What will the government do with Bitcoin the day a report comes out that American citizens have been killed in a terrorist operation financed by bitcoin?

What did the government do the day evil things happened over the internet using encrypted communication?

It banned the export of cryptography.

And yet a little "https" logo smiles at me in the address bar as we speak.

Point being that the government can't and doesn't ban everything that can be used for evil, be it from incompetence or rationality. Bitcoin will probably be heavily monitored though, as it is very suitable for that purpose.

I was referring to a mainly historic, very strict export ban that categorizes cryptographic software as munitions:

http://en.wikipedia.org/wiki/Export_of_cryptography_in_the_U...

HTTPS was crippled, since Netscape shipped only 40-bit RC4 internationally.[1]

PGP's source code was printed so it would fall under First Amendment protections, since binaries weren't legal for export.[2] (See also DJB's Bernstein v. United States)[3]

OpenBSD/OpenSSH is still based in Canada to avoid being subject to the laws.

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1 http://en.wikipedia.org/wiki/Export_of_cryptography_in_the_U...

2 http://en.wikipedia.org/wiki/Pretty_Good_Privacy#Criminal_in... and http://www.pgpi.org/pgpi/project/scanning/

3 http://en.wikipedia.org/wiki/Bernstein_v._United_States

4 http://www.openbsd.org/crypto.html

I know, but in the end they couldn't keep it that way forever.

Yes, of course.

Isn't it conceivable that the government would implement a similarly short-sighted (and ineffectual) policy if Bitcoins were seriously used to harm the US? :-P

Give it time.

>A ban of the technology would pretty... unprecedented

It would not.