When Rogue States Embrace Crypto
I want to talk about North Korea, but first we need to revisit El Salvador.
The Central American country’s decision to buy Bitcoin is looking good, despite almost universal skepticism from The Establishment when it was announced. Some of that skepticism ultimately proved accurate — legal tender status didn’t lead to mass adoption or cheaper remittances. But these motivations might have been red herrings all along.
President Bukele may have just wanted an excuse to acquire bitcoins for the government as part of their reserves. He was a bit overzealous and definitely too early in their purchases, but the decision paid off anyway. Not only has bitcoin appreciated in value, but El Salvador now has a part of its national savings in money that can’t be debased or confiscated.
This kind of diversification — not just of value, but also access — is something that every country wants. Bitcoin is the first algorithmically minted, apolitical, and censorship-resistance currency in history. Its appeal grows as geopolitical tensions rise and economic crises become more frequent.
I wouldn’t be surprised if other countries are now also acquiring Bitcoin, though perhaps quietly. A smart buyer never tips their hand. The savviest nations might be mining it, and there are interesting rumors about certain Middle Eastern governments. Regardless of how any country acquires it, owning Bitcoin at the national level has proven worthwhile.
Which brings me to North Korea, a pariah nation whose acquisition strategy has relied on hacking and theft. I don’t buy all the exploits that are attributed to them, but the numbers are still substantial, especially for an otherwise poor country. North Korea’s holdings have never been officially acknowledged, but we still need to ask an important question: What happens when a “rogue” nation embraces crypto officially?
I think it’s only a matter of time until some do — at least Bitcoin — and the most likely candidates are sanctioned countries with energy reserves. Mining is the perfect solution for anyone with too much oil and not enough hard currency.
America is not going to like this. Bitcoin can be used as a workaround to dollar sanctions, and America increasingly weaponizes dollar access as a foreign policy tool. So she’ll try to expand those sanctions to crypto but this won’t be easy because Bitcoin is pseudonymous. Washington may then turn inward, pressuring domestic crypto companies to start censoring blacklisted wallets. Like most kinds of financial censorship (AML, KYC, etc) this won’t be very effective, except to make life harder for ordinary Americans using digital assets.
The utility of crypto abroad on the other hand won’t be impacted much. Unlike fiat money, where virtually every dollar transacted abroad must eventually clear back home, bitcoin transactions are settled globally. All it takes is for one miner anywhere to include a single transaction and it must be added to the chain — nodes that refuse will no longer be in consensus. Septuagenarian senators who take pride in their ignorance won’t understand this and go after American crypto companies who follow the rules of the protocol, but that won’t achieve anything.
America could force its own miners and exchanges to censor certain coins, but that would just give the upper hand to foreign competitors. Unlike fiat money, Bitcoin always finds a way. It’s a bit like quicksilver in that regard. One of the added benefits of government’s mining is that they can always mine their own transactions.
Perhaps even more importantly, America’s bumbling attempt to “control” crypto will make it even more obvious that nobody can, which is why governments want it in the first place. A domestic crackdown will be the ultimate advertising campaign for Bitcoin, leading to greater adoption.
Some of you might be wondering about the moral questions around “rogue adoption”, which do exist. But the problem is that the morality of economic sanctions — and all financial compliance for that matter — is ambiguous. The bad guys usually find a way, but the poor and powerless suffer.
Sanctions in particular have a dubious track record. There are not many examples of them leading to a desirable outcome, like regime change. Instead what usually happens is that tens of millions of people who are already victims of a brutal regime suffer even more. One could even argue sanctions strengthen such regimes by increasing the divide between the oppressed and the oppressor, and giving dictatorial thugs somebody else to blame for their failed state.
Kim Jung Un will not go hungry tonight, but many of his victims will. Is that moral? I’m not sure.
