Key Points
- The Federal Reserve Bank of Minneapolis suggests banning Bitcoin to help governments maintain their deficits.
- The bank refers to Bitcoin as a “private-sector security” that lacks “real resource claims”.
The Federal Reserve Bank of Minneapolis has proposed a ban on digital assets such as Bitcoin in a recent research paper. The bank argues that such a ban would assist governments in maintaining their deficits.
In a working paper published on October 17, the Minneapolis Fed stated that Bitcoin’s presence in an economy where the government is trying to maintain a permanent deficit through nominal debt could pose problems.
Bitcoin’s Impact on Budgets
The bank also pointed out that Bitcoin could lead to a “balanced budget trap”, forcing the government to balance its budget. The researchers used Bitcoin as an example of a fixed-supply “private-sector security” that lacks “real resource claims”. They suggested that Bitcoin should either be banned or taxed to address this issue.
“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin,” the researchers stated.
Understanding Primary Deficit
A primary deficit occurs when the government’s spending exceeds its tax and other revenue collections, excluding interest payments on its debts. The term “permanent” in the context of a primary deficit implies that the government needs to plan to spend more than what it collects indefinitely.
The United States has accumulated a national debt of $35.7 trillion, with an annual gap between tax revenue and spending (the primary deficit) of around $1.8 trillion. According to a Reuters report from October 19, the main factor behind the fiscal 2024 deficit was a 29% increase in interest costs for Treasury debt, reaching $1.13 trillion. This was primarily due to higher interest rates and increased borrowing.
Matthew Sigel, head of digital asset research at VanEck, commented on the paper, noting that the Minneapolis Fed’s stance on Bitcoin aligns with that of the European Central Bank. He stated that the bank “fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure government debt remains the ‘only risk-free security.'”
Messari co-founder Dan McArdle referenced a 1996 Minneapolis Fed paper that defines money as an object that does not “enter production,” is “available in fixed supply,” and is “equivalent to a primitive form of memory.” The paper was released 12 years before the Bitcoin genesis block.
On October 12, the European Central Bank (ECB) released a paper arguing that long-time Bitcoin holders are benefiting at the expense of newer investors. The paper suggested that the cryptocurrency should either be regulated to prevent price increases or banned altogether. Jürgen Schaaf, the ECB senior management adviser, added that “non-holders should recognize that Bitcoin’s rise is fuelled by wealth redistribution at their expense. There are compelling reasons to advocate for policies that curb Bitcoin’s growth or even eliminate it.”
