According to Cointelegraph: A recent research paper published by the Federal Reserve Bank of Minneapolis has proposed that Bitcoin and other fixed-supply assets may need to be taxed or banned to enable governments to sustain permanent deficits. Released on October 17, the paper explores the challenges Bitcoin presents to policy implementation in an economy where the government seeks to maintain ongoing deficits through nominal debt.
Key Concerns: Bitcoin and the “Balanced Budget Trap”
The Minneapolis Fed's working paper highlights a scenario known as the “balanced budget trap”, where the existence of Bitcoin could force the government to balance its budget. The paper describes Bitcoin as a “private-sector security” with a fixed supply and no real resource claims. As a result, the authors argue that banning or taxing Bitcoin would allow the government to continue running primary deficits without the need to balance the budget.
A primary deficit occurs when a government's spending exceeds its tax revenues, excluding interest payments on existing debt. The idea of a “permanent” deficit implies that the government plans to maintain this overspending indefinitely. As of October 2024, the United States has amassed a national debt of $35.7 trillion, with an annual primary deficit of $1.8 trillion. This year’s deficit, the largest outside of the COVID-19 period, has been driven by a 29% increase in interest costs on Treasury debt, largely due to rising interest rates and additional borrowing.
The authors conclude that “A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
Criticism and Commentary on the Paper
This proposal has drawn significant attention and criticism from industry leaders. Matthew Sigel, head of digital asset research at VanEck, remarked on October 21 that the Federal Reserve has joined the European Central Bank (ECB) in its criticism of Bitcoin. Sigel stated that the Fed is considering prohibitions and taxes on Bitcoin to ensure that government debt remains the “only risk-free security.”
The paper has also stirred reactions in the crypto community. Messari co-founder Dan McArdle referenced a 1996 Minneapolis Fed paper titled “Money is Memory,” which foreshadowed Bitcoin’s potential 12 years before its creation. This earlier paper described money as an asset that doesn’t enter production, is available in fixed supply, and functions as a “primitive form of memory,” hinting at Bitcoin's foundational principles.
Bitcoin Under Fire: Echoes from the European Central Bank
The European Central Bank (ECB) has recently published a paper that echoes similar sentiments, claiming that older Bitcoin holders profit at the expense of newer investors. The ECB's October 12 report suggested that Bitcoin should be regulated or banned to prevent its price from rising, citing concerns over wealth redistribution. ECB Senior Management adviser Jürgen Schaaf also supported these views in a post on X on October 20, urging non-holders to recognize that Bitcoin's growth is fueled by wealth redistribution at their expense.
What’s Next for Bitcoin?
The Minneapolis Fed and ECB’s critical stance on Bitcoin highlights ongoing debates about the role of decentralized currencies in global financial systems. Both central banks express concerns over the impact of Bitcoin on government debt management and financial stability, advocating for measures that could limit or eliminate Bitcoin’s influence.
As governments face mounting national debts and seek ways to sustain deficit spending, the future of Bitcoin could see increased scrutiny. Proposals like taxation or outright bans on digital assets could reshape the regulatory landscape, raising questions about how decentralized finance will coexist with traditional financial systems moving forward.
