The Minneapolis Federal Reserve suggests banning or taxing Bitcoin due to concerns about the government budget.
A new paper from the Federal Reserve Bank of Minneapolis published on October 17 argues that governments may consider the option of taxing or banning Bitcoin to maintain the sustainability of significant and permanent budget deficits. The document examines how Bitcoin and other assets with fixed supply can pose challenges and obstacles for public debt management policies.
Banning Bitcoin to control debt
The authors of the paper believe that Bitcoin introduces the so-called “balanced budget trap,” a state in which the government is forced to establish a budget balance, hindering its ability to spend beyond the resources obtained through taxation. In other words, without Bitcoin as a monetary competitor, the authors argue that debt can increase indefinitely.
In the analysis, Bitcoin is described as a “private security with a fixed supply” not tied to real resources, and it is suggested that taxation or a ban could mitigate the potential problem of limited spending.
The option of a legal prohibition could, according to the document, help restore the possibility of maintaining permanent primary deficits. Alternatively, imposing a tax on Bitcoin could achieve the same objective.
A primary deficit occurs when a government spends more than it collects in taxes and other revenue, excluding interest payments on its debt. The term “permanent” for the primary deficit is key, as it means the government plans to continue spending more than it collects indefinitely.
Debt situation in the USA
Currently, the United States finds itself with a total national debt estimated at $35.7 trillion, with an estimated annual primary deficit of $1.8 trillion. According to a recent report by Reuters, one of the main factors contributing to the growing deficit for the fiscal year 2024 has been the 29% increase in interest costs on Treasury debt securities, due to higher rates and an overall increase in debt.
Industry reactions
Matthew Sigel, head of digital asset research at VanEck, highlighted a similarity between the proposal to ban or tax Bitcoin and the approach taken by the European Central Bank, stating:
“New paper claims governments can run permanent deficits if consumers don’t notice & adopt new money like BTC. Fantasizes about “legal prohibition” & extra taxes on BTC to ensure govt debt remains “only risk free security”.
Dan McArdle, co-founder of Messari, referenced an old paper from the Minneapolis Fed titled “Money is Memory,” dated 1996. Although it predates the creation of Bitcoin, this document provides a definition of money that could be applied to Bitcoin’s characteristics: an object not tied to production, with a fixed supply, and functioning as economic memory.
“I prefer the 1996 Minneapolis Fed which produced the “Money is Memory” paper; an intellectual exercise that (without knowing it) made the case for Bitcoin 12+yrs before the Genesis Block.”
Central banks against Bitcoin
The report from the Minneapolis Fed comes just days after the paper released by two ECB economists, Ulrich Bindseil and Jurgen Schaaf. According to the authors, long-term Bitcoin holders would profit at the expense of new investors and the general population. The document states that Bitcoin does not increase the productive potential of the economy and that its increase in value has merely redistributive effects. As a solution, they propose legislation to prevent Bitcoin’s price from rising or to make it disappear entirely. The authors encourage non-holders and their political representatives to actively oppose Bitcoin, arguing that the idea of Bitcoin as an investment is based on redistribution at their expense.
