Federal Reserve Suggests Ban or Tax on Bitcoin to Manage Deficits

The Federal Reserve Bank of Minneapolis recently released a paper suggesting that governments should consider banning or taxing Bitcoin to maintain primary deficits.

Federal Reserve’s Proposal on Bitcoin

In a working paper published by the Minneapolis Fed on October 17, the recommendation is to either legally prohibit the trade of Bitcoin or enact a Bitcoin tax to sustain permanent primary deficits. The paper, titled “Unique Implementation of Permanent Primary Deficits?” by Amol Amol and Erzo G.J. Luttmer, states:

“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin at the rate.”

Bitcoin as a “Balanced Budget Trap”

Within the 40-page document, Bitcoin is described as a “balanced budget trap,” which is an alternative state where the government is compelled to balance its budget. The Fed views Bitcoin’s decentralization as a hurdle for policy implementation, particularly for governments aiming to maintain their permanent deficits using nominal debt.

The researchers categorize Bitcoin as a fixed-supply “private-sector security” without “real resource claims.” Consequently, they propose that Bitcoin should be either banned or taxed to address this issue.

Understanding Primary Deficits

A primary deficit occurs when a government spends more money than it collects through taxes and other revenues. The term “permanent” signifies that the government plans to continue spending more than its budget allows.

Expert Reactions

Matthew Sigel, Head of Digital Asset Research at VanEck, considers the working paper published by the Minneapolis Fed as an “attack on Bitcoin.” According to Sigel, the paper suggests that governments can run permanent deficits if consumers “don’t notice & adopt new money like BTC.”

Sigel also referenced a post from Bitcoin analyst Tuur Demeester, who criticized a research paper by the European Central Bank dated October 12. The paper claimed that older Bitcoin holders profit from newer holders and argued for regulating Bitcoin to prevent its price from rising or banning it outright.

“[The paper] fantasizes about ‘Legal Prohibition’ and extra taxes on BTC to ensure govt debt remains ‘Only Risk Free Security,’” Sigel wrote in an October 21 post.

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