BRITAIN ALL IN ON BITCOIN

The Bank of England decided to print Sterling to buy BTC and Dishy Rishi is making it legal tender

The above title and subtitle may scare and shock a lot of Britons if it were true, but I’ll make the case here that to do such a thing would not only be a bold manoeuvre but sensible and pragmatic.

With the economic, social and political issues that the country faces, it is my contention that we must be ambitious. In 2012, Kwasi Kwarteng co-authored Britannia Unchained (alongside Priti Patel, Dominic Raab and Chris Skidmore), and when he was appointed Chancellor in the Truss government last year put his bold ideas into motion. Unfortunately, despite the fact that Truss and Kwarteng had been vocal about their ideas for well over 10 years, and despite Truss being exceptionally vocal about her plans in the Conservative Party leadership election, their first budget was not well-received and caught many capital allocators by surprise. Truss received an extraordinary amount of criticism for her plans. People were worried that she was taking too much risk and that interest rates would rise by several percentage points if she were to remain in power.

Truss was deposed after only 49 days in an internal coup, and Saucy Sunak took the helm. Interest rates rose anyway, and government debt continued to balloon — it is difficult to see how the outcome of Sunak’s plans were so significantly different from Truss’, except that they are far less ambitious.

Now, the nation is in a weird state of limbo: the two main political candidates are completely uninspiring: both believe in higher taxes, both are utterly disinterested in controlling immigration, both are considered to be out of touch, and neither of them inspire any confidence whatsoever.

Truss’ plans may have been bold and ultimately ineffective, but why was this the case? It is my contention that her plans weren’t bold enough. One could even make the case that they were only considered to be bold in the first place because The Blob exists in such a narrow echo chamber of “acceptable” ideas. Is there anything truly bold and brave about a government deciding that it will borrow more money? Is there anything bold and brave about a government choosing to bail out energy companies? Is there anything remotely remarkable about any political party in the UK, considering that not a single one even has even proposed an idea for how to address the debt spiral and bloated state? The Cameron government’s attempts to reduce the deficit were widely criticised for their austerity measures, and ultimately didn’t make a dent in the debt anyway.

With lateral thinking locked out and linear thinking locked in, we shouldn’t be surprised that solutions likely won’t come from the political sphere; the state isn’t known for its dynamism. Nevertheless, if there were the appetite in Westminster to take really think outside the box and grow (as there is in the rest of the country outside the Westminster bubble), it would be very successful. If there were a government that had the audacity to take the necessary steps, and the humility to recognise that politically-sponsored theft isn’t the solution, Britain would be far better-equipped to face the rest of the 21st century.

Mitigating the energy crisis

There are many issues that could be mitigated by adopting an aggressively pro-Bitcoin stance, not least of which the ongoing energy crisis.

There are many who believe that Bitcoin is not ESG friendly. I’m not of the mind that anyone should be pandering to nonsensical ESG metrics in the first place, but even if we were to treat them with the respect that our financial overlords at Blackrock expect, it would be difficult to argue that Bitcoin is not an extremely ESG-compliant asset — possibly the most ESG asset in the world.

Firstly, well over 50% of Bitcoin’s energy consumption (according to the Mining Council) is now derived from renewables. If we are to compare this with mining for gold, silver, oil, or any other commodity it is clear that Bitcoin is winning. One could even compare the energy expediture of mining Bitcoin to that of the traditional finance system, where trees are cut down to make paper notes, thousands of employees commute to central banks, etc., which consumes far more energy than Bitcoin mining.

One aspect of Bitcoin mining that is hardly talked about in the MSM is the potential for it to actually incentivise and subsidise greener forms of energy. Despite Grant Shapps’ dreams that the UK could become “the Saudi Arabia of wind energy”, it is extremely unprofitable and inefficient to use wind energy over oil and natural gas. The same is true for solar power. Both these forms of energy require huge government subsidies, but could instead be subsidised by mining as a free market alternative.

All over the world there are pockets of stranded energy, that would be completely useless since they aren’t located near urban conurbations. Rivers and waterfalls in the middle of Africa, South America and Siberia generate incredible amounts of megawattage, and yet there’s no pragmatic reason to harness these energy sources since the energy cannot be transported over long distances. This incurs other issues, in that governments may have to weigh up which stranded communities they believe it is worthwhile to build pipelines for. In Malawi, a company called Gridless is currently making use of the excess hydroelectric energy in order to mine Bitcoin, and as an added bonus there are now 1,600 families that have a reliable energy source which is financially feasible to sustain.

Furthermore, Bitcoin mining can capitalise on energy that would otherwise have been wasted with zero marginal cost. The best example of this is gas that would normally be flared gas from oil wells, which is highly pollutant and doesn’t produce any useful energy. Were flare gas (which is being produced anyway) redirected to Bitcoin, it would be far more useful.

The narrative on the topic of how ESG friendly Bitcoin is has noticeably changed over the last year. In 2021, Elon declared that Tesla wouldn’t be accepting Bitcoin in exchange for their cars unless over 50% of mining derived from renewable sources. Now, this is widely accepted to the case. Blackrock and the WEF had both expressed consternation about the environmental impact of Bitcoin, but their perspectives have also changed: the former stating that it is ESG friendly and lining up to release their own ETF.

Lastly, harnessing energy and producing more of it isn’t actually a bad thing anyway. Alex Epstein’s book The Moral Case for Fossil Fuels outlines the ways in which harnessing more energy from hydrocarbons and other such sources is actually one of the largest determinants of the quality of life within a given nation: the more energy that a nation produces per capita, the higher the quality of life. We shouldn’t be attempting to produce less energy at all, lest we live in mud huts foraging for berries.

Inflation and the debt spiral

Profligate and degenerate government spending has been a disaster for all Western nations over the last few decades, and has now reached completely unsustainable levels.

The UK debt now stands at over £2.5 trillion, and we have recently surpassed the all-important psychological threshold of 100% debt to GDP. Obviously, this is a completely untenable position for any country to be in, let alone one that is embroiled in a war with the largest country in the world (Russia’s debt to GDP stands at just 15.5%).

Despite the fact that it’s his only job and that it was obvious to everyone else, Andrew Bailey didn’t realise that keeping interest rates so low for so long would foster inflation. In order to rectify the situation, the Bank of England has hiked rates 14 times over the last 18 months. For context, this means that after the NHS and pensions, the third largest expense of the British government is servicing the interest on the national debt — not paying down the principle, just servicing the interest.

Mathematically, successive governments replete with incompetents have found themselves mired in myopia and dug the nation into a hole that it is now impossible to crawl out of without an incredible degree of wealth destruction. Leveraging an entire economy is a foolish idea and, like many Western nations, we now find ourselves on the brink of a debt spiral: in order to pay the debt, the government must borrow money to pay the interest on what they have already borrowed, lest they default.

This isn’t actually a bug of the current system, but a feature: governments require an inflationary currency in order to finance themselves via debt, and it is for this reason that over $400 trillion of government debt is now functionally insolvent. By contrast, Bitcoin is the complete opposite: there is a real cost to debt and one can’t simply magic up more coins with the BoE’s printing press.

There are two possible outcomes insofar as the debt spiral is concerned. The first is that interest rates go so high that the government is bankrupted, defaults on all their bonds, and Britain becomes impoverished overnight. The second is that the government papers over the problem and kicks the can down the road by welcoming even higher rates of inflation.

By adopting Bitcoin as part of the national treasury, and doing everything possible to help the ecosystem grow, we could ameliorate the issue significantly.

According to CMC, the “market cap” of all Sterling is currently around ~160m BTC. If one system falls whilst another rises, we should at the very least have some BTC as insurance — at the moment, we have no currency to fall back on as insurance when the pound fails.

Fixing an overly politicised financial system

Recently, there has been a noticeable rise of politicisation in the world, to the detriment of free markets. One needs to look no further than ESG mandates (BTC may well be ESG, but I’m not particularly of the mind that the free market should pander to this ideology anyway), and the terrible consequences for companies if they don’t conform with such a radical ideology, in order to see that the “invisible hand” of the market has turned into a fist, and begun to punch down.

There doesn’t appear to be any political will to change this whatsoever, and why would there be? Politicians are inherently people who seek power; the once-in-a-generation leader who assumes power only to give it away is a rarity, and one would be hard pressed to find any such figure in British politics today. Much like Gollum, many politicians of today overtly lust for power (Penny Mordaunt seems an obvious example), but seemingly have no idea what to do when they finally come to acquire it.

Central banks eliminate the need for governments to respond to the feedback of free markets, and the segment of the citizenry that choose to vote with their wallets. Governments of today don’t actually require such a mandate in order to finance their objectives, which creates a perversion of society in which power is centralised amongst the hands of the Westminster Cantillionaires.

Reforming overseas tax havens

The largest industry in the UK is financial services, and it is an open secret that much of the City of London’s profits are generated by helping large companies and HNWIs from all over the world to pay less tax. Some view the tax system as a game, some view it as morally reprehensible, but ultimately this doesn’t matter — the fact is that people are always going to try and pay less tax, and City of London accountants from KPMG, Deloitte’s, E&Y and PWC are world class at doing this. HNWIs trust British companies and territories to safeguard their finances from the taxman, whilst companies like Mossack Fonseca catch all the flack.

It is estimated that of the ~$36 trillion (2019) stashed in tax havens abroad, well over 50% of this resides in British overseas territories. Governments could do something about this if there were enough political will, but the revolving door between Westminster and cushy seats on boards of FTSE 100 companies prohibits such a thing from ever actually happening. One need look no further than the numerous examples of HMRC choosing (not) to investigate itself, and the fact that HMRC’s offices themselves are actually owned by a company in the BVI, to see that there are clear conflicts of interest. It’s highly unlikely that such a situation will change, given that to abolish such tax schemes would require Royal Assent, and our monarchs themselves are exempt from all taxes (and not even required to disclose where inheritance is apportioned).

Britain’s largest industries are all in the quaternary sector, and without facilitating money laundering, tax evasion/avoidance and sophisticated financial planning for citizens overseas, it would be a far less wealthy country. Favourable tax treatment for Bitcoin holdings (which can move anywhere in 10 minutes) would diminish the incentive to engage in such schemes, and free up intellectual capital for more utilitarian pursuits. At the same time, it would obsolete the need for such morally dubious practices which stain the national reputation.

The Fourth Turning and a return to minarchism

Howe and Strauss’ book The Fourth Turning outlines the ways in which civilisations go through cycles. The notion that we are currently on the precipice of a large financial reset (a Fourth Turning) may seem frightening, and will inevitably be disastrous for those who aren’t prepared to adapt. If The Sovereign Individual (by James Dale Davidson and Lord William Rees-Mogg) is anything to go by, the panopticon of the state will erode in influence as individuals rise to the fore — a successful society ought to prepare for a world in which individuals aren’t patronisingly mollycoddled and “protected” by the collective. The best way to do this would be to prepare for scaling down the size of the state financially, as well as socially (and most importantly, the pain of this transition could be ameliorated by having a large stake in the system of future).

One of the best examples in history of a minarchist state (also known as a “nightwatchman state”) was Britain in the late 1800s, during which time the country held a far more significant position on the world stage. In fact, one could argue that the rise of fiat (thanks to the duplicitous chicanery of the Bank of England) did not coincide with the bloodiest century in humanity by chance. The catalysts for Britain’s Industrial Revolution weren’t a bloated state and excessive regulation, but free markets and minimal government involvement.

“Britain … with its strong tradition of minimal government — the night-watchman state — visibly illustrated the speed of the shift from normalcy to drastic and all-embracing wartime powers.”

— Charles Townsend, The Oxford History of Modern War

In a minarchist society taxes are low, government involvement minimal, regulations few and far between, and individual liberty and property rights placed above all else.

Is it a coincidence that Britain’s relative decline in global power coincided so heavily with the rise of the state? If it isn’t, then what steps could the country adopt to revert to a time when it was more prosperous? A fantastic first step would be to separate money from state.

Nowadays, we’re a far cry from a world in which everyone knew the local taxman, and the government’s ability to create more political currency units (£) has eroded accountability. Bitcoin wouldn’t make it impossible for governments to levy taxes on citizens, but it may change the way in which they do it, and the transparent ledger would mean that on-chain analytics firms such as Chainalysis could be used to show the public how their taxes are being spent. If Matt Hancock’s pub landlord were winning outsized government contracts and MPs were charging the maintenance of private islands for their ducks to expenses, we would know about it more directly.

Protecting state coffers from democracy

One of the worse facets of democracy and fixed terms is that it incentivises politicians to think in the short term. In a monarchy, the sovereign typically has a long family history of rule and already has enough money and privilege. Such an incentive structure means that they are predisposed to think about the distant future, and less focused on enriching themselves at the expense of their subjects. One of the best examples of this is demonstrated by the various Arab states, in which all of the Arab democracies have historically had higher inflation than the Arab monarchies.

In a democracy (and particularly in a society that truly believes in democracy and places it on a pedestal), there is a far greater likelihood that objectives will be set over the short term, to the detriment of long term stability. The collective myopia of crowds guarantees it.

If a politician is only going to be in power for four years, what do they care what happens in 10 years? If they really care about their popularity and legacy (as most politicians do), then planting trees under which they’ll never sit isn’t going to be particularly appealing proposition.

Gordon “There’s Nothing Left” Brown isn’t renowned for his economic wisdom, particularly not after selling much of the nation’s gold reserves at the market lows from 1999-2002 (when he was Chancellor) and certainly not after exclaiming in 2007 (shortly after becoming PM) that there would be “No more return to boom and bust.” Yet, supported by his democratic mandate, he was able to take drastic economic decisions, and it would be difficult to argue that this was a boon for the country.

To add to this, the UK’s uncodified constitution means that our leaders have a huge degree of flexibility, and it becomes incredibly difficult to entrench long term plans and to achieve long term objectives. With Bitcoin’s timelocking feature, such a phenomenon could be avoided. The BIP65 soft fork introduced CheckLockTimeVerify (building on nLockTime in the original client), which allows users to restrict transaction outputs from being spent until a predetermined block height is reached. The state could theoretically use such a feature to ensure that it is endowed far into the future regardless of a particular government’s successors and how profligate they may wish to be with spending the national treasury. For example, if a Conservative government was concerned that a Corbynista may come to power, it could pass a bill through the Commons to prevent such a leader from frittering away the BTC portion of a nation’s finances.

The ground has already been laid

Britain currently occupies a unique position within the world, and has a significant advantage over other Western countries that may choose to adopt a similar strategy of Bitcoin adoption. The European Union is constrained by excessive bureaucracy, the fact that we have left ought to give our leaders more autonomy to take a different path (one could debate the success of Brexit thus far, but if there were enough political will we could do make good use of our sovereignty from Brussels).

Moreover, Britons already occupy a unique position within the world of Bitcoin and cryptography itself. Some of the world’s most important cryptographers throughout history have been British: Alan Turing broke the Enigma machine with Gordan Welchman at Bletchley Park, James Ellis developed public-key cryptography, and Malcolm Williamson was extremely important in developing block ciphers and hash functions. More recently, Adam Back and Mike Hearn have both contributed significantly to the development of Bitcoin (the former having developed hashcash, as quoted in Nakamoto’s white paper, and the latter playing a significant role as a core dev). And of course, we mustn’t forget the distinct possibility that Satoshi himself was English.

In Bitcoin’s first four years, 10.5m (50%) coins were mined. One could play with some extremely rough calculations and speculate that a country’s share of global GDP ought to correspond with how much BTC their citizens were able to accumulate. From the Genesis Block to the first halvening, Britain’s GDP represented between 2.5% to 3% of global GDP, meaning that we could reasonably expect that Britons accumulated at least 250,000 BTC in the first four years, and over 100,000 since then.

However, considering Britain’s historic involvement with cryptography, the fact that the white paper was published in English, and London’s place as a global financial hub, one would assume that for Britons to only own 3% of the circulating supply would be an astonishingly low figure. Does the average Briton really only own less than a million satoshis (0.01 BTC)? If so, what are we playing at?

What about ETH?

There are many in crypto circles who believe that Turing complete blockchains such as Ethereum are akin to digital nation states with thriving economies.

Raoul Pal, in particular, makes the case that Ethereum ecosystem ought to be considered as such. This analogy makes sense in terms of Ethereum blockchain having governance, its own currency, and an economy of smart contracts built on top of it.

However, there are many factors that point to Ethereum being significantly less decentralised and significantly riskier than Bitcoin, not least of which that the culture of community is far more willing to move fast and break things rather than take a more conservative approach. It’s also worth noting that recreating a nation state in the digital realm is not the same thing as separating money from state.

The blockchain trilemma stipulates that any blockchain can optimise for two of three things, making a concession on the third. Bitcoin has optimised for security and decentralisation, which is a first in the world of open source protocols. By contrast, Ethereum has made concessions that are likely to be detrimental to its longevity.

There are also concerns that proof of stake is inherently more centralising than proof of work: in a world where Ethereum became significantly more dominant than Bitcoin, one would simply have created a digital Keynesianism on a blockchain.

Nevertheless, the UK government has taken a relatively positive approach to Ethereum when compared with other countries. In the US the regulatory landscape for Ethereum seems far more uncertain, and many different regulators are competing for control. The CFTC believes that Ethereum is a commodity, and should therefore come under their remit, whilst at the SEC Gary Gensler has stated that Ethereum is most likely a security. This debate has now been ongoing for years, and the US regulators’ inability to come to consensus on this has been highly problematic. In the UK, whilst investors and capital allocators may choose to recognise the difference for themselves based on their own risk profiles, this hurdle doesn’t exist from a regulatory standpoint: both assets are regulated by the FCA.

If Ethereum continues to grow more prominent over time, it may well be logical for the UK to make use of regulatory arbitrage by offering preferential regulations when compared with the US, but it would be inappropriate for the government to adopt an Ethereum Standard, in much the same way as it would be inappropriate for a government to adopt the Microsoft Stock Standard. Some thinkers, such as Jeff Booth, would go as far as to say that other blockchains will eventually fall to zero in Bitcoin terms anyway, given that a ledger like Ethereum is more expensive than a traditional database, and without the focus on both security and decentralisation doesn’t merit having a blockchain: “How can you have DeFi on a centralising ledger?”

Time is of the essence

Assuming that a country were to adopt such a policy, the most fortuitous time to do so would be before other countries to choose to do so. The central banks and nation states who put Bitcoin on their balance sheets would be able to acquire their coins far more cheaply and with a far reduced opportunity cost relative to those who come later — such is the nature of Bitcoin’s Game Theory.

Britain wouldn’t be the first country to buy BTC directly, nor to adopt it as legal tender. El Salvador (and to a less extent the Central African Republic) are already ahead in that regard.

However, it would be the first major economic power to do so, which would give a significant advantage (El Salvador’s GDP is over 100x smaller than Britain’s, with a population 10x smaller).

On-chain factors demonstrate this more starkly. The graph below from Glassnode shows the percentage of available supply, and throughout most of its history, the supply available on exchanges has increased as more coins have been mined.

Since 2020, however, significant quantities of BTC have been taken off exchanges and into cold storage: the opportunity is already starting to slip away. Blockware Solutions estimate that if the % of supply available were to continue to diminish at this rate it will become more feasible to either mine or earn significant quantities of BTC rather than to buy them on the open market by the early 2030s. This means that if governments don’t capitalise on the opportunity within the coming years they will be placed at a significant disadvantage.

Even if Boris Johnson and Grant Shapps sincerely believe that the country can be “The Saudi Arabia of wind energy” (and I doubt the belief is sincere, since its such a stupid idea — Schapps might genuinely believe it but he also isn’t the sharpest tool in the shed), it would be better to compete on the basis of ingenuity rather than hoping to outcompete energy companies from all over the world a decade from now.

Will the government grasp the opportunity?

Assuming that I am correct, and the Bitcoin price continues to appreciate relative to £ and $ over the coming decades, one would hope that the government would seek to capitalise on the opportunity.

Unfortunately, it seems extremely unlikely that Sunak/Starmer would take such a stance on Bitcoin anytime soon. In fact, much of the Westminster murmuring would seem to indicate quite the opposite: the government’s current plan appears to be far more focused on Britcoin, our upcoming CBDC. Britcoin would not promise any of the aforementioned advantages.

Anyway, thanks for reading. I suppose we can look back on this article in 10 years to gauge whether or not any of my ideas were remotely salient.