A recent research paper from the Federal Reserve Bank of Minneapolis has stirred debate by suggesting that Bitcoin and similar assets may need to be taxed or outright banned to enable governments to maintain permanent deficits. The paper, released on October 17, highlights how Bitcoin's fixed supply creates challenges for economic policy, particularly in an environment where governments aim to run ongoing deficits.
According to the Minneapolis Fed, the presence of Bitcoin introduces a “balanced budget trap,” a scenario in which the government is compelled to balance its budget due to the fixed nature of Bitcoin as a "private-sector security" that lacks "real resource claims." The researchers argue that without intervention, the ability to implement permanent primary deficits—a situation where government spending exceeds tax revenue, excluding interest payments on debt—could be jeopardized.
To address this issue, the paper proposes that a legal prohibition against Bitcoin or a tax on its transactions could help restore the ability for governments to sustain permanent deficits. The concept of a "permanent" primary deficit is crucial here, indicating that the government intends to spend more than it collects indefinitely. Currently, the U.S. national debt stands at a staggering $35.7 trillion, with a primary deficit of approximately $1.8 trillion annually.
This year's deficit has been particularly large, primarily driven by a 29% increase in interest costs for Treasury debt, which has surged to $1.13 trillion due to rising interest rates and increased borrowing. These dynamics have prompted significant scrutiny over the implications of cryptocurrencies like Bitcoin on fiscal policy.
Matthew Sigel, the head of digital asset research at VanEck, responded to the Minneapolis Fed's paper on October 21, arguing that it mirrors sentiments expressed by the European Central Bank (ECB) regarding Bitcoin. Sigel criticized the notion of legal prohibitions and extra taxes on Bitcoin, asserting that these ideas reflect a desire to ensure government debt remains the "only risk-free security."
Interestingly, in a twist of irony, Messari co-founder Dan McArdle pointed out a 1996 paper from the Minneapolis Fed titled "Money is Memory," which advocated for principles akin to those underlying Bitcoin long before its inception. This earlier paper defined money as an object that does not "enter production," is available in fixed supply, and serves as a primitive form of memory.
The ECB has also weighed in on the Bitcoin debate. On October 12, it released a paper claiming that older Bitcoin holders are profiting at the expense of newer investors, suggesting that regulation is necessary to prevent unsustainable price increases. ECB Senior Management adviser Jürgen Schaaf reiterated this stance in a post on X (formerly Twitter) on October 20, stating that "non-holders" should acknowledge that Bitcoin's rise is fueled by wealth redistribution at their expense. He further advocated for policies that would curb Bitcoin's growth or eliminate it entirely.
As discussions surrounding the regulation of cryptocurrencies intensify, the clash between traditional financial institutions and the burgeoning crypto market highlights ongoing tensions over the future of money and fiscal policy.
October 2024, Cryptoniteuae