Can the Government Destroy Bitcoin? There is no question that governments can ban bitcoin, but whether they can fully destroy it depends on how aggressively they discourage its use. Alt-M » Can selgin bitcoin wallet Government Destroy Bitcoin? Cutting a Bitcoin IMG_7685″ by BTC Keychain, CC BY 2.
To be clear: China has not banned the use of cryptocurrencies. There seems to be no denying that governments can ban cryptocurrencies. More broadly, governments have taken steps to prevent other alternatives to their preferred monies. The question is whether — or, to what extent — a ban will actually discourage use. Some bitcoin proponents have argued that governments cannot really prevent bitcoin use. How could a government prevent people from using bitcoin? For starters, one must recognize that monetary demand — that is, the demand to use an item as a medium of exchange — is not quite like the demand for most other goods.
I can enjoy a fine bathtub gin even if no one else does. But the usefulness of a would-be money like bitcoin depends crucially on whether other people are using it. If one does not believe others will use bitcoin, she will be less inclined to accept it herself. In general, governments might determine the medium of exchange by coordinating beliefs, employing transactions policy, and punishing users of alternatives. By declaring an item legal tender, for example, the government might create an especially salient focal point around which individuals can coordinate on a particular money. Since I want to use the money you are using and you want to use the money I am using, simply stating that the dollar is legal tender and bitcoin is not legal tender might be enough to generate coordination on the dollar.
As a large and powerful player in the economy, governments are often in a position to provide such a focal point. Of course, if the net gains from switching to bitcoin are greater than the costs of coordination, we might establish some competing focal point to coordinate on the superior alternative. In this case, governments might resort to transactions policy — that is, committing to accept and spend its preferred money — in order to prevent bitcoin from gaining widespread acceptance. Some governments will not be able to determine the medium of exchange with transactions policy.