Can Bitcoin Be Banned By The Government? Behind The Myths

Bitcoin operates on a decentralized blockchain, and Bitcoin is the cryptocurrency most resistant to being controlled. This is precisely why some governments are trying to ban it. They are a threat to the authority and economic dictatorship of the banking system. But can Bitcoin be banned by the government? Operating on a decentralized blockchain network that is not controlled by a central authority, Bitcoin cannot be banned, nor can transactions be stopped or canceled. Despite this, governments can implement some actions to limit Bitcoin adoption and use. How?

Soft Bitcoin Ban

• Strictly or highly prohibitive requirements for exchanges and service providers.
• Preventing payment processors from facilitating Bitcoin transactions.
• Implementing strict taxation policies and detailed reporting on cryptocurrency transactions and holdings to tax authorities.
• Issuing public warnings and advisories about the risks of investing in Bitcoin.

Hard Bitcoin Ban

• Shutting down local exchanges or blocking foreign exchanges from offering services.
• Banning banks from dealing with Bitcoin businesses.
• Blocking access to Bitcoin-related websites through internet service providers (ISPs).
• Imposing restrictions on the use of VPNs to access prohibited services.
• Criminalizing the use of Bitcoin for illegal activities such as money laundering.
• Sharing information about suspicious transactions and enforcement actions across borders.

There have been some case studies of attempts to ban Bitcoin in some countries, and we will explore them together. We will also understand why Bitcoin cannot be regulated and what will happen if governments try to ban it. In this PlasBit analysis, we will provide you with all the tools you need to understand if Bitcoin can be banned by the government.

Can Bitcoin be Banned by the Government: Case Studies

The relationship between Bitcoin and other cryptocurrencies and governments is complicated and controversial. Some states have been more crypto-friendly, incentivizing the adoption of cryptocurrencies and blockchain technology, while others have been more adverse, trying (unsuccessfully) to ban cryptocurrencies. Which countries are trying to ban crypto? Some of the countries that are trying to ban crypto are Afghanistan, Algeria, Bangladesh, Bolivia, China, Egypt, Ghana, Iraq, Kuwait, Lesotho, Libyam Morocco, Myanmar, Nepal, North Macedonia, Qatar, Republic of Congo, Saudi Arabia, Sierra Leone, and Tunisia. Let's look at some case studies in more detail.

China: An Apparent Crypto Ban

Although China is against cryptocurrencies, it has never actually banned them completely, because it can’t. The Chinese government's stance against crypto began to take shape in 2013 when it banned financial institutions from handling Bitcoin transactions. This initial move was followed by more severe measures in 2017, when the government banned Initial Coin Offerings (ICOs), citing concerns over financial stability and investor protection. As of 2021, however, it has banned local cryptocurrency companies, including main exchanges and mining factories, and thus made it more difficult to buy and trade cryptocurrencies. Nonetheless, it did not ban cryptocurrencies, as peer-to-peer trading and over-the-counter (OTC) markets were still possible, and users often use VPN (Virtual Private Servers) to circumvent local restrictions and operate with overseas exchanges. In fact, according to a recent analysis by Chainanalysis, the cryptocurrency market in China is one of the most active and substantial in terms of volume despite cryptocurrencies not being declared legal tender.

Morocco: Strict Prohibition & Peer-to-Peer Resilience

In 2017, Morocco declared that all transactions involving Bitcoin and other cryptocurrencies were prohibited, highlighting concerns over the potential for money laundering and financial fraud.

The prohibition was supported by the central bank and other financial institutions, which reinforced the ban and warned the public about the risks associated with crypto investments. Despite these strong measures, the crypto community in Morocco has remained. People can still do Bitcoin operations because it’s impossible to stop transactions on decentralized blockchain networks. The crypto community in Morocco has shown resilience and uses Bitcoin and other cryptocurrencies through peer-to-peer transactions. Additionally, some exchanges, despite the Bitcoin ban, do not prevent users in Morocco from signing up using a VPN or other similar services. Can Bitcoin be banned by the government in Morocco? Well, although Bitcoin and other cryptocurrencies are publicly banned, it is impossible to prevent even ordinary, more inexperienced citizens from making peer-to-peer transactions and using VPNs to access services available in other parts of the world. So, the mission failed in this case as well.

Qatar: Cryptocurrencies are Against Religion

A particular case study is Qatar, which bans Bitcoin and other cryptocurrencies because of religion. Qatar is a Muslim nation and, as such, follows Sharia Law. To comprehend why Qatar (and, to some extent, Saudi Arabia) have banned Bitcoin, let us better understand the financial principles of the Muslim religion.

• Interest and usury are prohibited by the Islamic religion, as lending money automatically creates value out of nothing for the lender.
• Avoidance of speculation and risk: Islamic religion and finance strongly discourage speculative and risky financial activities.
• Prohibition of gambling: Gambling, betting on luck with high risks, is prohibited since it could lead to disorder and addiction.
• Importance of social justice: Transactions should be transparent, risk-free, and avoid any kind of injustice. Ethical finance is encouraged.

So, although many claim that Qatar and Saudi Arabia will also soon allow the use of Bitcoin and are only delaying their adoption, Bitcoin and other cryptocurrencies are currently banned in these nations. Despite this, also in this case, peer-to-peer transactions, OTC, or use of VPNs and foreign exchanges cannot be prevented.

As we have verified from these case studies, it is impossible to prevent users from using Bitcoin. Bitcoin's inherent resilience and adaptability have allowed it to thrive even in the face of stringent regulations. The continuous evolution of the crypto ecosystem, including the development of decentralized exchanges (DEXs) and privacy-focused coins, further complicates enforcement efforts.

Market Impact of a Government Ban on Bitcoin

Government bans on Bitcoin can have significant and far-reaching effects on the market, influencing prices, investor behavior, and market dynamics.

Immediate Market Reaction: Prices and Volumes Drop

If a nation as large and populous as China bans Bitcoin, the market reaction will be strongly negative, and the prices will drop. The ban on crypto mining factories in China contributed to a long bear market phase. The closure of major exchanges like Huobi and OKEx forced many traders to cease operations or move to overseas platforms, resulting in a noticeable dip in trading volumes within the country. However, it should also be considered which country bans Bitcoin: Small countries won’t impact the market so much. Most investors would liquidate their Bitcoin positions to avoid regulatory problems and reallocate funds to safer investments.

Diffusion of VPNs and Peer-to-Peer Markets

Although governments can block access to certain sites and restrict the use of DEX, CEXs, and crypto wallets, they cannot completely restrict the use of technology to move their location IP addresses. Through VPNs (Virtual Private Networks), for example, you can change the registered location of your device anywhere in the world. If a government bans Bitcoin, we would see rapid growth in the number of users who use VPNs and similar services to move their IP address and be able to access foreign exchanges. So, if a country bans Bitcoin, you can still use Bitcoin-related services and wallets anywhere in the world by moving your IP address. Moreover, peer-to-peer trading cannot be prevented. You only need a device with an internet connection and a Bitcoin wallet to carry out Bitcoin transactions. It underscores the crypto enthusiast's resilience and the impossibility of enforcing a total ban.

Impact on Local Businesses in the Bitcoin Sector

Although a government ban on Bitcoin cannot restrict peer-to-peer activities, the impact on local businesses In the Bitcoin sector would be devastating. For example, following the crypto ban in 2021 in China, most mining companies had to relocate outside China, and several exchanges had to close or move to other markets. In practical terms, this means that many employers and tech innovators who work in these companies need to find another job or follow the board outside the country if they can handle this transition.

Moreover, these restrictions would also affect all the people who work in businesses In the Bitcoin Sector behind the scenes: developers, venture capitalists, graphic designers, copywriters, and so on. To summarize, the impacts on local businesses would be devastating. Most of them would be forced to close their companies, while the most prolific ones can maybe afford to transfer their operations outside the country, as happened in China, for example.

Implementing Strictly Rules: Criminal Penalties

As we described before, even if the governments try to ban access to the exchanges, people can engage with Bitcoin through OTC platforms, peer-to-peer trading, VPN services, and foreign exchange. In a "soft ban", the government may not impose additional measures and rules, and people can use Bitcoin through the services mentioned above. However, in an "hard ban", the situation could be different.

In a hard ban, the government imposes harsh penalties and criminal sanctions if they track a citizen illegally using a Bitcoin service. It means that they could prevent access to VPN networks (by banning their source websites), they could track on social media all the country's people who use the keywords "Bitcoin" or "crypto," they can track transactions from exchanges to bank accounts, and so on. In a hard ban, only a very small minority of people could find a way to trade Bitcoin securely.

Why Governments are Generally Opposed to Bitcoin?

Wondering if Bitcoin can be banned by the government? And why are they generally opposed to Bitcoin? Well, there are several factors that contribute to this. Governments have always acted to control the populations, both the economic system, the food, and so on. Losing control of the economic systems means that the governments lose control of people's freedom. With Bitcoin, the government can’t block access to people's funds, deduct taxes automatically, and control your financial status. With a new financial system based on Bitcoin and decoupled from the traditional financial structure, people could get back, for the first time in history, their financial freedom and the maximum authority and sovereignty over their own funds. That would be amazing, but not for the governments because Bitcoin cannot be regulated.

Here are some of the reasons for which governments are generally opposed to Bitcoin:

• Bitcoin Cannot be Regulated: Bitcoin operates across borders on decentralized blockchain networks, making it difficult for any single government to enforce regulations effectively. No central authority oversees the transactions, and once they are concluded, they are irreversible. Additionally, to regulate Bitcoin, a global regulation would be needed, the same for all the countries, and that's very implausible to do.
• Loss of Control of Monetary Policy: Bitcoin operates on decentralized blockchain networks, and in the future, they could be independent of central banks. Consequently, various governments believe that Bitcoin undermines their ability to implement local and regional monetary policies, and this loss of control can affect inflation rates, currency stability, and economic politics. The governments are scared.
• Regulatory Oversight and Complexity in Taxation: Governments find it difficult to regulate and oversee transactions made with Bitcoin due to their decentralized nature, the lack of IP addresses in transactions, and pseudonymous and encrypted networks. So, the taxation of Bitcoin is very complex and challenging for tax authorities to enforce.
• System Risk and Market Volatility: Bitcoin is also known for its inherent risks and volatility, which can lead to financial instability if it becomes widely adopted. Consequently, integrating Bitcoin into the broader financial system could pose systemic risks, potentially leading to financial crises.
• Money Laundering and Criminal Actions: Bitcoin can be used to facilitate money laundering, tax evasion, and other illicit activities due to the anonymity they provide, sadly, also including funding terrorist activities.
• Fraud, Scams, and Lack of Recourse: The unregulated nature of Bitcoin has led to numerous frauds, USDT scams, and Ponzi schemes, posing significant risks to consumers. Additionally, in most cases, in the event of fraud or theft, individuals often have little to no recourse, as transactions are irreversible and likely anonymous.
• Currency Competition and Capital Flight: Bitcoin can compete with national currencies, potentially undermining a country's economic sovereignty. Moreover, Bitcoin can facilitate capital flight, allowing individuals and companies to move large sums of money out of a country without detection. The governments want to retain local money, entrepreneurs, and companies.

Alternative Approaches Governments Could Take Towards Regulating Bitcoin

As we explained, regulating Bitcoin is not easy for governments. There are several systemic risks in adopting a new (and non-mature) financial system based on Bitcoin. However, the ban is not the solution, as we analyzed in the case studies of China, Morocco, and Qatar. Not all governments are adopting such restricted rules and measures against Bitcoin. Various countries are exploring new innovative approaches to Bitcoin and other cryptocurrencies, and the results are good. One notable example is El Salvador, which made Bitcoin a legal currency, attracting a lot of foreign investors and digital nomads. So, Bitcoin cannot be banned, but some governments are trying to regulate Bitcoin and other cryptocurrencies while allowing for innovation and growth in the sector. Some proactive and positive approaches are:

• Soft and Clear Capital Gains Tax: One of the most common problems for crypto traders worldwide is tax reporting. Regulations are not clear, and tracking and reporting trades is difficult and time-consuming, considering that crypto platforms often operate from foreign countries and have different tax rules. One positive example is India, which has proposed a 30% tax on income from crypto transactions. Other countries, like Dubai, are more soft in capital gain taxes on crypto, with a lower percentage. Being open to exploring new financial frontiers, allows some countries to attract funds from foreign investors, allowing the country to grow.
• Regulating and Licensing Crypto Exchanges: Most governments and regulators require cryptocurrency exchanges to get licenses and comply with specific regulations, such as implementing strict KYC (Know Your Customer) and AML (Anti-Money Laundering) rules, which help prevent illegal activities. However, right now, in most countries, the regulations are still not clear and highly prohibitive, and consequently, users often prefer foreign exchanges with lower compliance and are more user-friendly.
• Regulating ICOs and Derivate Products: To prevent token scams and loss of funds due to mismanagement, only authorized companies should be able to raise funds with Initial Coin Offerings. Similarly, we believe that only authorized exchanges with clear proof of reserve should be able to offer advanced and derivated products such as leverage trading options.
• Educational Campaigns and Fraud Prevention: Governments should encourage users to learn more about blockchain technology and security instead of condemning and banning cryptocurrencies. Blockchain technology cannot be stopped, and security education is not sufficient at the moment, and scammers are always ready to exploit users' weaknesses and ignorance.

CBDCs: A New Approach of Central Banks

Central Bank Digital Currencies (CBDCs) are digital versions of a country’s fiat currency issued and regulated by the central bank. Instead of adopting Bitcoin and other cryptocurrencies, governments and central banks

aim to provide a secure and efficient (and more controllable) digital alternative to physical cash. But how do CBDCs work?

Central Bank Issuance

With CBDCs, the central banks are responsible for issuing and controlling digital currency, as is already the case with common fiat currencies. In this way, they can maintain complete control over currency supply and regulation, unlike cryptocurrencies like Bitcoin. People and businesses hold CBDCs in digital wallets, which can be managed through mobile apps or other digital platforms and are based on blockchain networks. This is not the financial freedom that Bitcoin should bring, but it is a huge step toward recognizing the real potential of blockchain technology, leading the way for new and more efficient financial infrastructures.

Transaction Mechanism

Users can transfer CBDCs using crypto wallets that work similarly to how they exchange fiat currency with bank accounts. However, with CBDCs, the government also has the authority to block or seize funds, and in most cases, transactions may be processed through intermediaries like banks or government payment service providers. That would not bring the financial freedom and economic inclusivity that we're aiming for, but the blockchain should ensure higher security and transparency in this hypothetical financial system.

Benefits

• Financial Inclusion: CBDCs can help provide access to financial services for people who do not have bank accounts, especially in regions where mobile phone use is widespread. For example, even if you live in a rural village, you'd be able to process transactions just by using your mobile phone, without a bank account.
• Efficiency: Digital transactions can be faster and cheaper compared to traditional banking operations. In fact, if you want to send money outside the country with a traditional banking system, your transaction needs to be approved by various financial institutions and regulators, leading to high costs and slow transaction speed. With a currency based on blockchain technology, this could be improved.
• Transparency and Security: CBDCs reduce the risks of fraud and counterfeiting associated with physical cash, and all transactions are traceable. While CBDCs can limit tax fraud and scams, they have several disadvantages. The power will be (still) only in the hands of central banks and governments.

Disadvantages

• Privacy Concerns: Unlike cash, CBDC transactions are traceable by the central bank and possibly other government entities. This level of surveillance can raise significant privacy issues, as users’ financial activities can be monitored and tracked, potentially infringing on individual privacy rights. The governments and central banks would know about every transaction you made.
• Centralization of Power: CBDCs give central banks increased control over the monetary system. This centralization can lead to concerns about government overreach, as authorities would have the ability to freeze accounts or restrict transactions, which could be misused for political or social control. With CBDCs, unlike Bitcoin, people don't have sovereignty over their funds.
• Cybersecurity Risks: While blockchain technology enhances security, no system is entirely immune to cyber threats. A large-scale hack or cyberattack on a centralized CBDC system could have severe consequences, potentially destabilizing the financial system. This could happen only with centralized currencies (such as current fiat currency and future CBDCs), while with decentralized currencies (cryptocurrencies such as Bitcoin), the risk is lower.
• Economic Control and Negative Interest Rates: Central banks could potentially implement policies such as negative interest rates more effectively with CBDCs, impacting savers by reducing the value of their digital holdings over time. Central banks have full authority over economic politics, and people would have no authority over them.

Implementation Examples

• China's Digital Yuan: This is one of the most advanced CBDC projects aimed at replacing some physical cash and enhancing the efficiency of the payment system.
• Sweden's e-Krona: This project addresses the decline in cash usage and ensures access to state-backed money.
• Bahamas' Sand Dollar: Launched to improve financial inclusion and make payments more efficient and secure across the islands.

Can Bitcoin Be Banned by the Government? Final Thoughts

As you can understand from this PlasBit analysis, Bitcoin bans are not easy and possible. Governments can try to forbid Bitcoin and other cryptocurrencies use, but it would be impossible to stop them in the long term. Governments and central banks can apply policies that can limit Bitcoin and other cryptocurrencies adoption but can't stop it. Additionally, solutions such as CBDCs don't solve the main problem of the current financial system: People want back the sovereignty and authority over their funds. In fact, governments' opposition to Bitcoin and cryptocurrencies generally stems from concerns about losing control over financial systems and taxation. While cryptocurrencies offer many potential benefits, such as increased financial inclusion and innovation, these concerns highlight the significant challenges that governments face in managing and regulating this emerging technology.

Blockchain can't be stopped, but can Bitcoin be banned by the government? Although they can try to adopt some restrictive measures against Bitcoin activities, such as exchange bans and high taxation, they cannot stop users from using Bitcoin. People will always find a solution to overcome a country's limitations, for example, using VPNs, foreign exchanges, and peer-to-peer trading. Crypto technology is here to remain. Bitcoin can't be stopped, and we're proud to be at the forefront of this revolution. With PlasBit, you can have all the information and tools you need to regain your financial freedom and sovereignty over your funds.