On August 7 of this year, the state of Arizona moves one step closer to recognizing Bitcoin and other forms of virtual currency as real money, and simultaneously loosens – if only slightly – the government’s stranglehold on paper dollars as the economy’s common denominator. The legislation comes in the form of a bill, passed in May by Governor Doug Ducey, which eliminates states capital gains taxes on gold and silver specie.
The bill focuses on gold and silver, not on virtual currency names like Bitcoin or Litecoin, and it removes the penalty invoked through taxes, of purchasing, holding, or selling gold, or using it within a transaction. The law essentially removes the tax on the purchase and sale of precious metals, which, according to the bill’s proponents, allows them to fall in line with the definition of “legal tender” as outlined in the Constitution.
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But on a deeper level, this threatens, or promises, depending on your politics, to remove some of the powers of government in terms of restricting the definition of “money” to paper currency, and consequently recognizes other forms of money as equal legal tender. The Arizona legislation follows similar actions passed in Idaho, and market watchers are expecting other states to follow suit.
The upshot with regards to cryptocurrencies is that they, too, stand to become more acceptable as legitimate currencies under the same vestiges as gold and silver. This has numerous implications.
For governments on a State and Federal level, as well as worldwide, these actions can be seen as a response to a continued devaluation of paper currency, a general failure to revive local and national economies, and a growing disillusionment with government in general. Investors have traditionally turned to precious metals as a protection against inflation and as a safe haven in times of uncertainty. As blockchain technology spreads out across the globe, moving from a theoretical curiosity to the foundation of business transactions, the more stable, more popular virtual currency names like Bitcoin, Ether, and Litecoin, stand a greater chance of becoming accepted, standardized, and more widely used. Though this may benefit individuals and businesses, it will continue to drain the coffers and the credibility of government.
For individuals, the acceptance of virtual currency as real money allows for greater liberty in their own purchase decisions. Currently, few retailers accept cryptocurrencies, and their reasons for not accepting them are sound. They include volatility, transaction times, and general consumer unfamiliarity. But the growing acceptance of “virtual payment” activities like Amazon One-click, Apple Pay, and “tap” debit cards, demonstrate customers’ comfort with contactless payment systems, and native mobile apps like those offered by Starbucks reveal that people are willing to use money held in a different kind of bank. Together, these are significant indicators of a willingness to move towards a virtual cash economy.
One can argue that a Starbucks app is merely a voucher system for fiat currency, but it also represents a profound step towards virtualization. It is now becoming increasingly easy for the average consumer to purchase Ether, Bitcoin and Litecoin online through an app, without programming knowledge. Should these currencies remain stable, or better yet, increase steadily in value, it will not take retailers long to set up a QR reader or similar, at their point of sale. From that point on, Metcalf’s Law steps in, growing the value of the virtual cash network logarithmically like it did for fax machines and email.
These are early days, but the pieces are coming together quite consistently. On the technical side, the governance and stability of the programming behind virtual currencies and their blockchains are working themselves out. On the political side, increasing dissatisfaction with traditional government is being seen in many countries worldwide. Faith in a centralized system is weakening, as is trust.
A money system based specifically on a process that replaces trust with immutability (in theory) and which replaces a center with centerlessness, is now ripe for adoption in a way that it might not have been a decade ago, even if the technology had existed back then.)
Even for those who have no interest in cryptocurrencies, the laws passed by Idaho and Arizona reflect a changing political landscape in which faith in a central government and its tools (including the Treasury and the dollar) are eroding quickly. As people continue to take their destiny into their own hands, their choice of how they will use money will go with it. Governments whose budgets and borrowing plans are based on a valuation of assets developed in previous decades may find themselves woefully underprepared. It is they themselves who will become virtual.