Exit can come in many forms. Eric Crampton has long been a vocal advocate of emigrating from the United States of Illiberalism to relatively free New Zealand. Patri Friedman wants to build new communities on seasteads. Bryan Caplan psychologically and socially walls himself off in what he calls his beautiful bubble, walking the earth as a tourist. Tyler Cowen escapes into pure, unadulterated interiority.
In February I was on an ISFLC panel on “economic secession,” which covered start-up cities and Bitcoin. The premise was that these were two exciting developments that would promote individual liberty by giving people the chance to opt out. Is the business you want to start over-regulated in your jurisdiction? Why not found it in a new start-up jurisdiction that will allow you proceed? Do you think that it’s your body and you should be allowed to ingest anything you feel like ingesting? Opt out of immoral drug laws by buying your illicit substances with Bitcoin.
But Bitcoin is unlike emigration, seasteading, start-up cities, and personal bubbles. It is not really an exit at all.
Consider the argument occasionally made by the anarchist wing of the Bitcoin community, that Bitcoin adoption doesn’t matter. We have the technology now to transact peer-to-peer. Who cares whether bitcoins are worth $0.10 or $10,000? This difference is just a nominal one, affecting only the number of bitcoins we need to send to our dark web drug dealers. The blockchain genie is out of the bottle, and the power to opt out of drug prohibition is forever ours.
This view is charmingly naïve. Do the math: If Bitcoin crashes to $0.10 and comes to be used only for black market drug purchases, the value of newly introduced bitcoins will be $360 per day. Since transaction fees are still a relatively small part of mining revenue, miners will not spend much more than $360 (or if you want to generously account for transaction fees, $500) per day on electricity costs. The cost of buying enough equipment to accumulate 51 percent of the Bitcoin network’s mining power will be under $100,000, within the reach not just of nation-states, but well-heeled anti-drug busybodies. With 51 percent of the network, an attacker would be able to double-spend with impunity, destroying the currency.
If Bitcoin is to be robust to such attacks, bitcoins need to be valuable assets, valuable enough to keep everybody mining. If they are used only by a handful of nerdy drug enthusiasts to conscientiously opt out of illiberal prohibitions, that won’t be enough. Bitcoin relies on relatively widespread adoption to remain cryptographically secure.
A widely-adopted cryptocurrency with a high fraction of legitimate use is also insulated from opposition from nation-states for macroeconomic reasons. Regardless of what anyone has told you, Bitcoin for now exists at the pleasure of governments. How long do you think it would take the NSA to crash Bitcoin? Simply announcing its intent to disrupt the network would make the price drop significantly. If Bitcoin were used only for illegal purposes, they would eventually do this. On the other hand, if Bitcoin transactions can ever account for even five percent of the legitimate global economy, governments will protect the network from crashes even if the currency is sometimes used to purchase illegal substances. No government wants to start a deep global recession in order to stop people from getting high.
In isolation, Bitcoin offers no special opting-out capability. Cryptoanarchy, it turns out, has network externalities. But this is only one side of the coin; consider also the obverse. If Bitcoin ever becomes widely adopted, it will change power relations not only between the state and the conscientiously libertarian. No, it will reduce the effectiveness of financial prohibitions between any two parties, regardless of their political views. Whereas exit only secures freedom for the one who is leaving, a cryptocurrency that is successful in the long run will impose a measure of freedom even on those who don’t want it.
There is a word for a change that imposes a radically new political reality on everybody, whether they want it or not. That word is not exit; it is revolution. Revolutionary freedom-advancing technologies have succeeded before. Containerization increased the elasticity of the supply of capital, and packet-switching moved telecom innovation from the core of the network to the edge. The (liberal) changes wrought by these technologies have taken decades to unfold, and the world is still reeling from them. Not everyone is happy about the changes, but they stick with the technologies anyway, because they are both economic and entrenched.
Cryptocurrency is potentially in this class of technologies. If Bitcoin is going to provide any long-run freedom for anyone, it will have to succeed on these terms, not on the basis of cryptoanarchist zeal alone. There is no exit here, nothing has been won, but seeds of revolution have been planted.