This is the fourth post in a four-part article exploring the constitutionality of state-level Bitcoin legal tender laws — and the philosophical arguments against such laws.

This post was originally published on May 2, 2022.

• Part I: Introduction and Summary of the Argument
• Part II: The Originalist Case for State-Level Bitcoin Legal Tender
• Part III: The Textualist Counter-Argument
• Part IV: Bitcoin’s Faustian Bargain

Bitcoin’s Faustian Bargain: Adoption at What Cost?

The previous two parts laid out the constitutional arguments for and against state adoption of Bitcoin as legal tender. This concluding part will focus on policy arguments.

In short, any government “adoption” of Bitcoin as legal tender is a bad idea. Tender laws are bad policy both ethically and economically. As discussed in Part I, tender laws don’t solve the problems proponents think they solve (elimination of capital gains or mandatory acceptance of Bitcoin for spot transactions). Instead, tender laws impair existing contracts and constrain the free market, including the process of discovering new forms of money. By promoting legal tender status, Bitcoiners are actively seeking government interference with money.

Fortunately, alternative policies exist that may more effectively drive adoption while preserving individual contract rights and market freedom. This article concludes with a summary of those alternatives.

Bitcoin Separates Money from Government

On January 3, 2009, the first block in the Bitcoin protocol — the genesis block — was mined with a message from its pseudonymous inventor, Satoshi Nakomoto:  “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

On the surface, this was merely a newspaper headline confirming the date of release. But the choice of headline was no mere afterthought. Bitcoin was released into a world of unprecedented sovereign market intervention during the global financial crisis. Satoshi chose a message that would leave no doubt about his intentions. Bitcoin’s raison d'être is the elimination of government control over money.

As Alex Gladstein has detailed, Bitcoin is the culmination of a decades-long quest for digital cash by cryptographers and “cypherpunks” — “students of computer science and distributed systems in the 1980s and 1990s who wanted to preserve human rights like the right to associate and the right to communicate privately in the digital realm.”1

Some cypherpunks were crypto-anarchists — deeply skeptical of the modern democratic state. Others believed it was possible to reform democracies to preserve individual rights. No matter what side they took, many considered digital cash to be the Holy Grail of the cypherpunk movement.2

Satoshi was a cypherpunk. He circulated his White Paper, explaining the purpose, structure, and operation of Bitcoin, on the Cypherpunk Mailing List.3 And the first citation in the White Paper is to a web-post by Wei Dai on “b-money,” a prior attempt at solving the problem of digital cash, which begins with a cypherpunk mission statement:4

I am fascinated by Tim May's crypto-anarchy. Unlike the communities traditionally associated with the word "anarchy", in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.

Shortly after Bitcoin’s launch, Satoshi explained Bitcoin’s purpose in a cypherpunk forum post:5

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.

…

With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

In other words, as Zoltan Pozsar recently observed, “Bitcoin is short the sovereign.”

Because Bitcoin is not a creature of governments, its value and use as a medium of exchange is not dictated by a central authority. Users may willingly choose to exchange goods and services for Bitcoin, and through the market process users will arrive at Bitcoin’s value organically.

The individual right to freely enter into agreements with whomever one wishes, with whatever money one chooses, is integral to Bitcoin. Indeed, the cypherpunks sought to safeguard individual freedoms such as these, and this purpose animated Bitcoin’s design choices.

Legal Tender Laws Are a Form of Government Intervention that Impair Individual Property Rights and Free Markets

Legal tender laws are — by their very nature — directly contrary to individual contract rights and a free market economy. This is quite evident in the case of El Salvador’s Bitcoin tender law, which expressly forces acceptance of bitcoin in spot transactions for all goods and services, with few exceptions.

But even so-called non-compulsory, “traditional” legal tender laws are not innocuous. Recall, "[l]egal tender is money which, if tendered by a debtor in payment of his debt, must not be refused by the creditor."6 If the parties contracted for payment in the legal tender, then the law is superfluous. If the parties contracted for payment in another money, then the law essentially re-writes the contract to allow payment in the official legal tender.

Thus, as Hayak put it, “legal tender is simply a legal device to force people to accept in fulfillment of a contract something they never intended when they made the contract.”7 By forcing creditors to accept a form of money they did not agree to accept in discharge of the debt, the government impairs the creditor’s contractual rights. “In fact, it is a forced and unnatural construction put upon the dealings of men by arbitrary power.”8

Because they “attack individual choice at its very root,” legal tender laws are inherently unethical.9 Justice Fields argued just that in The Legal Tender Cases: “[a] law which interferes with the contracts of others, and compels one of the parties to receive in satisfaction something different from that stipulated … , necessarily works … injustice and wrong.”10

To defend freedom of contract, the Founders in Article I, Section 10 of the U.S. Constitution not only forbade adoption of legal tender laws (but for “gold and silver coin”), but also expressly forbade states from “pass[ing] any … Law impairing the Obligation of Contracts.” Such a restriction was “thought necessary as a security to commerce.”11

By altering the deals struck between creditors and debtors, a tender law "becomes thus, in certain circumstances, a factor that intensifies the uncertainty of dealings," thereby affecting the entire market.12 Tender laws are not only unethical, therefore, but also detrimental to the healthy operation of markets.

By advocating for Bitcoin legal tender laws, therefore, Bitcoiners are actively courting nation-state intervention in private contracts and the economy.

And once a government has mandated Bitcoin’s acceptance in discharge of existing debts, it’s a small step towards even more coercive interference with individual rights. States could follow El Salvador and compel acceptance in spot transactions. This is not far-fetched: forced tender laws have been proposed at the federal level as recently as 2020.13 And who’s to say that once a government starts artificially stimulating Bitcoin transactions, it doesn’t mandate artificial prices, too.

While Bitcoin’s users are not a monolith, it can generally be said that they use Bitcoin because of some level of dissatisfaction with government money. Bitcoiners should thus resist turning Bitcoin into official government money through tender laws, which are at odds with Bitcoin’s very purpose of preserving individual rights. Seeking legal tender status is thus a Faustian bargain. In gaining wider adoption, Bitcoin risks losing its soul.

Alternative Policies to Legal Tender Laws

If increased Bitcoin adoption is the goal of legal tender advocates, alternative policies exist that may more effectively drive adoption while also preserving individual contract rights and promoting a free market for monetary goods.

Eliminate Capital Gains Taxes

As discussed in Part I of this article, legal tender status would not exempt Bitcoin from capital gains taxes. In many jurisdictions, including the United States, users are taxed on their capital gains whenever spending Bitcoin. If the value of one’s bitcoin is essentially reduced 20% at the time of purchase, this creates a strong disincentive to spending.

Not only that, but it creates an accounting nightmare. No one wants to track each pack of chewing gum or cup of coffee purchased. And what accounting method should be applied to determine gains? “First-in-first-out,” “last-in-first-out,” highest-in-first-out?" It’s simply unworkable. Bitcoiners are further dissuaded from spending.

Eliminating capital gains taxes on Bitcoin would remove a significant barrier to spending and, therefore, incentivize broader adoption and use.

For example, just this past week, Panama passed a law exempting Bitcoin (and other cryptocurrencies) from capital gains taxes — but not declaring it legal tender. Some more prominent Bitcoiners have acknowledged the superiority of this policy:

Here in the United States, Wyoming Senator Cynthia Lummis is preparing a bill providing a $600 capital gains tax exclusion for Bitcoin and other digital assets. While the relatively low threshold is not ideal, it’s a step in the right direction and will cover most daily purchases.14

The elimination of capital gains taxes is not something that state governments could effectively pass on their own, however, and would require federal action.

Bitcoin Clauses and Specific Performance Laws

There is an action states could take, short of declaring Bitcoin legal tender, that would respect Bitcoin as a medium of exchange and protect private contract rights and the free market. States could pass legislation acknowledging the right to contract for payment in whatever money the parties choose, and mandating that courts enforce the specific performance of payment in the chosen currency.

There is a historical precedent for such “specific performance” laws in the United States. During the Civil War, paper “greenbacks” were issued by the federal government and declared legal tender, mandating their acceptance. The merchants and government of California, however, worked together to insulate the state from the inflationary effects of greenbacks by relying on gold:

Used to a currency of gold coin only, with no intrusion of bank notes, California businessmen took steps to maintain gold circulation and avoid coerced payment in greenbacks. At first, the merchants of San Francisco, in November 1862 jointly agreed to refrain from accepting or paying out greenbacks at any but the (depreciated) market value, and to keep gold as the monetary standard. Any firms that refused to abide by the agreement would be blacklisted and required to pay gold in cash for any goods which they might purchase in the future.

Voluntary efforts did not suffice to overthrow the federal power standing behind legal tender, however, and so California merchants obtained the passage in the California legislature of a “specific contracts act” at the end of April 1863. The specific contracts act provided that contracts for the payment of specific kinds of money would be enforceable in the courts. After passage of that law, California businessmen were able to protect themselves against tenders of greenbacks by inserting gold coin payment clauses in all their contracts.15

The California language of the “specific contracts act,” which was upheld as constitutional by the California Supreme Court, provided:

In an action on a contract or obligation in writing, for the direct payment of money, made payable in a specified kind of money or currency, judgment for the plaintiff, whether the same be by default or after verdict, may follow the contract or obligation, and be made payable in the kind of money or currency specified therein.16

Bitcoin clauses similar to the gold clauses used by California merchants could be inserted into contracts. And similar “specific performance laws” could be passed by states to respect the contractual choice of payment, whatever the money chosen. The “specific performance law” is crucial to respecting this freedom of choice in currency. Without it, courts could enforce tenders by the debtor of an amount in U.S. dollars equal to the specified bitcoin, thereby nullifying the contract’s payment clause.

“Bitcoin clauses” and “specific contract laws” are potentially powerful policy tools for Bitcoin advocates, and deserve further research and study.

Conclusion

Bitcoiners are among the most zealous advocates for sound money and freedom. Bitcoin was designed to protect free markets and freedom of choice in currency. Legal tender laws do not comport with these objectives, but have historically warped markets and infringed on individual liberties. Bitcoiners, in their fervor to spread the good news, should not make a deal with the devil to advance adoption through coercive tender laws.

The best thing governments can do for Bitcoin is get out of the way. Policies that remove barriers to the free flow of monetary goods, while also protecting individual liberties, should be prioritized over legal tender laws. Top-down mandates do not facilitate the natural market processes that drive value discovery and adoption of new monetary goods. Bottom-up, grass-roots efforts, however, activate this natural market process and should be pursued above all else. Individuals should promote circular Bitcoin economies in their own towns and neighborhoods.

As Matt Odell recently observed, the story of El Salvador is not that of a flashy president unilaterally declaring Bitcoin legal tender out of the blue, but of increasing numbers of everyday people using Bitcoin at the local level, creating a circular economy that the government could no longer ignore.

Indeed, a foundational belief of this newsletter is that the law has no place in the process of defining money. “[T]he market creates, modifies, and recreates the concepts of money. The law simply recognizes the changes, often ex post facto.”17

At bottom, although state-level adoption of Bitcoin as legal tender may be constitutional (as demonstrated in the previous parts of this article), it is nevertheless unsound policy — both philosophically and practically.

Thank you for joining me on this journey through American history, constitutional law, economics and philosophy. The goal of these articles has been to spark thoughtful argument and debate on an important issue pertinent to Bitcoin and its effect on society. Please feel free to contribute to the discussion by commenting here, on twitter, or by email.

Until next time,

Aaron

1

Alex Gladstein, “The Quest for Digital Cash,” Bitcoin Magazine (Oct. 13, 2021) https://bitcoinmagazine.com/culture/bitcoin-adam-back-and-digital-cash.

2

Id.

3

https://www.metzdowd.com/pipermail/cryptography/2008-October/014810.html

4

Wei Dai, “b-money” http://www.weidai.com/bmoney.txt.

5

Satoshi Nakamoto, “Bitcoin open source implementation of P2P currency,” P2P Foundation (Feb. 11, 2009) http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source.

6

Arthur Nussbaum, Basic Monetary Conceptions in Law, 35 Mich. L. Rev. 865, 893 (1937).

7

F. A. Hayak, Denationalisation of Money 39-40 (1990).

8

Hayak at 39 (quoting Lord Farrer, Studies in Currency 45 (London: Macmillan, 1898))

9

Jörg Guido Hülsmann, The Ethics of Money Production 149 (2008).

10

The Legal Tender Cases, 110 U.S. 421, 468 (1884) (Fields, J., dissenting).

11

Robert Natelson, Paper Money and the Original Understanding of the Coinage Clause, 31 Harv. J.L. & Pub. Pol’y 1017, 1075 (2008) (quoting Letter from Roger Sherman and Oliver Ellsworth to Governor Samuel Huntington (Sept. 26, 1787), in NEW HAVEN GAZETTE, Oct. 25, 1787, reprinted in 13 DOCUMENTARY HISTORY, at 471).

12

Hayak at 40.

13

Senator Bob Menendez proposed a bill to force businesses to accept cash. “The legislation would prohibit retail businesses from refusing to accept cash as a form of payment, posting signs that cash is not accepted, and charging a higher price for using cash than for other forms of payment.”

14

Although, it is unclear if this $600 exemption is per transaction or annually. If the later, then the bill is no more than a symbolic gesture with no real benefits.

15

Murray Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, 127-28 (2002).

16

See Carpentier v. Atherton, 25 Cal. 564, 569 (1864)

17

Ali Kahn, The Evolution of Money: A Story of Constitutional Nullification, 67 U. Cin. L. Rev. 393, 414 (1999).