Can national governments enforce a Bitcoin ban?

in Iceland, Bolivia, Ecuador, Kyrgyzstan, Vietnam and Bangladesh
[Click on the map for more information about the countries which have banned Bitcoin]
The act of exchanging sovereign currency – or fiat – for digital currency is against the law in Iceland, Bolivia, Ecuador, Kyrgyzstan, Vietnam and Bangladesh. Yet in none of these six countries has anyone been prosecuted for the offence.

We decided to find out why governments are choosing to legislate against Bitcoin but are failing to bring prosecutions.

Vulnerable governments react

All states that have banned Bitcoin say they have done so to protect their citizens from the risks associated with cryptocurrencies. Not because they regard them as a threat to the state’s fiat money.

However, the majority of the countries where Bitcoin is banned have seen major fluctuations in their currencies in recent years.

Economic commentator Maswood Alam Khan argued in a blog post that:

 “Bitcoin thrives under weak governance.”

The figures seem to bear Mr Khan’s argument out.

Take Iceland as an example. The Icelandic Krona collapsed against the euro in 2008 following the bankruptcy of its three largest banks. It was forced to implement strict capital controls to prevent millions of krona flowing out of the country.

Or look at Vietnam, which has struggled over the past five years with high levels of inflation. The problem peaked during the financial crisis when inflation rose about 20 per cent.

This graph shows that inflation peaked in Vietnam during the financial crisis.

Source: the World Bank (http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG)

Commentators say a cryptocurrency ban is often a distress signal from a government under strain. As this Tweet from Michael Krieger, author of the Liberty Blitzkrieg blog, demonstrates:

States pioneering change

However, governments are not only banning Bitcoin to protect weak economies. Some are interested in developing the technology behind cryptocurrencies on their own terms.

The governments of Iceland, Ecuador and Bolivia are all in the process of issuing their own digital currencies and have outlawed Bitcoin in order to protect these.

Struggle for resources

On the other hand Kyrgyzstan, Vietnam and Bangladesh are not pioneering their own digital currencies. Their economies remain fragile and there’s evidence to suggest they might struggle to enforce a Bitcoin ban.

Let’s take Bangladesh as an example.

The country ranks high in Transparency International’s league table of perceived corruption. And according to World Bank data 31 per cent of the country’s population lives below the poverty line.

Bangladesh has a population of 156 million – making it particularly hard for the government to monitor the transactions of all its citizens.

Bangladeshi Bank officials told newswire AFP in September that anyone found guilty of using Bitcoin in the country could be sent to jail but despite this tough talk no prosecutions have been made.

Blocked by technical complexity

Many commentators underline how technically difficult it is to ban digital currencies.

In an interview at a Bitcoin meet-up Hugh Halford-Thompson, Head of UK Operations at cryptocurrency exchange Cointrader, said:

“Trying to ban Bitcoin is like trying to ban maths.”

Even government officials admit outlawing Bitcoin is unlikely to work. David Andolfatto, vice president of the Federal Reserve Bank of St. Louis, wrote in a paper:

“Enforcing an outright ban is close to impossible.”

Avoiding the ‘Streisand Effect’

Back in 2003 singer Barbara Streisand sued to get an image of her Malibu home removed from an internet page. Before the case went to court six people had viewed the image. In the month after the trial 420,000 people Googled it:  hence ‘the Streisand Effect’.

In the same vein, many governments seem to worry that banning Bitcoin will only raise its public profile.

To avoid glamorising Bitcoin, many governments are choosing to tax digital currencies instead. In Australia digital currencies are taxed as a commodity, in America they’re taxed as property.

So far it seems aggressive taxation regimes are more likely to halt the spread of digital currencies than bans which governments are finding difficult to enforce.

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