A recent research paper by the Federal Reserve Bank of Minneapolis has sparked debate, suggesting that taxing or banning Bitcoin could help governments sustain long-term budget deficits. The October 17 report highlights concerns about Bitcoin’s potential to disrupt economic policies aimed at maintaining nominal debt and continuous deficit spending.
Bitcoin and the Balanced Budget Trap
The Minneapolis Fed’s working paper introduces the concept of a “balanced budget trap.” According to the research, Bitcoin creates an alternative financial state where governments may be forced to balance their budgets, undermining their ability to run permanent deficits. In this scenario, assets like Bitcoin act as private-sector securities without real resource claims, posing a challenge to fiscal policies.
The researchers argue that Bitcoin, with its fixed supply, threatens government control over deficits. To counter this, they propose that Bitcoin be taxed or banned to ensure fiscal stability.
The Impact of Permanent Deficits
The term “permanent deficit” refers to a situation where a government continually spends more than it collects, excluding interest payments on debt. The United States is a prime example, with a national debt of $35.7 trillion and a primary deficit of $1.8 trillion as of 2024. Reuters reported on October 19 that the fiscal 2024 deficit is the largest since the COVID-19 pandemic, driven by a 29% increase in interest costs for Treasury debt due to rising rates.
VanEck and Messari Respond
Matthew Sigel, head of digital asset research at VanEck, reacted to the Minneapolis Fed’s paper, comparing it to similar stances taken by the European Central Bank (ECB). Sigel accused both institutions of “fantasizing about legal prohibition” and additional taxes on Bitcoin to maintain government debt as the “only risk-free security.”
Messari co-founder Dan McArdle referenced a 1996 Minneapolis Fed paper titled “Money is Memory,” which ironically argued the case for Bitcoin-like assets over a decade before Bitcoin’s creation. The paper described money as an object that does not “enter production,” is available in “fixed supply,” and functions similarly to a “primitive form of memory.”
ECB’s Attack on Bitcoin
The ECB has also joined the conversation, releasing a paper on October 12 claiming that early Bitcoin holders profit at the expense of newer investors. Senior management adviser Jürgen Schaaf added to the ECB’s criticism, stating on X (formerly Twitter) that non-Bitcoin holders should realize the asset’s rise is fueled by wealth redistribution. Schaaf advocated for policies aimed at curbing Bitcoin’s growth or even eliminating it altogether.
Conclusion
As governments worldwide grapple with managing deficits and debt, Bitcoin’s role in disrupting traditional economic policies is becoming a point of contention. Both the Minneapolis Fed and the ECB suggest that Bitcoin could undermine fiscal stability, fueling ongoing debates about how governments should approach cryptocurrency regulation.
