I am increasingly skeptical that Bitcoin can remain permissionless without maximum privacy. The Bitcoin Network itself is permissionless and censorship-resistant: governments can't shut it down or censor its transactions. But Bitcoin lacks access censorship-resistance. The pseudonymous open ledger makes it easy for governments to identify the owners of Bitcoin. And most crypto people had used fiat exchanges that require KYC. So, the users are still easily trackable and censorable. If Bitcoin has no access censorship resistance, governments can cripple Bitcoin without shutting down the network.
Take the example of the latest Infrastructure Bill. The bill forces node operators and DEXs to KYC every user that they serve. If this bill passes, the US Treasury will track and censor users as easily as they can on the traditional banking system. The bill seems to have surprised many people, but this should not be surprising at all. After all, the treasury's goal is to see all the money flow. They want to collect taxes and prevent money laundering. If you own bitcoin, governments want to know your name and the exact amount you own.
This sounds reasonable, so why is this bad for Bitcoin?
Imagine the economy goes through hyperinflation. Bitcoin price goes through the roof, and Bitcoiners become fabulously rich. This is, in fact, why many people buy bitcoin: to hedge against inflation. But what happens if governments know who owns bitcoin and the exact amount? Governments could tax 80-90% on their bitcoin gains. Or they could simply confiscate Bitcoin.
If this thought experiment sounds too extreme, consider the case of gold. When the gold gained significant value against fiat money back in the 1930s, the US government criminalized the hoarding of gold. The US government blamed gold for stalling economic growth and worsening depression. The government will blame Bitcoin the same way. And most no coiners would be very happy to see Bitcoiners losing money.
In the worst case, governments worldwide could coordinate a ban on the use of Bitcoin. It's unlikely, but this will tank the price of Bitcoin by more than 90%. The network will still be up and running, but Bitcoin would have failed as money.
We need to rethink what censorship resistance really means. The network censorship-resistance of Bitcoin is good but access censorship-resistance is essential to keep the Bitcoin network permissionless. More Bitcoiners should adopt LN since it provides much better privacy and fungibility than the base layer. On top of LN, we need more private networking. Blockstream's satellite service allows people to use Bitcoin without the internet. So if one country bans Bitcoin and monitors it at the networking layer, one could avoid such access censorship by getting a satellite kit.
Without maximum privacy, we can't keep our bitcoins hidden from governments. And any decentralized money that competes against fiat money are vulernable to regulation and confistication as seen in the case of gold. I am not arguing for tax evasion here, but for Bitcoin to succeed as a decentralized money, ordinary people should be able to resist unjust asset forfeiture. Of course, if the FBI wants to find certain Bitcoiners who committed crimes, they will. And that's a good thing. But we don't want governments to track the financial activity of every citizen. If society could enjoy privacy at a lower cost at scale, financial privacy would become a norm. The new normal will make it politically expensive to censor the access points of Bitcoin, making Bitcoin more robust as decentralized money.
Some Bitcoiners believe the lack of privacy is a feature, not a bug. Since Bitcoin is easy to track, governments feel ok with loose regulation. The loose regulation attracts institutional and retail money, accelerating the adoption of Bitcoin. The proponents of this theory argue that once Bitcoin reaches critical mass, governments will have a harder time criminalizing it since most citizens own it. A trojan horse argument.
Some believe that the game theory of Bitcoin ensures that it will be impossible for the one government to kill Bitcoin. Bitcoin Network is censorship-resistant, so no country can shut it down. If the US tries to criminalize the use of Bitcoin, the talent and capital will simply leave for other countries. A Prisoner's dilemma argument.
Both arguments are decent, but I believe governments will never willingly give up the power that comes from taxation and fiat money. And we don't want the success of Bitcoin to depend on the possibility that governments might not try their best to kill Bitcoin. For Bitcoin to succeed as a decentralized money, we need both network and access censorship-resistance. Bitcoin can be destroyed by a motivated group of nation-states today. But we still got time. To prepare for the coming attacks on Bitcoin, we need wider adoption of privacy at all access points of Bitcoin.