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Recently, there have been rumors that some governments from around the world are looking forward to legalize crypto currencies and recognize them as legal tender / official payment methods.

What do you think?

  • Is it something that is going to happen?
  • Will it affect the value of the bitcoin?
  • If it is not a hoax, is it just to be able to tax it and to be able to set up a government authority controlling bitcoin?
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Bitcoin has already been recognized as a currency by many nations for quite some time. But that's only a prerequisite. It previously was seen as as commodity by many nations which in a lot of tax systems has a very bad implication:

If you buy something like food or electronics, that's a commodity. If you pay it with a currency, you have to pay sales tax for the value of the commodity you sold or bought (depending on the tax system). Now hat if instead of trading currency against commodity, you trade commodity against commodity? Can you evade sales tax by this? Of course not, the makes of tax systems thought about that and in most cases implemented a law making it highly undesirable to trade commodity against commodity: Sales tax has to be paid for both commodities which were exchanged so you basically have to pay twice the sales tax if you don't use a currency.

With bitcoin being recognized as a currency by many nations, this problem vanishes. However, it still doesn't mean that it's widely known and used which are the real factors for success. Of course, if payments in bitcoin are more widely accepted, demand for bitcoin rises which increases the bitcoin price because bitcoin is non-inflationary.

However, it is reasonable to assume that governments aren't exactly in favor of bitcoin becoming more widely accepted because it makes it harder for them to monitor and control the flow of money. As a government, you can force banks to tell you about all bank remittances. You can also add serial numbers to bank notes and force banks to tell you when which serial number was given out or taken in by which branch of which bank by which person. In bitcoin, money isn't associated with people's names and addresses except if this information can be derived from other information. This makes monitoring the flow of money considerably harder.

Furthermore, right now, governments can force banks to make money of certain people unspendable (to "freeze"/block accounts). This gives them great control but isn't possible with bitcoin.

Bitcoin doesn't enable you to not pay taxes. If your employer pays you in bitcoin, they and you will have to pay the same amount of taxes and whether these taxes are paid to the state in bitcoin or that state's fiat currency, doesn't really matter for the concept of it. The state you live and work in decides how much you have to pay in taxes, not the currency you're using.

However, just because your government can (and will) still force you to pay taxes (which are needed for a functioning society, after all), doesn't mean they have great control over bitcoin. Something like what you mean with "to be set a government control over it", isn't possible because it would require a national entity to be able to declare a block invalid if it contains a transaction it declared invalid. In bitcoin, the the longest valid block chain defines the history of transactions and who has control over how much money which ultimately is whether a money transfer was or wasn't executed.

In particular, the longest valid block chain defines how much money you have. If the government wants to make a transaction of money I sent to you invalid, it has to persuade the miners to not view the longest valid block chain as the effective block chain but the longest one which doesn't contain that transaction. A government can't make everyone do that. It can force the miners in the area it controls to stop mining on top of the (for everyone else) effective blockchain and make then fork their own one. But their's will just have no value as it isn't accepted by the people. If many governments do that by force (has to be done by force) in a joint effort, that would just be them making mining of bitcoin illegal, therefore restricting their peoples' freedom to a great extend. Would you want to live under a government which tells you which computations you can and cannot execute?

Ergo, governments can't control bitcoin. The best they can do to control it is to make it illegal.

  • There are concerns that censoring some addresses could actually be a problem. If Chinese government were to declare some transactions invalid, most miners would have to obey, as most mining power is based in China. That would either lead to censorship, or probably bitcoin hard forks, in any case bad things would happen. – comodoro Dec 31 '16 at 16:59
  • If anything, they'd have to declare certain UTXOs unspendable. Just making certain transactions invalid wouldn't be effective as the same UTXOs could be spent via different transactions to the same receiving entity. If they make certain UTXOs unspendable in China, but there exists a transaction spending them, someone outside China will include these UTXOs in a block anyway. If China makes it illegal to have a blockchain spending those UTXOs, miners would pay the fines, bribe their ways out of it, or sell their hardware to people or companies in different countries. – UTF-8 Dec 31 '16 at 17:13
  • Sorry, that's what I meant. As for the censorship, we can only speculate on what would happen. One consequence would very likely be a big drop in price and shift to other cryptocurrencies. – comodoro Dec 31 '16 at 17:40
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Banks and government will fight with bitcoin. They will blame it for supporting terrorism, drugs,...

"Advanced" governments will want to shut bitcoin down. The problem is with the control of people and tax collection. We live in capitalism so money is the symbol to control everything, mainly people. The problem for banks and governments is that they can't print more bitcoins, they want to know who is who, they want collect as much as they want,...

I think nations will come up with their own implementation of cryptocurrency. Such implementation will not be decentralized like bitcoin. It will be centralized because of additional money creation, tax collecting, KYC/AML policies,...

I strongly recommend watching The Inside Job movie to know how governments and banks outsmart us all.

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