I've written about Bitcoin in the past, always to make a single simple point: As cool as the technology might be, government agencies will not allow it to thrive in the manner that its biggest fans might hope. Over the past few months, numerous enforcement actions and bankruptcies around the globe have added flesh to my admonitions. Yesterday the IRS added enormous fuel to the fire when it announced that Bitcoins are property, not currency. Why does that distinction matter? Because anything that you exchange for property is a barter, and thus a taxable event. Any transaction involving Bitcoins now incurs non-trivial bookkeeping and reporting requirements.
So what does this ruling say about the broader economy?
Not much in and of itself. But some of the reactions to it speak volumes. Here's a good one from Wired, a source that is reasonably well attuned to the thoughts and inclinations of the digerati. Wired actually sees the ruling as a boon, because it will spur the need for startups focused on the electronic wallet space.
This type of reasoning is devastating precisely because it is indicative of what is undoubtedly an important mindset. Entrepreneurship is a boon to society when it promotes growth. Electronic wallet companies arising in the wake of an IRS ruling do not represent a growth opportunity. Rulings of this nature--independent of their merits--increase transaction costs. As almost all observers concede, the cost of transacting business in Bitcoins just increased. Companies that arise to tame those transaction costs, at their very best, promise to reduce those transaction costs to some level higher than they were prior to the ruling, but lower than they now are. As beneficial as such reductions in administrative overhead might be, they do not grow the economy.
We are becoming a rent-seeking society. More and more of our professionals dedicate their careers to "compliance," basically helping their clients tame administrative transaction costs and proving that they have not violated an increasingly complex regulatory code. Such efforts are the white collar equivalent of digging ditches to refill them. Yes, a government program that dug ditches while leaving the refilling to independents would create both public and private sector jobs--but it would add nothing to economic growth.
That Wired could see the birth of a new compliance industry as a positive is telling. The digerati were once committed to growth and innovation. No longer. The risks are far too high, and the red tape is daunting. They are beginning to fall in line behind the lawyers and accountants already committed to writing regulations for other lawyers and accountants to disentangle.
And we will all be much poorer for it.