Coin World Report:
The Minneapolis Federal Reserve Bank has recommended taxing or banning Bitcoin. In a recent working paper, the Minneapolis Federal Reserve Bank describes this as a necessary condition for the government to maintain a permanent primary deficit.
According to researchers, Bitcoin makes it difficult for the government to maintain a permanent primary deficit because it provides an alternative. However, banning or taxing the flagship asset would solve this problem.
It states: “A legal ban on Bitcoin can restore the unique implementation of a permanent primary deficit, as does taxing Bitcoin.”
The research abstract notes that in an economy where consumers have sufficient risk aversion, the government theoretically can implement a permanent primary deficit. However, this implementation has failed due to Bitcoin.
A primary deficit refers to government spending exceeding income, excluding debt interest. In the fiscal year 2024, the US primary deficit was $1.13 trillion, far below the $35.7 trillion national debt.
By increasing permanence, researchers envision a scenario where the government plans to spend more than it earns every year. While this is possible, Bitcoin introduces a “balanced budget trap” that forces the government to balance the budget.
The research describes Bitcoin as a useless piece of paper. Meanwhile, the paper refers to Bitcoin as “worthless paper” because its value is unrelated to tangible resources. Researchers point out that Bitcoin represents “a metaphor for a fixed-supply private sector security, rather than a claim on any real resource.”
Although Bitcoin is described as useless, the paper acknowledges that government securities are no different from Bitcoin because they also represent “nothingness.” This comparison does not overlook the fact that government stocks generate dividends, as researchers note that the government ultimately prints more money “for an increasing number of people to claim against zero nominal interest rates.”
By comparing Bitcoin and government securities, researchers are concerned that Bitcoin may become a substitute for government stocks. Therefore, it is necessary to implement bans or taxes.
It states: “When there are laws against private sector bubble assets, the government can easily design unique policies to implement a permanent primary deficit, provided there is sufficient special risk to make such a deficit possible.”
However, researchers point out that there is no need for a complete ban as long as the government taxes Bitcoin at a sufficiently high rate to sustain a permanent primary deficit.
Cryptocurrency community reacts to central bank’s call for banning Bitcoin
The Minneapolis Fed’s research comes a few days after European Central Bank (ECB) researchers called for a ban or restrictions on Bitcoin prices. They claim that Bitcoin’s rising value makes early adopters wealthy and others poorer, leading to wealth inequality.
As expected, the cryptocurrency community has responded, pointing out that this highlights the traditional financial system’s view of Bitcoin as a threat. Investment strategist Lyn Alden notes that this research may ultimately reveal potential concerns of the traditional financial system regarding Bitcoin.
Meanwhile, Matthew Sigel, Head of Research at VanEck, suggests that researchers will only push for a ban or taxation on Bitcoin, leaving government debt as the only risk-free security. He adds that the paper ultimately identifies a problem that the government has been trying to address: consumers cannot continue to fund government debt when alternative assets are available for investment.
However, some praise the paper for being more technically advanced than the ECB’s paper. An anonymous user on X, a Bitcoin economist, notes that the model proposed in this paper may be correct but only reveals what has been known for some time.
He says: “Technically, this paper is much better. The model may be correct, but we’ve known this all along. That’s the point – what’s becoming more apparent is Bitcoin. Gensler has always known. Look at Hillary’s speech. Same old story.”
Meanwhile, others take this opportunity to mention the Minneapolis Fed’s early work, noting a change in the bank’s tone. Dan McArdle, co-founder of Messari, highlights that the Federal Reserve published a paper in 1996 titled “Money is Memory,” stating that the purpose of money should include the ability to record and track all transactions, which Bitcoin has been able to achieve.