Can governments shut down Bitcoin?

Since open and permissionless blockchains have either completely or partially removed the need for trusted third parties, not only have banks found themselves disrupted but also national governments around the world are experiencing significant powers being taken away from them. This is especially true in relation to Bitcoin which acts as a main monetary asset that has its own pre-determined monetary policy that is totally outside the control of central banks. Historically, we saw how governments have gradually centralised and confiscated the market-chosen monetary asset — gold — and replaced it with a fiat system that is completely under the control of a centralised power. Executive order 6102 of late US President Franklin D. Roosevelt from 1933 that forbade the “hoarding of gold coin, gold bullion, and gold certificates” (Executive Order 6102 Wikipedia page) followed by president Dixon defaulting on Breton-Wood agreement in 1971 via the abolishment of US Dollar convertibility into gold, are all key examples showing how powerful central governments have continuously strived for overzealous control of money.

It is only natural to think that given such a radical challenge that comes from the Bitcoin blockchain, the national governments and banks are incentivised to interrupt or permanently disable the operation of public blockchains. The European Central Bank President Christine Lagarde said in January 2021: If there is escape, that escape will be used (Svanholm 2022), suggesting the bank’s determination to keep Bitcoin “under its thumb”. At this stage it is worth bringing back one of the Satoshi Nakamoto’s quotes on this subject: Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own (Nakamoto 2008). As a matter-of-fact Tor network is still operational today but Napster has been shut down. Thus, it seems that, in general, given the fact that Bitcoin blockchain is a peer to peer network without any central entity being responsible for it, it is rather “safe”. It is conceivable that if Bitcoin could have been shut down by government agencies it would have already been non-operational. Since it is still around, it is a testament to its resilience. However, let us ponder on what are some ways by which Bitcoin could be affected by the government.

From the technological standpoint, one way to disrupt Bitcoin is by cutting off internet connection altogether. After all, Bitcoin is a layer 1 protocol for the transfer of value, that exists on top of layer 0 of the internet protocol for the transfer of information. So shutting down the internet would naturally imply disabling the Bitcoin network, since peers and miners would have no way to broadcast their transactions. At the first glance it seems there is little that can be done about it. However, the use of mesh networks can ensure peer nodes can connect “offline” by relying on peer-to-peer radio signals rather than some centrally vulnerable internet service provider (Harper 2020). While it is improbable that governments will decide to cut entire countries from the internet, given the economically detrimental effect of such a move which would have a wide ranging negative repercussion, it is wise that such mesh networks are developed, not least because at times of war it is more likely that absence of internet connectivity can occur. It is worth noting here that complete internet shut down has been implemented a few times, for example in Algeria during the time of its baccalaureate exams (Mitchell 2023). Thus, it is important that the network has contingency plans in place to ensure continuous operation and usability in the absence of the internet. Adam Back, who is one of the lead Bitcoin core developers and who exchanged correspondence with Satoshi, is a strong proponent of mesh networks (Adam Back Wikipedia page).

Another way by which Bitcoin blockchain could be compromised is with 51% attack. To accomplish that, the government would need to set up a massive mining facility that would take control of the network’s hash rate in order to control what transactions are included into the blocks or to allow for coins to be double-spent significantly reducing the confidence in the Bitcoin network security. In this context, it is plausible to say that a supra-national entity would emerge rather than an individual government attempting to execute the 51% attack. The reason for a need for a coalition to undertake the attack is because of the massive cost involved. For 2024, the costs we are considering here is the equivalent of the US military budget for the whole year! Two more things could be said in this context. Firstly, it is important that the networks remains as decentralised as possible and the existence of mining pools pose a vulnerability here since there is a risk of collusion between the pool and the supra-national entity in order to reduce the cost of the attack (assuming any bribing for the miners done by the government still makes it more cost effective for the government). Secondly, it can be argued that game theory may “come to the rescue” here. Nakamoto noted in the white-paper that “If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth” (Nakamoto 2009). Could it be the case that network peers will adapt the consensus rules such that through-collusion-government-imposed blockchain version would be considered invalid? It is worth noting here why it is so important for Bitcoin to remain the primary monetary settlement layer. Alternative blockchains are more vulnerable to be compromised in case of such a governmental disruption. For example, non-proof-of-work blockchains that are Byzantine Fault Tolerant-variants with a much lower threshold of 33%. Moreover other blockchain that decided to use sharding techniques have introduced a risk of shard take-over or similar risks because of proof-of-stake consensus.

Third type of risk is related to the denial of service attacks on the network. Government may decide to “create congestion” in the network thus compromising the service for legitimate users. This would be an issue if no transaction fees were to be attached to the transaction, but since fees exist the impact of denial of service is somewhat lessened as it becomes more costly for the attacker. Moreover given the distributed nature of miners, executing a successful denial of service attack is rather difficult since there is no central server to attack. Nevertheless this is not an existential risk for Bitcoin as rules of the network in terms of state of the ledger would continue “business as usual”.

Lastly, governments can of course ban the Bitcoin blockchain by making it illegal to hold or use Bitcoin. A taste of this situation occurred when “The People’s Bank of China (…) [introduced] ban on cryptocurrencies (…) [in order] to curtail financial crime and prevent economic instability” (Shin 2022). This legal threat to Bitcoin may reduce the value of the network, but it is possible to say that individuals that choose to use Bitcoin will simply move to the jurisdictions where it is not criminalised, similarly to the way Chinese miners moved to other countries to continue mining there. Moreover, a mere legal ban will not prevent Bitcoin from operating. Another side of the same coin when it comes to this issue are centralis bank digital currencies (CBDCs) which are fundamentally centralised alternatives to decentralised Bitcoin but using some minor aspects of blockchain technology. The way to address this problem is by educating people which can make an informed decision.

In summary, open and permissionless blockchains, particularly Bitcoin, have disrupted banks and reduced government control over monetary policy. Bitcoin’s decentralised nature and fixed monetary policy challenge traditional central banking. Despite potential threats, Bitcoin’s peer-to-peer network remains resilient. Shutting down the internet could disrupt Bitcoin, but mesh networks offer a solution by allowing offline connectivity. A 51% attack, where a group controls the majority of Bitcoin’s mining power, is theoretically possible but prohibitively expensive and likely deterred by the system’s decentralisation and economic incentives. Denial of service attacks could create network congestion but are mitigated by transaction fees and the decentralised nature of Bitcoin miners. Legal bans on Bitcoin could reduce its usage in certain jurisdictions, but users and miners may relocate to more favourable areas, as seen with China’s cryptocurrency ban. Educating people about the differences between decentralised Bitcoin and centralised CBDCs is crucial for informed decision-making.

References:

• Adam Back Wikipedia page. Available at: https://en.wikipedia.org/wiki/Adam_Back [Accessed 14 June 2024].
• Executive Order 6102 Wikipedia page. Available at: https://en.wikipedia.org/wiki/Executive_Order_6102 [Accessed 14 June 2024].
• Harper, C., 2020. FROM ISP TO P2P: HOW MESH NETWORKS TAKE BITCOIN OFF THE GRID. Available at: https://bitcoinmagazine.com/technical/from-isp-to-p2p-how-mesh-networks-take-bitcoin-off-the-grid [Accessed 14 June 2024].
• Mitchell, R., 2023. Algeria: Exam Season 2023 Internet Shutdowns. Internet Society Pulse. Available at: https://pulse.internetsociety.org/blog/algeria-exam-season-2023-internet-shutdowns [Accessed 14 June 2024].
• Nakamoto, S., 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. Available at: https://bitcoin.org/bitcoin.pdf [Accessed 14 June 2024].
• Shin, L., 2022. What’s behind China’s cryptocurrency ban? Available at: https://www.weforum.org/agenda/2022/01/what-s-behind-china-s-cryptocurrency-ban/ [Accessed 14 June 2024].
• Svanholm, K., 2022. Bitcoin: Everything Divided by 21 Million. Konsensus Network.