Bitcoin Supports US National Economic Strength
Shortly after taking office, President Biden described a world at an “inflection point” and stressed the need for democracies to demonstrate they “can still deliver for our people.” Bitcoin is emerging on the world economy at just this moment of inflection and, if properly understood, presents the United States in particular with an opportunity to — again in Biden’s words — “build back better our economic foundations.” It can support national economic strength by fostering domestic energy innovation, help to counter China’s economic ambitions, and stimulate innovation and capital growth at home. Here’s how.
Bitcoin is a technology. Synthesizing decades of research in cryptography, distributed systems, and peer-to-peer networking (often funded by the U.S. government), this digital asset offers everyday Americans and institutional investors alike a vehicle for long-term savings and commerce. With no central authority required, it combines the scarce “hard” attributes of gold with the transactional benefits of fiat money (e.g., paper bank notes and ledger liabilities).
The scarcity of Bitcoin is fixed by an open source protocol voluntarily adopted by its users. Transactions are secured by competing “miners” who expend energy to earn Bitcoin by proving to the network that they have solved a computational problem. The difficulty of this problem automatically adjusts to keep new Bitcoin issuance on a fixed schedule. This “Proof of Work” mechanism allows the network to achieve distributed consensus on the record of Bitcoin transactions. As a result, the supply of new Bitcoin is entirely independent of demand, and PoW makes Bitcoin miners a unique energy consumer.
Consider the pace and scale of the impact bitcoin “mining” is having on the U.S. energy sector. China’s June 2021 ban of the practice precipitated a shift in the global distribution of “hashrate,” a measurement of the computational effort put into digitally mining the currency as a reward for processing transactions. Though specific estimates are tricky, the United States now has a plurality of global hashpower. Several of the largest bitcoin miners are now publicly listed in the United States. Intense competition is driving rapid innovation in hardware, business operations, financing models, scale of deployments, and improved economics for renewables.
This is helping spur a renaissance in the physical world of the American energy industry, improving our ability to be energy independent. It has implications for the capture and reduction of harmful emissions and waste, the economics and demand profile for renewable generation, the resilience and stability of our increasingly burdened electrical grids, and the first real investment and innovation in nuclear power in decades.
China rightly views Bitcoin as a threat to its authoritarian system and strict capital controls, accelerating implementation of its Digital Currency Electronic Payment (DCEP) in response. At the same time, China’s purchases of U.S. Treasury securities peaked in 2013 as they redeployed their dollar reserves (from our trade deficit) into western real estate and equity markets, giving them financial power to exert political influence over US corporations. China is also using these dollars to finance its Belt and Road Initiative, a strategic effort to spread Chinese influence and secure access to critical transport infrastructure and natural resources across the globe. As this initiative has grown, China and Russia (and other states in their orbit) have formed a closer strategic partnership, including direct bilateral trade that bypasses the dollar, increasingly denominated in yuan, ruble, and euros.
The existence of bitcoin is a severe complication for China’s CBDC ambitions, presenting an attractive store of wealth and effective cross-border payment system to those BRI nations that China seeks to entangle with the e-RMB. Meanwhile, global demand for dollar-pegged stablecoins has exploded, especially by citizens of emerging markets facing currency distress.
As the industry becomes increasingly regulated and transparent, the U.S. should encourage stablecoins as an effective tool to maintain dollar dominance at the digital front line competing against China’s eRMB. Mostly backed by cash-equivalent reserves, the growth of these stablecoins also increases demand for U.S. Treasuries, helping the Federal Reserve keep interest rates low in the face of inflation.
There are likely now over 150 million bitcoin users in the world, including over 47 million Americans. Given that a large amount (potentially a majority) of Bitcoin is held by U.S. residents, we stand to disproportionately benefit from its monetization. Over 500 U.S. start-ups have raised over $6 billion in seed funding, building strong businesses and attracting international talent, capital investment, and consumer demand. Already boasting some of the biggest brands in the industry, our deep and liquid capital markets provide the go-to public exchanges to host bitcoin firms.
America stands on its wealth, but stands for freedom. At the heart of our national ethos is a professed commitment to essential human rights like individual liberty, freedom of speech, privacy, and democratic choice. These values, under threat by illiberal and authoritarian states around the world, sit at the center of our strategic interest in promoting liberal democracy and protecting civil societies around the world. Anything that helps advance the cause of freedom thus helps advance this core national interest.
As the Human Rights Foundation calls it, Bitcoin is freedom money. In particular, Bitcoin is a highly effective and practical tool being used now by refugees fleeing war, by democracy activists dodging state oppression, by impoverished populations protecting their wealth from hyperinflation and state collapse, and by the unbanked billions around the world accessing for the first time a savings vehicle that gives them a step up onto the economic ladder.
To the extent that U.S. national strength rests on our energy resilience, technology innovation, capital growth, and liberal values, Bitcoin gives us a clear advantage over our adversaries. The time to take maximum advantage is now. More than just about any other country in history, the United States has adapted and led in times of challenge and change. Let’s do it one more time.
Matthew Pines is a fellow with the Bitcoin Policy Institute.
