I had a great exchange with a reader in response to last week’s The Sovereign Individual Weekly Newsletter. The reader asked, “The moment the dollar is threatened by crypto assets as the reserve currency of choice globally, why won’t the USG simply outlaw owning or trading in Bitcoin (and other crypto assets)? Are you aware we did exactly that in the 1930s with gold?”
It’s such an important question.
I realized that my answer combined many themes from TSI Weekly together. So I thought I’d rework my answer, provide some additional thoughts, and share it with my broader digital community.
My short answer: With nationalism on the rise, the concept of crypto regulation traps government’s in a prisoner’s dilemma. This means that to successfully regulate the decentralized crypto industry, nation states must work together. Otherwise, they risk being taken advantage of economically by peers on the global stage. And although it would be rational for all nations to work together, the global trend of rising nationalism makes it unlikely this will happen. Instead, we will see zero-sum scenarios emerge which incentivize little to no cooperation. As a result, it’s highly unlikely that there will be regulation that eliminates the crypto industry entirely.
Read on to learn why.
How are Nation States Handling Crypto Regulation in a Globalized Economy?
Restating the reader’s original question: Why would a nation-state allow an encroaching monetary system to siphon away its global influence? The honest answer is they wouldn’t. Monetary systems are the core of modern state power. And in an increasingly global and digitally connected economy, these monetary systems gain influential.
Throughout history, control of monetary systems has become the backbone of power and influence. The Bretton Woods Agreement followed and the end of the gold standard led to the US Dollar becoming a global reserve currency. And more recently, other currencies like the Euro have gained clout as de facto reserve currencies internationally. But for now, the dollar still reigns supreme. And as a consequence, US economic policy has influenced all global policy.
So it makes sense that the G7 Nations recently showcased their desire to take regulatory action against these crypto assets. A decentralized financial system challenges a major component of the modern nation states control.The G7 nations will try to come up with a solution together because crypto poses a very real threat. But despite this threat, it seems unlikely that they will effectively work together given recent global developments.
Rising Nationalism Harms Global Cooperation Creating Zero Sum Games
The issues are more complex than deciding to allow vs disallow bitcoin for fear of losing reserve status. The US is arguably well underway to losing that status because of the populist nationalism in both parties. American politics has diverse sets of policies choices, but both flavors include nationalist policies. And many of these policy choices will reduce America’s competitiveness on the global stage.
I’ve written about how several past global economic events have caused a rise in nationalism and a retreat from globalism. As nations retreat from global economic cooperation in favor of protectionist policies, they create an economic prisoners dilemma. A Prisoner’s Dilemma is a scenario in which a lack of cooperation can seemingly make strategic sense.
And as nations opt for Nationalism, they adopt protectionist policies, and harm global integration, creating a zero sum game. ie: A scenario where competition is over a finite value, and one player’s gain is another players loss. In this type of scenario, nationalists jockey for advantage on the global stage, and in some instances retreat from global integration. These moves are designed to benefit one nation over others.
Nationalism harms an ability to address global collective action problems.
An Example of the Zero Sum Games that Form Because of Nationalism
As an example, consider the US trade war with China. The best outcome would result from these countries working together. But because of nationalism, both China and the US aim to renegotiate deals so that one country benefits more than the other. The irony is that in this dispute, the implemented sanctions and tariffs put up barriers to global economic integration. It’s a more expensive outcome than if they worked together.
What’s lost in the bickering is that China and the US are not negotiating in a vacuum. Despite the nationalist policies, these countries rely heavily on the global economy for economic prosperity. And rising nationalism won’t eliminate global trade, it will simply force it to take a more circuitous route. If the US doesn’t do business directly with China, someone else will. Nationalism simply adds costs and friction.
As another example, to prevent direct business with a rival nation, developed nations typically use economic sanctions. Weaponizing the global reserve currencies and access to the global financial system. But these sanctions work only when the world is in global harmony. They are much less effective when nationalism is on the rise.
Imagine the effectiveness of US sanctions on Iran if a post-Brexit England, seeking trading partners, ignored US sanctions? Without collective action, the regulatory attack is ineffective. An unlikely scenario but increasingly possible in a world with rising nationalism.
Post-COVID: The World Will Experience More Nationalism
The post-COVID economic world will lead to more nationalism. Increased stimulus for global reserve currency nations benefits domestic constituents while debasing the currencies. And the trade war and West vs East hostilities (primarily China, somewhat Russia) that emerged under Trump will deepen under Biden. More tariffs, more indirect trade, and more jockeying for economic dominance. These scenarios will harm global integration and reinforce the rise of zero-sum nationalism.
Although the “West” G7 nations are aligned on policy, China’s economic clout can harm the West if China moves away from the dollar. And unlike the Iran sanctions example, other Western nations will continue doing business with both China and the US. Despite the deepening conflict. ie: The “West” won’t remain as unified in this new environment. This again, will enhance zero-sum nationalism and reinforces the global prisoner’s dilemma.
Crypto Assets Are A Globalist Hedge On Rising Nationalism
So with that backdrop in mind, what does it all mean to crypto assets and regulation? Crypto is a fundamental economic concept of the information age and should be approached from a globalist perspective. Bitcoin, (and the broader digital asset category) is fundamentally designed as a globalist hedge against rising nationalism. It acts as a liquidity layer, providing an asset tradable against all global currencies. In most cases, it functions more efficiently than traditional financial systems. This is important in that it supports a globally interoperable economy despite sanctions.
And I believe that most people willing to put money into Bitcoin see it as a globalist hedge against rising nationalism. Investors want to make money by gaining exposure to a globally networked digital asset.
Nationalism Creates a Neo-Medieval System
Nationalism at the nation state level creates a feudal system of globalism. That’s one of the reasons I find the concept of neo-medievalism so fascinating. Globalization created conflicting allegiances causing the fragmentation of sovereign power like during the medieval ages. ex: The Medieval Church vs Feudal Lords and Monarchs has now become NGOs and Identity politics vs Nationalism.
It fits our current situation so well.
Bitcoin and several other cryptos have potentially achieved a globalized network potentially immune to direct attacks from nation-states. So whether the US government likes it or not, Bitcoin already functions as a de facto global reserve currency. Banning Bitcoin in the US would only hurt America’s competitiveness and ability to operate on the global stage.
Bitcoin already functions as a means for rival countries to bypass hostile US financial actions. These financial regulations become ineffective in a world with rising nationalism. By banning Bitcoin, and increasing nationalist zero-sum policy choices, Western nations simply add costs to their own people.
This would be a mistake especially given that “Western Nations” have always gotten their strength from global integration despite of nationalism.
This all ties back to game theory and the economic prisoner’s dilemma. Banning crypto will only work if all nations do it in unison. If the US were to act on its own, it would be very foolish, harming American competitiveness in the growing digital economy. Which will continue growing despite nationalism.
Crypto’s Value Is Rooted In It’s Global Interoperability
Most government officials have a poor understanding of what’s driving crypto adoption. They blame anonymous crime and libertarian ideals of reducing state power. But crypto is less about anarchist utopian fantasies and more about global integration.
A rising tide of nationalism and protectionist policies is sweeping the world. Despite this change, nations must maintain access to the global economy. And despite the ignorance of many politicians on the technical aspects of crypto assets, politicians are intuitively good at learning how to survive.
In an increasingly digital and globally integrated world, banning Bitcoin makes a nation less competitive on a global and digital basis. Politicians will come to learn this and won’t implement hostile regulations that hurt their own competitiveness.
I’m building a digital age worldview. Every Monday, I write and curate a publication called The Sovereign Individual. A weekly newsletter that includes news roundups and analysis to help digital age workers adapt and thrive in our changing society. Topics intersect at geopolitics, fintech, crypto, individual responsibility, and personal freedom. Don’t get left behind, subscribe below.