Minneapolis Fed Proposes Bitcoin Ban or Tax to Address Primary Deficits

The Federal Reserve Bank of Minneapolis has sparked a significant debate with its recent working paper, which suggests that governments should consider banning or taxing Bitcoin to maintain primary deficits.

Released on October 17, the paper, titled “Unique Implementation of Permanent Primary Deficits?” by researchers Amol Amol and Erzo G.J. Luttmer, outlines concerns regarding Bitcoin’s impact on government fiscal policy.

The authors argue that Bitcoin, described as a “balanced budget trap,” poses a challenge for governments aiming to sustain their permanent primary deficits—situations where expenditures exceed revenues over the long term. The paper contends that Bitcoin’s decentralized nature hampers policy implementation, making it difficult for governments to rely on nominal debt to finance ongoing deficits.

“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin at the rate,” the abstract states. The researchers categorize Bitcoin as a “fixed-supply private-sector security” devoid of “real resource claims,” advocating for regulatory measures to mitigate its influence on fiscal stability.

A primary deficit occurs when a government’s expenditures surpass its tax revenues, and the term “permanent” signifies an intention to continue this practice indefinitely. The implications of this paper are substantial, as it suggests that the existence of Bitcoin could undermine traditional fiscal strategies.

Matthew Sigel, head of digital asset research at VanEck, has characterized the working paper as an “attack on Bitcoin.” He asserts that the paper highlights a concern among governments that they could only sustain permanent deficits if consumers remain unaware or do not adopt cryptocurrencies like Bitcoin.

In a social media post, Sigel referenced a critique from Bitcoin analyst Tuur Demeester regarding a recent European Central Bank research paper, which claimed that older Bitcoin holders profit at the expense of newer investors. This sentiment reflects broader apprehensions within traditional financial institutions about the growing popularity of cryptocurrencies.

“The paper fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure government debt remains the ‘only risk-free security,’” Sigel commented on October 21.

The Minneapolis Fed’s paper is part of an ongoing dialogue among financial regulators and economists about the role of cryptocurrencies in modern economies. As Bitcoin and other digital currencies continue to gain traction, their potential impact on fiscal policy and economic stability will likely remain a contentious issue.

In conclusion, the Minneapolis Fed’s call for a ban or tax on Bitcoin highlights the challenges posed by cryptocurrencies to existing financial frameworks. As governments grapple with maintaining fiscal discipline in an evolving economic landscape, the future of Bitcoin and its regulation remains uncertain.