It’s no secret that Bitcoin and other cryptocurrencies are a threat to the currency monopolies enjoyed by various governments around the world. Yet, in spite of this, the reaction from most governments to cryptocurrency so far has been reluctant tolerance rather than outright hostility or prohibition. This is likely because governments around the world currently see cryptocurrencies as a nuisance rather than an existential threat– like a fly buzzing around an elephant. But what happens when this is no longer the case (and we think it’s a matter of “when” not “if”)? In spite of how threatening cryptocurrencies are to the status quo of virtually all developed nations, it seems little consideration is given to the seemingly inevitable outcome: What happens when governments shift from reluctantly tolerating cryptocurrencies to an attitude of outright hostility and prohibition toward them? What can governments do to ban Bitcoin and other cryptocurrencies if they really wanted to? How effective would their efforts be and what can we do to mitigate them? These are questions we think are not only think under-considered, but also critical to the future of individual freedom as we know it.
The Low-Hanging Fruit: Centralized Exchanges
While Bitcoin and other cryptocurrencies can technically be owned and transferred without any involvement from centralized third parties, the sad and ironic fact is that the vast majority of nontechnical users rely on centralized exchanges like Coinbase or Gemini to custody their crypto for them. As if dealing the ultimate slap in the face to Bitcoin’s original vision, the centralized network of banks that Bitcoin was trying to disrupt has been replaced by a different yet equally centralized network of exchanges (in fact it’s arguably more centralized than the banks due to stronger network effects around liquidity).
What is the problem with such heavy reliance on centralized exchanges? Well, currently, since most governments see cryptocurrency as a mere nuisance, there isn’t a big problem with it. Exchanges like Coinbase and Gemini have legal licenses to operate from regulatory authorities (specifically money transmitter licenses) and exchanges that operate without such licenses can ban US IP’s and operate in “friendly” jurisdictions like Gibraltar. But, when governments upgrade crypto from “nuisance” status to “existential threat” status, it seems the first thing they will do is outlaw cryptocurrency exchanges, not just domestically but globally.
It cannot be overstated the extent to which a simple change in the legal status of centralized exchange activities can impact these businesses. Nations like the US and EU operate with a heavy reliance on “rule of law,” and all it would take is an act from Congress to cause all centralized exchanges to shutter overnight. To put it another way, if the US government can effectively ban end-to-end encryption, you better believe it can shut down centralized servers that allow you to trade crypto. Moreover, the US, if it decides it wants to ban crypto, can implement sanctions on all of the small countries in which shadier exchanges operate to get them to shutter access as well. Why would it do this? Presumably because it wants to impose dollar hegemony not only on its own citizens, but on all of its trading partners as well. After all, a currency network effect isn’t very valuable if it doesn’t entangle the entire global economy in its web, as the US dollar currently does.
What does a ban on centralized cryptocurrency exchanges look like? Well, it would have three significant outcomes:
- Most of the world would lose its ability to convert crypto into fiat money (aka their “fiat rail”).
- Most of the world would lose its ability to convert crypto into other crypto.
- Virtually everyone would be forced to shift to self-custodying their cryptocurrency, something that most nontechnical users wouldn’t have the knowledge to do securely.
While it would still be possible to use “fully-decentralized” cryptocurrencies like Bitcoin or the Ultranet, there can be no doubt that if a global centralized exchange ban were put into effect today, or even in the next year or so, the crypto community would be dealt a massive blow. Moreover, while it might seem like supposed innovations like “decentralized exchanges” can mitigate the impact of the above bullets, the reality is that all (i.e. 100%) of decentralized exchanges today, aside from the Ultranet as we will discuss later, are actually centralized in one way or another, therefore making them directly subject to an exchange ban. Specifically, they generally all require the use of a centralized server (usually called a “relay”) to actually match orders without opening themselves up to front-running attacks.
The Nuclear Option: IP Blocking
Suppose that banning centralized cryptocurrency exchanges was not enough to sufficiently quash the use of cryptocurrencies. This could be the case if, for example, governments take too long to implement an exchange ban or if self custody naturally grows in terms of popularity after such a ban. What can governments do then? Will self-custody allow cryptocurrencies to remain a bastion of freedom?
Sadly, unless technology improves, even fully-decentralized cryptocurrency systems like Bitcoin or the Ultranet can be banned via more invasive methods that are well within the scope of what developed-world governments can achieve. The problem lies in how cryptocurrency nodes initially connect to one another or “bootstrap.” Simply put, when a Bitcoin or Ultranet node boots up, it needs to be made aware of other nodes on the network that it can talk to to get up-to-date. How do Bitcoin and Ultranet nodes solve this bootstrapping problem to figure out what peer nodes are on the network? Basically, the standard software downloads a public list of IP addresses corresponding to active nodes by querying a “DNS seed” (the Ultranet has a slightly more sophisticated mechanism, but the idea is the same). The problem with this approach, and indeed any solution to the bootstrapping problem, is that if the list of active nodes is accessible to anyone on the network, then governments can take that list and ban precisely those IP addresses on their network. All they have to do is download the standard software, run it, and pretty soon they’ll be aware of all the IP addresses of all the other nodes on the network. This is precisely how China managed to ban Tor, and it is a problem that even the diligent developers of Tor haven’t been able to solve (in spite of a fair amount of cat-and-mouse iteration on the relatively naive bootstrapping scheme Bitcoin and the Ultranet use).
Will Governments Really Block Bitcoin Node IP Addresses?
So, if governments have the ability to technologically ban something like Bitcoin or the Ultranet, the natural next question is: will they? The interesting thing about an approach that bans crypto at a technical level as described previously is that it is far more invasive than a simple blanket centralized exchange ban, to the point where it actually starts to border on constitutional issues relating to freedom of speech and suppression of public discourse. Put another way, while it would likely be difficult for a centralized exchange to challenge an act of congress prohibiting the exchange of crypto for crypto (or crypto for fiat) on a centralized platform, it is conceivable that an assertion of one’s right to run a Bitcoin or Ultranet node and to hold Bitcoin or Ultra for themselves could triumph on constitutional grounds. Of course, this is all speculation, but it does seem to be a glimmer of hope, assuming the US constitution is still taken somewhat seriously at the time governments decide to go to war with crypto.
So What Can We Do About This?
Unfortunately, even if governments don’t go so far as to ban cryptocurrencies at a technical level, the reality is that a blanket-ban of centralized exchanges would be very damaging to the crytpocurrency ecosystem if it were to happen today. What can we do about this? Well, the most obvious thing we can do is create alternatives to centralized exchanges so that we can be ready when the heat gets turned up. This logic is precisely what drove us to develop the Ultranet a fully-decentralized blockchain marketplace, where all orders are end-to-end encrypted and listings can’t be censored or taken down. In some sense, the Ultranet exists to attack the same type of centralization Bitcoin was attacking with the banks, only now dealing with platform monopolies and centralized exchanges instead. But speaking more broadly, the fact of the matter is that we need to do as much as we can to reduce our reliance on centralized exchanges in the cryptocurrency ecosystem, whatever that entails. Because it’s only a matter of time before the government advances from trying to ban end-to-end encryption to banning cryptocurrencies as well.