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"This will only cause people to flee to the virtual currency and stay there, over time"

Only if they can actually do stuff with that virtual currency in the real world, like pay rent and buy food. Otherwise, not so much.

"Given 2 options, one with a lot of friction and one without, no matter the "marketshare" of the first, the latter one will eventually win."

This isn't always true.

"The only way fiat can prevent this is to stop punishing good actors with AML/KYC compliance."

As has been posted, it's not that hard to comply. And if they want to act like a real currency, then they should be following the same regulations as real currency.

You're describing one trip through "the loop". Remember, the state will react to crypto growth too.

There's a transitivity aspect to it. Ultimately taxes need to be paid in fiat, and large organisations will eventually get stomped on for accepting crypto if it subverts government control.

On the second trip through the loop, you have crypto which can be used for small (in a sense, black market) transactions and fiat which can be used to pay things like utility bills or buy stuff from companies which must accept fiat. Individuals will provide exchange services (buy iphones with crypto!) at their own risk, basically by subverting KYC with small transactions. [We are already here].

What's the nth trip through the loop? I'm personally not sure, but interested in your views.

> Ultimately taxes need to be paid in fiat, and large organisations will eventually get stomped on for accepting crypto if it subverts government control.

Ultimately global trade will have to occur in the global currency, and governments large and small will eventually get stomped on for accepting only their local currency if it subverts international consensus.

The current global currency is the US dollar. Most countries do not allow you to pay taxes in dollars. Why are Bitcoins different?

The USD is a pretty lousy global currency. You can't exactly use it anywhere in any sort of transaction. I've only ever heard of a handful of places outside of the States where the local currency is terrible enough that local people prefer to hold and transact in USD over long periods of time. A true global currency would be one that you could use to buy practically anything, anywhere, whether it was a very large or very small transaction.

Regardless, Bitcoin has several advantages. For one thing, you're not dependent upon continually obtaining a flow of paper notes from a foreign country that may lie halfway around the world. For another, you can divide Bitcoin to extremely small and precise quantities - the dollar on the other hand doesn't scale as well to economies where a penny may start to approach a significant individual unit of money.

There are of course many other advantages of Bitcoin that make it attractive for people in many different countries to adopt. The fact that you can transmit and receive it to and from anywhere in the world, with the same certainty of transaction confirmation as cash in hand, without the need to either physically ship cash or rely on a network of physical cash shipment, is a pretty good one, especially as the world grows ever smaller.

A final advantage would be that you are never hostage to the political dangers of a nation-state controlled currency (i.e. a small group of rich white men can at any point decide to devalue your savings, to the point of destruction, by printing an unlimited amount of the currency.)

I am so glad people are starting to realize that what gives currency its values is that it, and only it, can be used to pay taxes, which are incurred in many transactions that don't even have to involve money.

At least in the UK[1], the value of currency is that it's backed by the courts, and therefore enforced by police:

> Legal tender... means that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender.

In other words, any transaction not involving fiat currency can be legally transformed into a transaction involving fiat currency (which makes "backed by gold/silver/whatever" currencies like Liberty Dollar[2] meaningless).

Any transaction involving fiat currency which isn't settled can lead to legal punishment, ie. fines, prison, etc.

Any punishment which isn't legal (eg. taking the gold which is 'rightfully yours') also leads to legal punishment, so there's no way to "escape" the system.

[1] http://www.royalmint.com/aboutus/policies-and-guidelines/leg... [2] http://en.wikipedia.org/wiki/Liberty_Dollar

> just like people like to "stay" in cash, now (in fact, just today a contractor offered me no tax if I paid him cash...)

I might be nitpicking, but people don't like to "stay in cash". They just like tax evasion. It's not about staying in cash or not, it's about the ability to underreport revenue without an auditable paper trail.

You know, if a contractor gives you an invoice, and you pay in cash, nothing actually prevents them from burning their copy of the invoice and saying it never happened if the IRS asks.

Source: I'm from a country where the grey market is very alive and very flourishing.

The whole point of money laundering is that permanent "staying" isn't very appealing: cash and BTC will get you a pizza delivered but they won't buy you a house, hence money launderers - generally dealing with larger sums than the average "cash discount" - being very keen to get the proceeds of their crime into the banking system.

And government regulators will be quite happy to make life more difficult for vendors as well as money transmission businesses if they start to worry that criminals are finding it too easy to spend their Bitcoins.

Organised criminals staying in BTC is not going to make the average person want to flee to it, it's going to increase their suspicion that Bitcoin's days of being a surprisingly friction free way of buying goods and services in their own country are numbered.

>How the powers that be do not see this, astounds me.

Because "fleeing to the virtual currency and staying there" has very small value and utility, unless you can at some point channel those money to regulated business and tangible goods...

> (in fact, just today a contractor offered me no tax if I paid him cash...)

Which means he's probably not paying tax on that himself. Which is tax evasion, pure and simple. Which is illegal for good reasons.

I've worked with a lot of contractors. Invariably, if you bitch about guberment and then have a polite chat with the ones who make these kinds of offers, they're trying to get around paying taxes. This might be anecdotal, but it's not pure speculation.

You can disagree with the tax system in the US, but that doesn't make tax evasion legal.