A recent research paper from the Federal Reserve Bank of Minneapolis has sparked debate. The paper argues that governments should either tax or ban Bitcoin to manage their deficits. Released on October 17, the working paper raises concerns about how Bitcoin complicates fiscal policy in a system that relies on permanent deficits.
Bitcoin’s Impact on Fiscal Policy
The Minneapolis Fed asserts that Bitcoin creates a “balanced budget trap,” which compels the government to maintain a balanced budget instead of permitting ongoing deficits. The paper classifies Bitcoin as a fixed-supply “private-sector security” that lacks real resource claims. This classification poses challenges for governments trying to implement policy through nominal debt.
The authors argue, “A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.” They explain that a primary deficit occurs when a government spends more than it collects in taxes and revenue, excluding interest payments on its debt.
The idea of a “permanent” primary deficit is noteworthy. It suggests that the government plans to spend beyond its means indefinitely. Currently, the United States faces a staggering national debt of $35.7 trillion, with a primary deficit of about $1.8 trillion.
Rising Interest Costs and Deficits
Reuters reports that the fiscal year 2024 will likely see the largest deficit outside the COVID-19 pandemic period, driven by a 29% increase in interest costs for Treasury debt, which has now reached $1.13 trillion. These rising costs present additional challenges for fiscal management.
Reactions from Experts
In response to the Minneapolis Fed’s paper, Matthew Sigel, head of digital asset research at VanEck, commented on October 21. He noted that the Fed has joined the European Central Bank (ECB) in critiquing Bitcoin. Sigel expressed concern over the idea of a “legal prohibition” and increased taxes. He stated that these actions would ensure government debt remains the “only risk-free security.”
Dan McArdle, co-founder of Messari, unearthed a 1996 paper from the Minneapolis Fed titled “Money is Memory,” which inadvertently supported Bitcoin twelve years before the first block was created. It defined money as an object that does not “enter production,” is “available in fixed supply,” and serves as an early, rudimentary form of memory.
ECB’s Stance on Bitcoin
In a related development, on October 12, the ECB published a paper claiming that older Bitcoin holders benefit at the expense of newer market entrants. This paper advocated for possible regulations or outright prohibitions on Bitcoin to curb price increases. On October 20, ECB Senior Management Adviser Jürgen Schaaf expressed a similar viewpoint. He urged non-holders to recognize that Bitcoin’s rise redistributes wealth at their expense and called for policies to limit Bitcoin’s growth or eliminate it.
I am Toby Rothschild, Co-Founder of Spearmint and author at Coinography, and a strategist focused on advancing Web3 innovation, digital ecosystems, and the future of decentralized technology. I combine product thinking, creative leadership, and deep interest in emerging trends to help shape how individuals and organizations interact with the next generation of digital systems.
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