The U.K. government’s Treasury Committee, made up of cross-party MPs, has suggested that the Treasury should regulate Bitcoin as gambling, rather than as a financial service. They base this on the ignorant notion that investing in bitcoin carries the same risk.
What Does The Treasury Committee Claim?
The claims of the Committee can be summarized as the following:
- Bitcoin’s use cases are limited to improving the speed and efficiency of making payments, especially those that are cross-border.
- Bitcoin has no intrinsic value.
- Bitcoin offers no clear benefits to the financial system, whilst posing genuine risks to consumers.
- Investing in bitcoin is speculation and therefore poses a risk to consumers.
- The risk posed to consumers is the same risk posed by gambling.
- Bitcoin should therefore be regulated as gambling, rather than as a financial instrument, under the principle of “same risk, same regulatory outcome.”
- Regulating bitcoin as a financial asset would create a “halo effect” and thus give it undeserved legitimacy.
- The digital asset industry is a “wild west.”
- The government and regulators should attempt to keep up with technological innovations in the digital asset industry.
How Legitimate Are These Claims?
In a few words? Not at all.
One might expect that a taxpayer-funded committee of elected officials, whose job is literally to do their research, might actually do their research.
Apparently, one would be expecting too much of the government.
Despite hearing evidence from industry experts, the Committee, headed by Conservative MP Harriet Baldwin, has simply repeated the same ignorant myths that have been debunked a thousand times before.
Seemingly, they need to be debunked at least once more.
What Are Bitcoin’s Use Cases?
Bitcoin is more than just a digital asset.
Dogecoin is a digital asset. But that’s about it. It has no use, no functionality, and no intrinsic value.
Bitcoin is different; it has inherent usefulness.
A Store Of Value
Firstly, it’s a store of value. Its quality as a store of value is supported by its intrinsic value (more on that later) because anything with intrinsic value will necessarily hold that value relative to the money supply.
Of course, the idea is that, in the end, one bitcoin will equal one bitcoin. But for now, we’re still living in a fiat world. So, for now, rather than holding bitcoin for use in transactions, people hold bitcoin to convert back into fiat when they need it.
As a store of value, the worth of the bitcoin relative to fiat will have gone up at least in line with inflation. Whilst short-term volatility is high, over the long term, bitcoin performs even better than traditional stores of value such as gold.
In fact, bitcoin was the best-performing asset of the 2010s, beating the NASDAQ 100 by 10x.
A Monetary System That Can’t Be Inflated
This goes hand in hand with bitcoin’s status as a store of value.
One of the reasons it performs so well is that it can’t be inflated. Whilst bitcoin is currently increasing in supply, everyone knows that supply will eventually reach a peak of 21 million bitcoin.
People have faith in a currency that they know can’t be inflated beyond a certain point. If the government can increase the money supply, at no cost to themselves, and thus dilute the value of your savings, you can’t hold those savings with confidence.
People will naturally gravitate towards using a currency that isn’t under the control of any centralized authority because it means no individual entity has the power to dilute the worth of their holdings.
Bitcoin fulfils this criterion perfectly. No one controls the Bitcoin network, and no one can decrease the value of your savings by inflating the supply.
Amongst others, this is one of the reasons why people in Venezuela made use of the Bitcoin network when facing hyperinflation.
A Trustless, Peer-to-Peer Network
Bitcoin doesn’t require a centralized, third-party entity to operate. There is no other financial service in the world that operates this way.
The traditional financial system relies on huge digital and physical infrastructures to provide financial services.
Bitcoin is peer-to-peer. There are no middlemen, and the physical infrastructure is far smaller and less energy-intensive (despite what the mainstream media will have you believe) than the Bitcoin network.
Because of this, transactions are more efficient, and therefore quicker and cheaper, on the Bitcoin network than in the traditional financial system.
Many of these costs and inefficiencies in the centralized system are hidden from you. For example, a microtransaction with your debit or credit card appears instant and free.
What you don’t see is that the transaction actually takes days to be cleared by the financial institutions involved, and those costs are dispersed throughout the system.
A Bitcoin financial system is quicker, cheaper, better for the environment, and, best of all, doesn’t require anyone to trust in any middlemen.
Better For The Environment
The Bitcoin network has a use that seems completely counter-intuitive to anyone who reads about it in the mainstream media.
Bitcoin is actually good for the environment.
This is partly because, as already mentioned, the system is far more efficient than the traditional financial system. Where financial, material, and manpower costs go down, so too do the costs to the environment.
As a store of value, bitcoin is also a far better option than gold when it comes to environmental devastation.
But beyond even this, Bitcoin’s proof-of-work consensus mechanism dramatically increases the economic viability of renewable energy infrastructure.
This is because bitcoin miners are:
- Location agnostic: They always set up close to the source of electricity, limiting waste through transmission
- Buyers of last resort: They buy up electricity that would otherwise be wasted
- Utilizing wasted methane gas: This decreases the emissions of CO2e
- Interruptible loads: A study by ERCOT found that flexible load centers led to a decrease in CO2e emissions and facilitated renewable energy build-out
Overall, a financial system on the Bitcoin standard is far better for the environment than the centralized fiat system we have now.
Bitcoin Has Intrinsic Value
The myth that bitcoin has no intrinsic value is so often repeated, and has been so thoroughly debunked each time, that it makes me wonder whether these people actually know what intrinsic value is.
The question has to be asked: if bitcoin has no intrinsic value, what intrinsic value does fiat currency have?
The funny thing is if you google “Does fiat currency have intrinsic value”, the answer that appears right at the top of the results is a resounding “no.”
Fiat money isn’t backed by anything; it costs nothing to create, and can therefore be inflated at no cost.
Yet, for some reason, this isn’t a problem at all to the bitcoin critics.
To them, bitcoin having no intrinsic value is a massive issue, making it dangerous to consumers. But the cash in their pockets having no intrinsic value? No problem.
These people either don’t understand money (likely), don’t understand bitcoin (very likely), or don’t understand either (almost certain).
The concept of intrinsic value is, in itself, controversial and somewhat subjective. What should not be controversial at all is that bitcoin has a whole lot more of it than fiat currency does.
If we can argue that something has intrinsic value because it’s useful, then fiat currency does have some intrinsic value because we use it as legal tender and to pay our taxes.
However, it could be argued that this is actually extrinsic value – value we derive from something else, in this case, its usefulness.
Bitcoin has this because, as previously discussed, it’s useful. So it has at least as much value as fiat currency does (arguably more, and certainly more if and when we start paying taxes in it).
But what gives bitcoin true intrinsic value, value in and of itself, is the proof-of-work consensus mechanism.
Bitcoin Is Costly To Produce
Fiat money can be produced ad infinitum for no actual cost.
The central bank and commercial banks can simply issue credit by updating numbers on a spreadsheet and, hey presto, new money.
It’s not tied to anything in the real world. Nothing had to be expended to bring it into existence.
Imagine you could do this with gold.
Rather than having to high workers, buy machinery, dig it up out of the ground, separate it from its ore, then smelt it into ingots or mint it into coins, imagine you could simply snap your fingers and have limitless gold at no cost to you whatsoever.
Would gold continue to be valuable?
Well, that depends.
If anyone could do this, gold would become worthless immediately.
If you can force people to use gold as currency and pay you taxes in it, and no one else can make gold appear with the snap of their fingers, congratulations: you’re a rich man.
This is how the central bank works.
Fiat currency only has value because we all have to use it and we can’t create it ourselves. When we do, it’s called counterfeiting, and it’s illegal.
When the central bank does it, it’s called inflation, and they actually have government-mandated targets to inflate the currency each year.
Gold has historically increased in supply (inflated) by 2% each year, roughly the same as fiat currency inflation targets.
However, the gold supply could only be increased by expending capital to dig it up. And rather than a centralized authority having a monopoly on this, there was free-market competition.
Bitcoin is similar to gold in this way.
Currently, the bitcoin supply is growing, as we haven’t hit the 21 million cap yet. However, miners compete in a free market to be the ones to get the block reward.
They do this by expending capital in the form of electricity (and, to some degree, mining equipment and other operational costs).
In this way, the increase in the supply of bitcoin is tied to the real-world expenditure of resources.
When you expend value to create something, it becomes imbued with the value that you had to spend.
Because of this, bitcoin is imbued with the value of the electricity used in the proof-of-work mechanism.
Unlike fiat currency, there are real-world, physical resources that have to be used to create bitcoin and maintain their existence.
Even when the 21 million cap is reached, the network will still rely on miners for security, decentralization, and the processing of transactions.
Proof of work also prevents double-spending, thus ensuring that bitcoin is uniform (cannot be counterfeited), durable (cannot be destroyed), and trustworthy (acceptable as a form of payment).
In this way, the proof-of-work mechanism ensures that bitcoin has the necessary characteristics to be considered money.
If the miners stopped, the network would shut down, and the bitcoin would become worthless.
This is fundamental proof that bitcoin have intrinsic value as determined by the resource expenditure of the proof-of-work mechanism.
For anything to have value, it must be costly to produce.
Unlike fiat money, bitcoin fits the bill.
The Financial System Would Benefit From Bitcoin
As previously stated, we’re living in a fiat world.
We can dream of a day when bitcoin is the world reserve currency, and the traditional financial system is no more.
For now, the traditional financial system could benefit from a reserve asset with intrinsic value.
There are currently 23 public companies holding reserves of bitcoin.
Clearly, more institutions are catching on to the benefits of a hard-money reserve asset backed by physical resource expenditure.
Central banks around the world are also unloading their dollar holdings. This is an inevitable, and unstoppable, slide for the U.S. dollar.
As a fiat currency, it has no real value. For this reason, central banks are starting to get skittish about holding so much of it to back their own currencies.
Backing your money with something that has no value is starting to look less and less attractive.
Bitcoin solves this problem.
The financial system, both central and commercial banks, would benefit from holding bitcoin as a reserve asset because, unlike dollars, it’s tangible.
The asset itself may be digital, but the proof-of-work consensus mechanism ties it to the real world and gives it intrinsic value that can’t be matched by fiat currencies.
The UK Treasury Committee may argue that bitcoin isn’t backed, but this isn’t just wrong, it misses the point.
Not only is bitcoin backed by the energy expenditure required to create and maintain it, it’s also the thing that should be doing the backing.
Using bitcoin to back the value of a currency, much like how the gold standard worked in years gone by, would provide economic stability and prevent hyperinflation to any country using it.
Bitcoin is more than useful for the financial sector, it might actually be the savior of it.
Bitcoin Is Not Gambling
The UK Treasury Committee argues that investing in bitcoin is like gambling and should therefore be regulated as such.
They argue that, because of the price volatility and the risk of losing your investment, it should be considered gambling under the “same risk, same regulatory outcome” standard.
It’s unclear whether they don’t understand bitcoin, investing, gambling, or all three.
They cite the dramatic fall in the price of bitcoin in 2022 as evidence that the digital asset industry is like a “wild west” and that consumers who invest are in a dangerous game of speculation.
It’s a wonder they didn’t make the same argument about buying mortgages after the housing bubble collapse of 2008.
How many times has the stock market crashed over the centuries? Does this mean that investing in the stock market is akin to gambling?
Is forex trading gambling, considering it’s trading in fiat currencies that have no intrinsic value?
No, obviously not.
All industries have ups and downs, and anything that involves consumer investment has the possibility of forming a bubble, which is what happened in 2021/22 in the digital asset industry.
But over the 14 years of Bitcoin’s existence, it has demonstrated massive growth and has leveled out after its late-2022 slump, even making some gains since the turn of 2023.
Clearly, the volatility is short-term, and the price is not random, but tied to the general economy and the cost of mining.
This ultimately means that investing in bitcoin is not at all similar to gambling, certainly no more so (and possibly even less so) than investing in the stock market, mortgages, or international currencies.
Bitcoin is a financial instrument and should be regulated as such.
Politicians And Regulators Must Do Their Research
The UK Treasury Committee made the point that the government and regulators must keep up with innovations in the digital asset industry.
No one can disagree with this.
The odd thing is that it appears to be a clear case of the pot calling the kettle black.
It’s odd for a committee to call on others to be informed and educated on these issues in a report that so clearly demonstrates their own lack of knowledge and understanding on the matter.
Clearly, there is much to be done for those of us in the Bitcoin space to educate those outside of it.
Cynical people might believe that they don’t want to learn.
They’re anti-bitcoin because they don’t want to lose the power that the traditional fiat system and centralized power structures have given them.
Whilst that may be true, the only productive thing to do is to provide as much information as possible and put it into terms they can understand.
In this way, perhaps politicians and regulators who actually do have good intentions can be brought around to seeing the benefits of Bitcoin.