Fed Proposes Tax or Ban on Bitcoin to Address Deficits

The Federal Reserve suggests taxing or banning Bitcoin to manage government deficits, raising concerns among Bitcoin advocates about fiscal policies.

Fed Proposes Tax or Ban on Bitcoin to Address Deficits

A recent research paper from the Federal Reserve Bank of Minneapolis has raised alarms regarding the implications of Bitcoin on government fiscal strategies. The paper suggests that to effectively manage government deficits, Bitcoin may need to be subjected to taxation or even outright prohibition.

Concerns Over Bitcoin's Fiscal Impact

The report, published on October 17, emphasizes that Bitcoin complicates the ability of governments to maintain ongoing fiscal deficits, particularly in economies that rely heavily on nominal debt.

  • The Minneapolis Fed describes a "balanced budget trap" created by Bitcoin, which pressures governments to achieve balanced budgets.

Disruption of Traditional Fiscal Policies

Bitcoin's inherent characteristics, such as its fixed supply and absence of direct claims on real assets, challenge conventional fiscal policies by offering an alternative financial asset.

  • The researchers argue that imposing a tax on Bitcoin or instituting a legal ban could mitigate these disruptive effects.

  • The paper states, "A legal prohibition against Bitcoin can restore the unique implementation of permanent primary deficits, and so can a tax on Bitcoin."

Understanding Primary Deficits

A primary deficit occurs when a government's spending surpasses its revenue, excluding interest payments on existing debt.

  • The paper highlights the concept of a "permanent" primary deficit, where governments plan to continue overspending indefinitely.

  • Currently, the U.S. national debt stands at $35.7 trillion, with a primary deficit of $1.8 trillion. Increased interest costs on Treasury debt have significantly contributed to this deficit.

Criticism from Bitcoin Advocates

The paper has faced backlash from proponents of Bitcoin.

  • Matthew Sigel, head of digital asset research at VanEck, criticized the Minneapolis Fed for mirroring the European Central Bank's (ECB) negative view of Bitcoin.

  • Sigel noted that the paper fantasizes about legal restrictions and additional taxes on Bitcoin to preserve government debt as the only "risk-free" asset.

  • Dan McArdle, co-founder of Messari, referenced a 1996 Minneapolis Fed paper that eerily described Bitcoin's characteristics long before its inception.

ECB's Similar Stance on Bitcoin

Earlier in the month, the ECB also advocated for regulating or banning Bitcoin, citing concerns over wealth redistribution.

  • ECB Senior Management Adviser Jürgen Schaaf reiterated the need for policies to limit Bitcoin's expansion.

  • Critics argue that the ECB's perspective overlooks the broader issues of monetary inflation, with public sector debt in the UK nearing 98% of GDP, the highest since the 1960s.

  • In the U.S., the national debt has surged to $35 trillion, partly due to a 41% increase in the M2 money supply since 2020.

Bitcoin's Role Amid Inflationary Pressures

The paper's conflicting assertions—that Bitcoin lacks intrinsic value while simultaneously posing a threat—fail to acknowledge the inflationary pressures Bitcoin was designed to counteract.

  • As traditional currencies diminish in purchasing power, Bitcoin's appeal as a store of value continues to draw interest from both institutional and retail investors.

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