washington who can mandate something as simple when to capitalize (I have capitalized Bitcoin to allow for both use cases and maybe flamed for this) and the Bitcoin rag-taggle army often appear to be more vociferous in fighting each other than fighting King George. Welcome to the chaos of freedom. To stretch the analogy too far, George Washington may not be able to motivate the rag-taggle army. If consumers simply shrug and walk away, what sovereign regulators do becomes a moot point. We believe that there is still a reasonable chance that Bitcoin will change the world and so it is worth looking at what the sovereign regulators are doing.
Three things that worry King George
- # 1: Will citizens be exposed to more fraud & crime?
- # 2: Will citizens desert their national currency?
- # 3: How will we collect tax?
Four Types of Countries
- Offshore Countries positioning as global hubs
- Countries with weak currencies
- Countries with a tendency towards freedom & innovation
- Superpowers that may set the de facto standard
Offshore Countries positioning as global hubs
These are countries with small populations and local economies that make money by being a global hub in some way. Derided as tax havens in the past, many are now re-positioning to attract Bitcoin entrepreneurs. They have little to lose and a lot to gain. They have to make sure their country is not a perceived as a haven for tax evaders, money launderers and other bad actors. They are primarily concerned with how people outside their country use Bitcoin. If other countries adopt overly restrictive regulations, Bitcoin activity will move to these hubs. They have a natural role as a place to locate exchanges and vaults. The Channel Islands and the Isle of Man are two counties positioning in this way.
Countries with weak currencies
These are countries that rightly fear that citizens will desert their national currency. If you suffered hyperinflation in Zimbabwe for example, Bitcoin looks pretty good. These countries are too numerous to name. The simple rule of thumb is that when you see a country ban Bitcoin, they are worried about currency flight. The real decision by citizens when their national currency is losing its spending power is do they use barter or physical US Dollars (any strong currency will do but US Dollars are well understood and tend to be used in these situations) If there are physical Bitcoins in circulation they can be an alternative.
One country with a weak currency that is taking a more innovative approach is Tunisia (Dinar is the currency, TND is the symbol). Tunisia has become the first country to issue their national currency on the Blockchain. Note that this is not as radical as a country adopting Bitcoin as their national currency. Tunisia still has control over their currency. This is all about financial inclusion and mobile money. Tunisia already has a digital currency called the eDinar that is issued through the Tunisian Post. The eDinar is designed for the over 3 million Tunisian adults who have no banking relationship (but which use the Post Office). With this announcement, Tunisia offers an Android app powered by Monetas, which allows their citizens to “make instant mobile money transfers, pay for goods and services online and in person, send remittance, pay salaries and bills, and manage official government identification documents.” The country that kicked off the Arab Spring with one entrepreneur with a mobile phone may kick off a revolution in digital currency.
Our thesis on Daily Fintech is First the Rest then the West. Innovation is reversing direction and starting in the Rest Of the World where there is greater need and where it is possible to leapfrog using new technology. The leadership today is coming from China and India. It may come from Africa in future. For a purely fun science fiction view of where this could go, read The Pan African Currency Union based on bitcoin replaces US $ as reserve currency.
Countries with a tendency towards freedom & innovation
These countries also often have strong currencies. Take Switzerland as an example. The Swiss love their currency. It has historically been a strong store of value; so Bitcoin does not appear like a threat. Because of an unusual bit of history (which Daily Fintech first spotted a year ago in Geneva), Switzerland is officially a multicurrency country. There is a legal alternative currency in Switzerland called WIR that was created in 1934 by people who wanted to create an alternative to a financial system that had failed so dramatically in 1929. Does that sound familiar? WIR accounts for a tiny % of Swiss GDP but it is real, useful and legal. So, by default, Switzerland is a multi-currency country and Bitcoin is legal tender. One cannot imagine Swiss people exchanging Swiss Francs for Bitcoin in order to switch into another weaker currency. This is no threat to the national currency. However it does help to position Switzerland as a hub for innovation. Switzerland also has strong privacy laws, which was the driver for the pretty dramatic news of a Silicon Valley company moving to Europe, reversing the usual flow of entrepreneurs from Europe to Silicon Valley (Xapo story on Daily Fintech is here). It is no surprise that Switzerland ranks #1 in the Global Innovation Index and that the Zurich Zug corridor is emerging as Crypto Valley.
Other countries with a strong currency and a history of innovation (ie not dependent on oil for a strong currency), but without superpower status include Australia and New Zealand. Like many other countries they are adopting a relatively laissez faire position of delaying any Bitcoin specific regulation.
The Reserve Bank of New Zealand expresses this as follows:
“Non-banks do not need our approval for schemes that involve the storage and/or transfer of value (such as ‘bitcoin’) – so long as they do not involve the issuance of physical circulating currency (notes and coins).”
Luxembourg is also being proactive. The country issued a license to SnapSwap in October 2015. SnapSwap is another example of a company relocating from America to Europe. This indicates that innovation within the Eurozone is possible.
Superpowers that may set the de facto standard for regulation
China would like the Remnimbi to replace the US $ as reserve currency and this tends to make them anti-Bitcoin. However China is such a big and dynamic economy and such a big player in Bitcoin Mining that one should never count them out.
America is the obvious candidate to take a leadership role but is hobbled by battles between States (New York and California have very different points of view).
European Union could take a leadership role because both America and China may leave the way clear for somebody else to take leadership.
Take a chill pill King George
- # 1: Will citizens be exposed to more fraud & crime? Not if you enforce existing laws such as segregated accounts (the issue behind Mt Gox and many traditional financial services frauds). Decentralized storage maybe safer from cyber crime than centralized storage.
- # 2: Will citizens desert their national currency? Not if you avoid the temptation to inflate away your currency. If you do, your citizens will use gold, US$ or Bitcoin. The issue is not Bitcoin.
- # 3: How will we collect tax? Treat Bitcoin as an asset and tax the capital gains. That is simple and most countries already do this.
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