The Federal Reserve Bank of Minneapolis suggests a Bitcoin ban or tax to ensure its ability to generate permanent budget deficits.
The Federal Reserve Bank of Minneapolis recently proposed the prohibition of digital assets such as Bitcoin to assist governments in maintaining their deficits in its most recent research paper. The Minneapolis Fed’s working paper, published on October 17, stated that Bitcoin poses challenges in an economy where the government attempts to sustain a permanent deficit through nominal debt.
The Federal Reserve also observed that Bitcoin introduces a “balanced budget trap,” necessitating the government to balance its budget. Additionally, the researchers cited Bitcoin as an illustration of a “private-sector security” with a fixed supply that lacks “real resource claims.” They recommended that it be taxed or banned to resolve this issue. Additionally, they included:
“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
Management of Primary Deficit
A primary deficit is triggered when the government expends more than it collects in taxes and other revenue, excluding interest payments on its debts. The term “permanent” for the primary deficit is crucial, as it implies that the government must plan to spend a significant amount more than it collects indefinitely.
Thus far, the United States has accumulated $35.7 trillion in national debt. Nevertheless, the primary deficit, which is the annual disparity between tax revenue and spending, is currently estimated to be approximately $1.8 trillion. The primary factor contributing to the fiscal 2024 deficit, the most significant deficit outside of the COVID-19 period, was a 29% increase in interest costs for Treasury debt, which reached $1.13 trillion, according to the most recent Reuters report from October 19. The primary cause was the rise in interest rates and the subsequent increase in borrowing.
On October 21, Matthew Sigel, the head of digital asset research at VanEck, commented on the paper, observing that the Minneapolis Fed had united with the European Central Bank in its criticism of Bitcoin. Additionally, he stated:
“Fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’”
Conversely, Messari’s co-founder Dan McArdle disclosed the Minneapolis Fed paper of 1996. This paper, which was published by the Federal Reserve 12 years before the Bitcoin genesis block, defines money as an object that is “equivalent to a primitive form of memory,” is “available in fixed supply,” and does not “enter production.”
A paper was released by the European Central Bank (ECB) on October 12, last week, that alleged that long-term Bitcoin holders are gaining an advantage over newer investors. The paper recommended that the cryptocurrency be banned or regulated to prevent price increases. Jürgen Schaaf, the ECB senior management adviser, further bolstered the argument, stating that “non-holders should acknowledge that Bitcoin’s ascent is fueled by wealth redistribution at their expense.” There are compelling reasons to support policies that restrict or even eliminate the expansion of Bitcoin.
