- Minneapolis Fed suggests banning or taxing Bitcoin to maintain deficits.
- Bitcoin is labeled as a “private-sector security” without real claims.
The Federal Reserve Bank of Minneapolis has recently proposed that governments should ban or tax Bitcoin. This recommendation aims to help maintain permanent budget deficits. In a working paper published on October 17, the Minneapolis Fed highlighted that Bitcoin complicates fiscal policy. Specifically, the Fed argues that Bitcoin creates a “balanced budget trap.” This term refers to a situation where the government must balance its budget, which poses a challenge for those seeking to maintain fiscal deficits.
According to the paper, Bitcoin is categorized as a “private-sector security” lacking real resource claims. The researchers assert that the cryptocurrency’s fixed supply disrupts the government’s ability to manage spending effectively.
They suggest that a legal prohibition or a tax on Bitcoin would help restore the implementation of permanent primary deficits. In simpler terms, banning or taxing Bitcoin could provide a solution to ensure that governments can continue spending more than they collect.
Reactions to the Fed’s Bitcoin Stance
A primary deficit occurs when government expenditures exceed tax revenues, excluding interest payments on existing debt. The notion of a “permanent” primary deficit indicates a government’s intention to maintain this spending pattern indefinitely. Currently, the United States has accumulated a national debt of $35.7 trillion, with a primary deficit of about $1.8 trillion.
Critics have responded to the Minneapolis Fed’s stance. Matthew Sigel, head of digital asset research at VanEck, views the paper as an attack on Bitcoin. He stated that the Fed fantasizes about legal prohibitions and taxes on Bitcoin.
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. https://t.co/Y8IJMLnYcy https://t.co/65TIjyAN1J pic.twitter.com/xjTT3PgGYL
— Dan McArdle (@robustus) October 21, 2024
Additionally, Messari co-founder Dan McArdle highlighted a 1996 Minneapolis Fed paper that recognized the characteristics of Bitcoin long before its creation. This earlier paper described money as an object that does not enter production and is available in fixed supply.
The Minneapolis Fed’s proposal echoes recent criticisms from the European Central Bank (ECB). The ECB has also called for regulating or banning Bitcoin, arguing that long-term holders profit at the expense of new investors. As debates around Bitcoin continue, the implications for fiscal policy and monetary systems remain significant.
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