Federal Reserve Bank Suggests Taxing Or Banning Bitcoin To Maintain Government Deficits

According to Cointelegraph, a recent research paper by the Federal Reserve Bank of Minneapolis has proposed that assets like Bitcoin may need to be taxed or banned for governments to sustain permanent deficits. The paper, released on October 17, highlights the challenges Bitcoin poses to policy implementation in an economy where the government aims to maintain ongoing deficits using nominal debt. The Minneapolis Fed's working paper describes a “balanced budget trap,” a scenario where the government is compelled to balance its budget due to the presence of Bitcoin. The researchers used Bitcoin as an example of a fixed-supply “private-sector security” without “real resource claims,” concluding that banning or taxing Bitcoin could resolve this issue. They stated, “A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.” 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” implies that the government plans to continue spending more than it collects indefinitely. The United States currently has a total national debt of $35.7 trillion, with an annual primary deficit of around $1.8 trillion. The largest driver of this year’s deficit, the largest outside of the COVID-19 era, was a 29% increase to $1.13 trillion in interest costs for Treasury debt due to higher rates and more debt to finance, as reported by Reuters on October 19. Matthew Sigel, head of digital asset research at VanEck, commented on the paper on October 21, noting that the Minneapolis Fed has joined the European Central Bank in its criticism of Bitcoin. He remarked that the Fed “fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’” Meanwhile, Messari co-founder Dan McArdle referenced a 1996 Minneapolis Fed paper titled “Money is Memory,” which argued the case for Bitcoin 12 years before its creation. The paper defined money as an object that does not “enter production,” is “available in fixed supply,” and is “equivalent to a primitive form of memory.” On October 12, the ECB released a paper claiming that older Bitcoin holders are profiting at the expense of newer holders and suggested that the asset should be regulated or banned to prevent its price from rising. ECB Senior Management adviser Jürgen Schaaf echoed these sentiments in a post on X on October 20, advocating for policies to curb Bitcoin’s growth or eliminate it, stating, “Non-holders should recognize that Bitcoin’s rise is fuelled by wealth redistribution at their expense.”