A recent research paper from the Federal Reserve Bank of Minneapolis has sparked significant discussion regarding the future of Bitcoin and its implications for government fiscal policy. The paper, released on October 17, argues that in order for governments to sustain permanent deficits, they may need to consider taxing or outright banning cryptocurrencies like Bitcoin.
The Minneapolis Fed asserts that Bitcoin, currently valued at approximately $69,020, poses challenges for governments attempting to maintain nominal debt levels while running persistent deficits. The researchers describe a “balanced budget trap,” where the existence of Bitcoin forces governments to balance their budgets rather than allowing for ongoing deficits.
The paper suggests that a legal prohibition on Bitcoin could restore the government’s ability to implement permanent primary deficits. This is crucial because a primary deficit occurs when a government spends more than it collects in taxes and other revenues, excluding interest payments on its debt.
The concept of a “permanent” primary deficit indicates that the government intends to continue this practice indefinitely.
The U.S. currently faces an astronomical $35.7 trillion in total national debt, with an annual primary deficit estimated at $1.8 trillion. The rising costs of servicing this debt have become a significant concern, particularly as interest rates increase.
Recent reports highlighted that interest costs for Treasury debt surged by 29% to $1.13 trillion, marking the largest deficit outside the COVID-19 era.
Matthew Sigel, head of digital asset research at VanEck, commented on the Minneapolis Fed’s findings, suggesting that the Fed has aligned itself with the European Central Bank (ECB) in its critical stance toward Bitcoin.
He remarked that the Fed’s proposal of “legal prohibition” and taxation reflects an attempt to ensure government debt remains the “only risk-free security.”
Conversely, Dan McArdle, co-founder of Messari, pointed out an intriguing historical note: a 1996 paper from the Minneapolis Fed titled “Money is Memory” laid out arguments that align closely with concepts later embodied by Bitcoin—defining money as an asset that does not enter production and is available in fixed supply.
The European Central Bank has also recently released papers criticizing Bitcoin, claiming that older holders profit at the expense of newer investors. ECB Senior Management adviser Jürgen Schaaf has echoed calls for regulatory measures or even outright bans on Bitcoin to prevent wealth redistribution that disadvantages non-holders.
The Minneapolis Fed’s research presents a provocative perspective on how cryptocurrencies could disrupt traditional fiscal policies and government operations. The potential for taxation or prohibition has raises questions about the future role of cryptocurrencies in global finance and their acceptance among investors and policymakers alike.