The deadly combination of tight capital controls and inflation slowly starve the people’s life savings. Luckily, Bitcoin can help escape from capital destruction.
Capital controls are a structure used by governments to restrict, or prevent, the flow of capital out of the country. China, for example, recently tightened regulations on moving money out of the country when faced with a devaluing yuan. Unfortunately, when paired with a penchant for inflating the national currency, capital controls can have a devastating effect on the long-term wealth of the people.
The people are forced to use one currency
In much of the developed world, legal tender laws exist, establishing a government-sanctioned medium of exchange.
This means that for the most part the people are relegated by law to the use of a single currency, their earnings tied to its value, whatever that may be.
In a free country, a certain level of global currency competition exists, as citizens have some degree of ability to open accounts in foreign countries and hold other currencies (even though they must still use their country’s currency for economic transactions).
Some countries such as Iceland and China, however, have strict capital controls, restricting the flow of money out of the country. In such countries, citizens are tied to the currency both as a medium of exchange and a store of value.
The currency is devalued, devastating life savings
Once citizens are forced into one medium of exchange and store of value, they have no choice but to use it regardless of whatever changes it may undergo.
Governments profit off of this by inflating the currency as an easy way to generate revenue, without either voting to raise taxes or incurring public debt. This “invisible tax,” however, still draws funds from the people, as their currency is worth less with each round of inflation.
The sad result is that the average citizen’s wealth is slowly starved as they are helpless to escape their fate. They are banned by law from transferring more than a small amount of their wealth into something that does not bleed value as quickly, and must accept and spend their hemorrhaging currency in their day to day business dealings.
There exist extralegal solutions for capital flight, but those are not without their risks of fines and imprisonment if caught, and even they may not be an option for the people of a small and insulated nation such as Iceland.
Cryptocurrency is the only way out
Locked into a system of constant devaluation, the people have few options if they want to avoid slowly losing their life savings. Luckily, this task is made far easier with the advent of new technology, namely cryptocurrency.
Because it is very difficult to trace when done properly, and it can be easily and instantly sent to anyone anywhere in the world, the difficulty in acquiring and using cryptocurrency (under both legal and extralegal circumstances) is far lower than that of other alternatives to local currency such as foreign money, precious metals, insurance policies, etc.
As such, we can expect to see the flight from controlled, devaluing currency to crypto, and to a certain extent we have.
Earlier this year, tightening capital controls in China, coupled with a depreciating yuan, pushed an influx of traffic to the Bitcoin exchanges, driving the price up by more than 25%.
Iceland, fairly fresh off the heels of a major banking collapse, experienced an even more significant price spike in Auroracoin after it was distributed to the Icelandic people. However, now that an online exchange is operational and other infrastructural improvements are being developed, we may see a more lasting capital flight occur in the near future.
Use Bitcoin to avoid capital starvation
The central banking system is broken. It serves a system that starves the people by devaluing their earnings, and citizens of countries with strict capital controls have no escape from the slow destruction of their life savings. Bitcoin can provide a much-needed escape from this starvation scheme, an escape that is not easily blocked.