The Liberal Democratic Party (LDP), the dominant party in Japanese politics since 1955, has announced that it will not be enacting any legislation aimed at restricting or regulating Bitcoin in any way. This announcement comes in light of considerations by the Japanese government in writing Bitcoin regulation into law following the infamous Mt. Gox crash in late 2013. Mt. Gox was the world’s largest Bitcoin exchange in the time preceding its failure, being responsible for the majority of the world’s Bitcoin transactions. In a shining display of ineptitude, or what some consider deliberate fraud, Mt. Gox allowed 850 thousand bitcoins to go missing. At the time of this disappearance, the bitcoins were worth more than 450 million USD.

Luckily, rather than hastily passing restrictive legislation on Bitcoin exchanges or the currency itself, the Japanese Liberal Democratic Party took their time, deliberating on whether or not to pass such legislation. Obviously, they decided against passing Bitcoin regulation; Takuya Hirai, LDP lawmaker and leader of the LDP’s Internet media division spoke on behalf of the party and told Reuters that “Basically, we concluded that we will, for now, avoid a move towards legal regulation.”

Potential Effects of Legislation on Bitcoin Price

The announcement from the LDP that they will remain neutral regarding the issue of Bitcoin legislation likely signifies a dodged bullet for the Bitcoin price. Judging by past reactions of the Bitcoin price to attempts from China to ban Bitcoin from their country, it seems likely that any kind of implementation of Bitcoin legislation would produce a temporary increase in Bitcoin price volatility, more so than the normal rate of Bitcoin price volatility, and possibly a long term drop in the Bitcoin price.

However, the recent scare over Bitcoin mining pool, Ghash.io, attaining 51% hashing power has produced in the Bitcoin community a minority that supports government regulation of Bitcoin. From an ideological point of view, calling for government regulation, which assumes a trust in government, to regulate Bitcoin mining pools because they have eliminated the trustless nature of Bitcoin is illogical. It is contradictory to the widely accepted libertarian ideology that exists, at least loosely, in the majority of the Bitcoin community. Regardless of ideological philosophies, however, the objective fact of this situation is that there is a small support for government regulation of Bitcoin.

What could Bitcoin regulation mean for the Bitcoin price? The obvious answer is that any government attempt to regulate Bitcoin will exert a downward pressure on the Bitcoin price due to the fact that it would likely drive many people away from Bitcoin altogether.

However, this assumes that the government would enact legislation to restrict the use of Bitcoin. What if the government does something to stimulate its acceptance, such as somehow linking it to the central bank’s supply of cheap credit? In such a situation, the Bitcoin price would skyrocket, along with all the other areas of the economy that become inflated far beyond sustainable levels due to the central bank’s cheap money policy. Unfortunately, the increase in Bitcoin price would be extremely temporary. The bubble would likely come crashing down at some point, after the central bank in question contracted its supply of credit. So, the effects of government intervention on the Bitcoin price in the immediate term can go either way. But the long-term effects are both negative, in terms of sustaining an upward trend in the Bitcoin price.

Wouldn’t Government Regulation Make Bitcoin Safer, and Cause the Bitcoin Price to Rise?

Assume that government intervention does not produce any direct effect on the Bitcoin price. This would happen most likely because the legislation would be aimed not at Bitcoin itself, but the Bitcoin exchanges. Suppose that governments restricted the operations of Bitcoin exchanges. It may seem as though this kind of regulation would make the Bitcoin market safer, and thereby stabilizing the Bitcoin price. However, as we have discussed, hindering the market of Bitcoin exchanges, even if for the purposes of “consumer safety,” encourages the establishment of an exchange monopoly. Imagine if the government indirectly– or directly– set up one single Bitcoin exchange, or a small, closely related group of exchanges, to dominate the Bitcoin transactions in that country.

What if that one exchange, or the interconnected group of exchanges, ended up being another Mt. Gox, and crashed due to ineptitude, or deliberate fraud? The Bitcoin price would plummet, just like it did when the real Mt Gox crashed. However, unlike with fiat, more bitcoins cannot be created out of thin air to prop up the insolvent entity. There would be no “bailout” to save this creation that, for all intents and purposes, would be very similar to a traditional government backed banking system.

Also, it is likely that the fall in Bitcoin price would be even worse in this hypothetical situation. Once Mt. Gox crashed, consumers had several other choices of Bitcoin exchanges that they could freely migrate to, and that very likely applied friction that lessened the fall in the Bitcoin price. In a situation where there is one, government-established exchange monopoly for every country that deals in Bitcoin, the barriers to entry set up by regulations would likely make it close to impossible to migrate to another country’s exchange should one country’s exchange fail. The result of such a limitation in competition would drive the Bitcoin price into the floor in the event of failed exchange. We can see here that any Bitcoin regulation would have some effect on the Bitcoin price that may or may not be foreseen upon the passage of such regulatory legislation.

Economic theory, and hypothetical situations, aside, the fact is that Japan has opted to keep the Japanese Bitcoin market free and unregulated. Whether or not the Japanese government will remain neutral on the issue of Bitcoin regulation cannot be certain. But for now, the market will remain free and the Bitcoin price will be determined by the free play of the market, rather than unseen consequences of government intervention. We can extrapolate from this continued Japanese neutrality that, for the present, the factors determining the current flattened Bitcoin price trend remain equal.

As long as things continue to remain equal, the analysis this author made in a previous article will remain constant. The current Bitcoin price will remain steady, and possibly even rise slightly, for the next two weeks, until the US federal government commences its auction of the seized Silk Road bitcoins. After that point, it remains unknown what will happen to the Bitcoin price. The auctioned bitcoins could flood the market, thereby driving down the Bitcoin price, or the purchaser(s) of the Silk Road coins could hold on to them, which could either sustain the current Bitcoin price trend or serve as the catalyst for another upward swing in the Bitcoin price.