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Can Bitcoin Save You from a Tyrannical Government?
This is not going to go the way you think.
It was embarrassing when your debit card was rejected at the coffee shop, but after your credit card was also declined, a sense of dread swept over you.
You call the bank as you continue your commute. They say the account has been frozen and they can’t say more until the investigation is complete. The credit card company offers a similarly vague response.
Heart pounding in your chest, your brain starts racing through your memories in a desperate attempt to piece together why this is happening to you. And then it hits you.
That damn protest.
You were far away from it, but you vaguely recall your spouse mentioning something about giving $50 to Americans for the Defense of Democracy.
That was months ago, but the ADD’s DC protest last weekend got… messy. You didn’t see the big deal. It was just some property damage and not that many people were hurt. Besides, that FBI building was ugly anyway. And they had been perfectly peaceful before that, when your spouse donated the money.
President Trump had already been much grumpier than you remembered. At his second inauguration, he promised “no more mister nice guy” and he meant it. He was even grumpier after the protests began, which led to the passage of the AMERICA FIRST Act, which requires banks and credit card companies to close accounts of suspicious customers and shields them from any liability for doing so.
White knuckled now, you wonder how you’ll pay your mortgage or even buy groceries. You’re almost out of milk. Then you remember something that gives you a ray of hope.
Bitcoin. That crazy uncle of yours — yes, that one — had given you $5,000 of it on a whim. It was on some little flash drive thing that you locked up in a desk drawer and promptly forgot because Bitcoin always seemed like a scam. And it’s bad for the planet.
But maybe now it can give you a way to bypass this blacklist and keep your family afloat until you can get this all straightened out.
Or can it?
We here at Unprepared don’t care about your politics because preparedness is for everyone. The little bit of speculative fiction above was a creative illustration of how political powers and mores can twist in unexpected directions, and we always need to be aware of potential threats… even if it’s from your team. We don’t want to be paranoid, but we do want to be aware.
We also don’t want to break the law. I don’t even speed or smoke pot. Buying and selling crypto is perfectly legal in most places, but certain techniques for anonymizing those transactions may not be. It’s your responsibility to understand your local laws and abide by them. And, as I’ll explain, authorities have many tools to thwart them.
But the above scenario isn’t even a slippery slope. In addition to the recent news out of Canada, which I’m sure you’re aware of, Muslims have already experienced this type of unaccountable account freezing in the United States.
Now that we have your attention, let’s look at the facts and explore the pros and cons of crypto for this purpose in a way anyone can understand.
Bitcoin in Theory and Practice
I’m only going to focus on one cryptocurrency: Bitcoin. It’s the most popular cryptocurrency, meaning it’s the most likely to be accepted by any random vendor. Even if you don’t know the technical ins and outs, you’ve likely heard of Bitcoin and know it’s some kind of money.
In theory, Bitcoin is completely decentralized and permissionless. You can send Bitcoin to anyone with a Bitcoin address at any time and no one can stop you. The problem is, most places don’t accept Bitcoin. For example, could you pay your power bill with Bitcoin? What about your phone bill? Can you reserve a hotel room with a few sats (fractions of a Bitcoin)?
Probably not. So you need a way to exchange that Bitcoin for traditional currency. That’s where a crypto exchange, like Coinbase, comes in, which lets you buy and sell Bitcoin just like you would a stock. If you have a lot of Bitcoin, not a lot of cash, and you have bills to pay, you sell some Bitcoin, transfer the cash to your bank, and pay the piper. But what if you suddenly couldn’t?
Who’s In Your Wallet?
Exchanges are the fulcrum of control governments have over crypto, since they’re regulated just like banks. If you keep your Bitcoin on the exchange, which many people do, it’s trivial for a government to seize it like any other asset. And exchanges are required by law to collect personal information about you, known as Know Your Customer, usually shortened to KYC but it could just as easily be CYA (“Cover Your Ass”).
The crypto crowd has a solution: an “offline” wallet. That could be an app on your phone, like Exodus, a hardware wallet like a Trezor, or even a laptop running Bitcoin wallet software like Samourai Wallet. Such wallets store the keys to your computer coins on the device instead of an online server. More specifically, a wallet stores the encryption keys that give you access to those coins on the Bitcoin blockchain, which is an encrypted ledger that records every Bitcoin transaction that has ever transpired.
Despite your keys being offline, these wallets still let you send and receive Bitcoin over the internet, or even in person by scanning special barcodes called QR codes. Each wallet has a long password called a seed phrase, and you can even distribute Bitcoin by handing someone a seed phrase written down on paper, which they can use to “sweep” those coins into their wallet.
When your Bitcoin is stored in an offline wallet, it means if the government wants your crypto, they’re going to have to physically come and take it from you. Guns will likely be involved, but at least you’ve made it harder for them than clicking a few buttons or making a phone call.
Of course, the wallet does you no good unless you transfer your Bitcoin to it from the exchange, which costs a small fee and takes a little time. It’s a good practice to only send a small amount at first to make sure everything works correctly before sending your entire stack.
So now you have your Bitcoin on your person, inaccessible by anyone but you. Maybe you even took the trouble to smuggle your wallet in an orifice. Uh… congratulations? But how are you going to spend it when you’re banished from using an exchange?
Life Outside the Exchange
Some hardcore crypto enthusiasts live without a bank account or with very little cash money in their bank, instead choosing to keep their net worth in crypto. There is a movement called #GetOnZero that encourages this practice, but they rely on exchanges like Coinbase and Strike to convert crypto to traditional currency.
If you’re banished from financial services, you could trade with people and businesses who accept Bitcoin. Overstock is one of the rare online retailers that accept Bitcoin directly. However, Overstock uses Coinbase, so that may not work after all. There are companies, like Coingate, that let you buy gift cards for major vendors with crypto, so you can indirectly spend your Bitcoin with Amazon, Target, and a whole host of retailers. But that doesn’t take care of the light bill.
There is a solution there, as well. You could directly exchange crypto with someone for cash, using a wallet’s QR code. There is an app for making these sorts of connections, called Bisq, which is an encrypted, decentralized exchange. Think of it like Craigslist or eBay, but for Bitcoin.
Another alternative is Bitcoin ATMs, which are more and more common. I even have one in my tiny town. However, you’d have to find the right one. Some require as much KYC as any exchange. Coinsource, a Bitcoin ATM vendor, requires an account and states on their website:
As the world’s largest Bitcoin ATM operator, Coinsource is nationally licensed and federally regulated which requires proper ID verification of our customers.
“Unfortunately, many BTM operators feel that merely asking for a cell phone number is enough due diligence to absolve them of their mandated KYC requirements,” said Bo Oney, Executive Vice President of Operations and Head of Compliance at Coinsource. The CCC is seeking to bolster regulatory requirements for the benefit of all BTM users and operators. In this light, we are seeking input from the most knowledgeable in the industry, all with the goal of making the cash-to-crypto space as safe as possible for consumers, operators, and industry partners.”
But even with Bisq, an offline wallet, and a cool Bitcoin ATM, you’re still going to have trouble. Good luck getting a hotel room or a rental car without a credit card. And you can’t get a crypto mortgage, at least not yet. There is a technology called DeFi, short for decentralized finance, which lets you borrow money over crypto networks, but you would still have to turn that crypto into cash to buy a house unless the seller is a fellow crypto fanatic.
Encrypted Doesn’t Equal Private
Alas, there is yet another problem. Bitcoin may be encrypted but it’s not entirely private. The entire blockchain, which records all transactions, is viewable by the public. Each wallet can contain multiple Bitcoin addresses (think: accounts) represented by a long address of numbers and letters like 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa. Someone may not know a long string of numbers and letters is one of your addresses, but if that wallet has been used with an exchange tied to your personal identity, that wallet address could be flagged by the government.
But Bitcoin has demonstrated some resilience against government sanctions. An amusing story from Coindesk explains that while a Canadian court blacklisted 120 Bitcoin wallet addresses, many of those coins ended up on exchanges anyway.
However, that’s merely a loophole, given that the exchanges in question are hosted in the United States and aren’t subject to Canadian law. However, if a similar move was taken in the United States it would be a different story. And it’s conceivable the US government could compel an American exchange to abide by a Canadian court order.
Tumbling Bitcoin for Greater Anonymity?
But there are even solutions for that. For instance, many wallets let you create as many Bitcoin addresses as you like. One address could be what you use for KYC exchanges and you could then distribute the Bitcoin from your KYC address to other addresses on your wallet.
Those transactions could be traced, but if you did it right, it would be difficult to prove that you were shuffling money around instead of sending small amounts as payments. Unless your wallet was seized.
There is an anonymizing technique for Bitcoin called “tumbling” or “mixing,” which blends up pieces of Bitcoin in such a way that they’re hard to trace… for a fee. The aforementioned Samourai Wallet calls its tumbling feature Whirlpool. Another popular solution is called CoinJoin.
You might say, “Wow, that sounds like a great tool to launder money,” and you’d be right. Last year, Roman Sterlingov, founder of early tumbling service Bitcoin Fog, was arrested and charged with helping launder $335 million of Bitcoin over a decade.
Tumbling is a legal gray area, but it’s conceivable that the government could charge you with money laundering or “structuring” for doing so, especially if you’re engaged in illegal activity.
And there is another catch: mixed coins can be easily spotted, and some companies won’t take them. If you unwittingly receive mixed coins you could find yourself holding the bag.
Many Bitcoin fans say that you should tumble as many coins as possible, thus “tainting” so much of the pool that mixed coins are functionally impossible to ban (there is a limited supply of Bitcoin that can ever be created). That seems reasonable, but we don’t know to what extent governments may go to halt crypto. Many countries, including China, have banned crypto entirely.
And there now appears to be ways to “unmix” coins to trace their activity.
Even if a government doesn’t outright ban crypto, it could take the bold move of blacklisting any address that had touched another blacklisted address. So a dissident sends you a few sats for a coffee and the next thing you know your Bitcoin is no good anywhere.
Don’t think governments are unaware of crypto. The FBI recently formed a new National Cryptocurrency Enforcement Team dedicated to figuring out and thwarting everything outlined here. Over time, governments will only get better at controlling crypto.
But recent events have made believers out of skeptical techies. David Heinemeier Hansson, a controversial but influential developer, recently published an essay called “I was wrong, we need crypto.” As governments get better at seizing crypto, some of the biggest brains in tech are working to make crypto even more ungovernable.
Maybe I’ve painted a dour outlook on Bitcoin, but the real lever of power is in the exchanges. If a critical mass of people started doing business in Bitcoin such that exchanges weren’t necessary, that would change the game.
How to Consider Bitcoin for Your Preps
Is crypto a prep? I would argue yes it is, though not nearly as crucial as things like food and water. Get your basics squared away first. Here are my recommendations and things to keep in mind:
All crypto, including Bitcoin, is volatile. Bitcoin recently dropped to about half of its all-time high. It’s true that inflation devalues your cash, but crypto can drop even faster.
Consider purchasing small amounts of Bitcoin to learn how it works hands-on.
Do not keep your coins in an exchange like Coinbase. Choose a wallet and move your coins to it. Again, small amounts at first to test the transaction. Exodus is an easy app to start with on your phone, but you shouldn’t put too much on a phone wallet.
When you have enough Bitcoin that you would sweat if you lost it, consider a hardware wallet like a Trezor One.
Consider storing your wallet’s keyphrase on metal instead of a piece of paper. Keep it locked up in a safe place.
If you’re a seasoned Bitcoin user, think about running your own node, which offers more privacy, some level of control over the blockchain, and helps you learn more about the technology.
Don’t consider tumbling coins unless you know exactly what you’re doing.