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A new working paper from the Federal Reserve Bank of Minneapolis has sparked debate by suggesting that Bitcoin may need to be banned or heavily taxed to help governments maintain permanent deficits. The paper argues that the existence of fixed-supply assets like Bitcoin complicates fiscal policy, introducing what the researchers call a âbalanced budget trap.â
In this alternative state, governments could be forced to balance their budgets rather than maintaining continuous deficitsâa situation that many economists believe is unsustainable. The paper concludes that taxing or outright banning Bitcoin would help resolve the policy conundrum and allow for a smoother implementation of permanent government spending in excess of revenue, also known as primary deficits.
A Thorn in Government Fiscal Plans
At the heart of the research is the idea that Bitcoin, as a private-sector security with a fixed supply, presents challenges for governments trying to implement ongoing deficit policies using nominal debt. Since BTC has no real resource claims and operates outside traditional monetary systems, it could disrupt fiscal strategies that depend on continuous debt issuance.
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âA legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin,â the paper stated. Currently, the U.S. is grappling with a national debt of $35.7 trillion, and interest costs on Treasury debt have soared due to higher rates, contributing to a $1.8 trillion primary deficit.
This makes controlling alternative assets like Bitcoin more critical for governments aiming to keep debt at manageable levels.
Calls to Curb Bitcoin Growth
The Minneapolis Fed paper aligns with similar sentiments recently echoed by the European Central Bank (ECB). On October 12, the ECB published a paper claiming that older Bitcoin holders are profiting unfairly at the expense of newer investors and that the assetâs price should be controlled or banned to prevent wealth redistribution.
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ECB Senior Management Adviser JĂŒrgen Schaaf took to X on October 20 to support these findings, stating, âThere are compelling reasons to advocate for policies that curb Bitcoinâs growth or even eliminate it.â The growing push to regulate or ban Bitcoin comes at a time when central banks are increasingly concerned about the disruptive potential of cryptocurrencies in an era of rising government debt and fiscal challenges.
