Bitcoin for Government
This article is for God-loving statesmen and philosopher kings: those who see the State as a tool that, when left to the will of men, turns to wickedness — but given God’s Providence the State can work for the common good. For anyone who rejects the premise, this article will be senseless or even enraging.
Fiat currencies are informally backed by a portfolio of land, gold reserves, and economic tax base, secured by credible military and civilian institutions. This stabilizes the value of the fiat currency by signaling a real option to sell assets or raise taxes, which would reduce the units of currency in circulation. To be real, the option cannot be a bluff: it has to be exercisable and exercised as necessary.
Inflation gets out of control when the State can’t remove units of currency from circulation due to constraints: insufficient assets to sell, profligate spending, ruinous debt, a weak economic base, political infighting, or capture by insolvent bankers who need inflationary bailouts. A combination of these factors inevitably leads to significant currency devaluation, damaging the price system and inefficiently redistributing resources.
Inheriting this predicament, it might seem hopeless, where any change in policy is a zero-sum tradeoff. There is one policy that can create a new positive-sum path: issuing new fiat currency to accumulate bitcoin. It may seem counter-intuitive, but adding bitcoin as a treasury reserve asset more that offsets the dilution of the fiat currency. This positive-sum outcome is achieved by one simple fact: bitcoin is undervalued relative to every fiat currency. This reality is due to the software engineering and monetary economic fundamentals of the Bitcoin system relative to fiat currency systems.
It is inherently wise for a State to sell an asset it has a super-abundance of, fiat currency, to acquire the scarcest asset in the world, bitcoin. What is hard to understand at first is that this policy actually strengthens the fiat currency, as it becomes indirectly backed by the bitcoin on the State’s balance sheet. It’s not a currency value peg where the exchange rate is fixed, but the bitcoin reserve qualitatively improves the asset side of the currency issuer’s balance sheet.
The most important second-order effect is momentum: the government is bidding up the price of bitcoin in its local currency, this attracts short-term traders and long-term savers to also accumulate. The snowball momentum increases the value of the government’s acquired reserve, further strengthening confidence in their fiat currency and stabilizing its purchasing power.
This is in stark contrast to traditional foreign currency and bond reserves, where accumulating the foreign asset causes more of the foreign asset to be produced. Bitcoin’s scarcity, enforced by the strict halving issuance schedule, prevents dilutive issuance that is the result of reserve accumulation. Furthermore, accumulating bitcoin does not create geopolitical dependencies, as the network is neutral and permission-less.
The State’s bitcoin reserve can be secured by smart contracts that make it resilient to institutional issues. For example, timelocks can prevent short-term misuse of bitcoin, and multisig can separate power in a credible and scalable manner, such as giving a giving a key to each legislator or regional governor. The treasury reserve of bitcoin can incentivize political stability and unity, needed to effectuate economic and social reforms for balancing the government’s budget.
Before long, the bitcoin treasury reserve can be used to pay off debts, re-capitalize the banking system to be 100% reserve, and lower taxes.
Governments don’t change bitcoin, bitcoin changes governments. New incentive structures enforced by cryptography and scarcity can break the cycle of State-sanctioned looting and return the State to promoting the common good, the Will of God.