I'm a Bitcoin optimist. Henry Farrell isn't. In an astute post, he argues that the big threat to Bitcoin's long-term viability comes from government regulation. Governments are used to being able to control how the financial system works, and the Bitcoin network's decentralized structure threatens that control. So, Farrell argues, if Bitcoin ever really takes off, regulators will try to destroy it.
This is a smart argument. Indeed, I believed it a couple of years ago. The problem is that it's a couple of years out of date. If regulators were going to try to shut down the Bitcoin network, they needed to do it in 2012 or 2013, not 2015.
In early 2013, Bitcoin was best known as the payment system used by the drug marketplace Silk Road. It wouldn't have been surprising if federal officials had taken a hostile stance toward the system. But a savvy lobbying campaign from Bitcoin supporters convinced the feds that the smart play was to make peace with Bitcoin rather than to fight it.
Advocates' argument was simple: Bitcoin was so decentralized and globalized that it would be impossible to drive it out of existence. Even if it was suppressed in the US, the network would continue operating overseas. Americans could use anonymizing technologies like Tor to access it. But if US officials tried to stamp it out, they'd destroy legitimate Bitcoin businesses and with them any influence over how the Bitcoin economy evolved. In particular, they'd lose the ability to subpoena the records of Bitcoin companies to help them trace Bitcoin transactions.
Regulators seem to have bought this argument. When the Senate held hearings on Bitcoin in November 2013, they were lovefests, with key regulators emphasizing the need to accommodate legitimate Bitcoin applications, even as they cracked down on illegal uses. Sen. Tom Carper, who chaired one of the hearings, drew an explicit parallel to the early internet. "Innovation is a very important part of our economy," said Jennifer Calvery, the woman who enforces the nation's money laundering laws. Mythili Raman of the Justice Department talked about Bitcoin's "many legitimate uses."
And remember, this hearing happened after federal officials seized assets belonging to Mt. Gox, which was then the leading Bitcoin exchange and would later declare bankruptcy. It was mere weeks after the feds shut down the Bitcoin-based drug marketplace Silk Road. In short, the feds at that point were under no illusions that the technology would only be used for legitimate purposes.
Farrell argues that the government's attitude will change if Bitcoin ever becomes popular enough to pose a real threat to conventional, regulated financial networks. But I think that gets things backwards. Bitcoin will only grow enough to be economically significant if a lot of legitimate businesses start to rely on it. But the more legitimate users the network has, the more politically difficult it will become to shut it down.
Bitcoin already has more powerful allies than it did two years ago. In 2014 alone, dozens of Bitcoin startups have raised money. Their backers aren't going to stand idly by while the government destroys their investments. For example, influential pro-Bitcoin venture capitalists, including Marc Andreessen and Fred Wilson, have pooled their resources to create a new Bitcoin advocacy organization called the Coin Center.
And of course the arguments that persuaded regulators in 2013 are still true. The Bitcoin network probably can't be shut down; it can only be driven underground. Doing so won't prevent serious criminals from using it, but it will make it harder for law enforcement to track down people using the network. And Bitcoin has good applications as well as bad ones. After going before Congress and endorsing these arguments last year, it would be awkward for regulators to do an about-face and declare war on the technology.
In short, if the regulators were going to try to shut down Bitcoin, they would have done it two years ago when it was still a fringe technology with no real support among elites. Now it's too late.