Background
The gold standard was a system in which, paper notes could theoretically be traded in for a specific amount of gold. This is what gave them value. The world got taken off the gold standard in 1971 thanks to Richard Nixon. Now money is a paper IOU with nothing backing it, but the belief of people and that belief is beginning to run out.
The Bitcoin Standard and other cryptocurrencies will be rejected by the majority of countries and financial institutions for the lack of control they have over the system (aka none). The cryptocurrencies becoming more mainstream, the harder it will be for these institutions to exist in their current form. Large amounts of money can be held in wallets with entities unable to access the currency held within. With the ability to transfer any amount of funds to another party without the use of the current banking system. Taxes will be harder to collect; potentially with the threat of force.
The Initial Solution and its Failure.
Exchanges might be charged a tax which will be passed onto consumers as part of a country tax or fee, although with something like the use of a VPN this could be difficult. Governments will likely go after exchanges to track funds due to current verification processes required to buy funds. If these processes go away possibly replaced with usernames or other ID, this would prevent the majority of citizens from being taxed. The exchange system would have to sort users by country, but even this is not a foolproof system.
Any exchange system that would cooperate with governments would find just, as many fighting them. With users flocking to ones with lower fees, easier verification and free from government taxation. Not so much as a dissent movement, but rather a pragmatic choice.
This doesn’t even consider the rise of peer to peer transactions or decentralized exchanges. Any government trying to cut off the head of the snake would instead encounter a hydra of mythic proportions. If the trend towards decentralization continues, taxation on exchanges will be a mirage.
The Death of the State, as we know it?
The idea of complete liquidity and virtual untraceable money is a major concern and fear for governments. For the government has two main institutions that keep it in power, control over the legitimate money supply (fiat currency) and military force. Without the power to control citizen spending, taxation, interest rates etc. Governments become a neutered shell of the massive behemoths they are today. Social safety nets cannot function without funds.
Regarding military force, how many soldiers do you think are just going to work for free, when they have families and friends to take care of? How long will that even last when you can’t pay for food and water? Not long. Worse yet like the “War on Terror” how can you tell a normal citizen from one who is committing tax evasion. You can’t.
Thus the only way countries can function without control of the money supply would be taxation on goods, services, real-estate etc. Income taxation would now be impossible unless done at the company level, for once money is deposited into a wallet the government cannot retrieve it. In fact, many companies may bypass an income tax by sending money from a company wallet into a workers wallet bypassing the government entirely. Any company taxed can move to another free from enforcement laws and still pay employees via cryptocurrency. The only companies not immune to this taxation are ones that require major infrastructure. Manufacturing plants, warehouses etc. This causes a major drop in revenue for any government. So only goods, services and physical assets can be taxed. Yet these taxes will have to be lowered. As it will eventually be cost effective to move entire operations from heavily taxed areas.
The Rebirth of the City State?
Even with something like exchange or wallet taxation, people will generate new wallets or use different exchanges to circumvent the fees. It will become an arms race to the bottom for number of users and in-turn the entire market. Capital flight will become a norm and extremely volatile. As countries charging extremely high taxation on physical goods and items (real-estate etc) will cause the entire movement of fortunes. Countries can go bankrupt overnight if enough people decide to up and leave. Someone with their entire fortune in cryptocurrencies can simply take their hardware wallet, paper wallet or even memorize their wallet to any other country. This liquidity will ultimately reward countries that charge low to zero taxes or usage fees.
The rich individuals and companies currently use something known, as the “Double Irish” tax loophole to pay virtually zero tax. This kind of tax evasion will no longer be necessary; for no one will be able to access their funds, as they will be located outside any country. Thus countries will now have to cater to citizens and companies as this liquidity is virtually 100%. What will reduce this liquidity of the rich individuals and companies is physical assets such as real-estate, and behaviour, particularly sentimentalism. Without these two factors, mass migration would occur. However, if people become more incentivized to move countries the ability to move will be much easier and obviously more likely.
Capital Flight & the Descent of the Masses.
Mass migration is prevented by people’s attachment to things: routine, physical view, neighbours, friends, family, culture, amenities, as well, as physical objects. These things are the main anchors to an area if all capital & investments are liquid. This is really a country network effect; countries if they want to survive should try to reinforce and encourage this network effect to prevent capital flight.
Taxation on goods sold, real estate etc. has to come down in price due to the removal of major capital flight prevention mechanisms. Rather the only thing keeping people where they are preventing mass migration is the country network effect and the supranational system of countries. The first country to realize this will have or build amenities to attract capital flight. Doing so will also prevent future capital flight. This will attract people who will flee countries with more restrictive laws on currencies and or higher taxation. If this continues long enough the net result will be massive disproportionate wealth concentration in certain areas of the globe, far more then we see today unless other countries make similar moves.
Since capital is even more concentrated, people will flock to these new areas to try and get a piece of the pie. If taken to its inevitable logical conclusion massive wealth concentration in a small area will cause hordes to descend upon areas of wealth; as we have seen with the migration of people to Europe. However, since the wealth is no longer in a physical form it cannot be taken as readily. The wealthy will move from one location to another so long as they have wealth, simply to protect it. So a small group will move from one place to another followed by the masses.
To prevent this we need to enforce the aforementioned country network effects to keep the migration of people relatively stable. This will also keep capital relatively stable and keep capital flight at a minimum. This will keep violence to a minimum and nation-states from collapsing into anarchy.
First Mover Advantage:
The first country that adopts the bitcoin standard or another cryptocurrency is likely to receive large a influx of wealth from people beyond their country. In fact, they may become the world’s new reserve currency especially if there is a limited supply. The result would have others scrambling to implement their own cryptocurrency which will inevitably be backed by country performance and economic growth.
If Bitcoin reaches the mythical one million dollar mark this could cause problems, as people can not afford a single Bitcoin. Bitcoin can be fractionally split into 1⁰⁸, however, psychologically this is a barrier to entry for many. More likely with only twenty-one million in circulation and many lost; another currency may take its place for daily transactions. Potentially every company may have its own currency or country. Too many currencies, however, will lead to the economic problem of the double coincidence of wants. It is more likely only a few different currencies will survive each with different use cases and features.
Any country issuing cryptocurrency with an unlimited cap, will see less adoption then one would expect. For it would become similar to fiat with an inflationary nature. Etherium being the most famous and current example of this “crypto-fiat”. Individuals, when given the choice, will always migrate to an appreciating currency. Thus the adoption of fixed capped currencies. Countries however, will still likely issue this “crypto-fiat”, as any major market fluctuation would cause the masses to give up freedom for safety.
Conclusion:
The creation of cryptocurrencies now brings the power back down to the individual level rather than institutions. Individuals will have more freedom in some sense however, this uncertainty brings about new challenges. With the potential rise of the city-state again, conflicts may become more commonplace. As with all new things, people will be left behind. The only thing we can do is mitigate the fluctuations of the transition period.
