New York, Monday, October 28, 2024 – A new research paper from the Federal Reserve Bank of Minneapolis released on October 17 has raised concerns about Bitcoin’s impact on government fiscal policies, suggesting that the cryptocurrency may need to be taxed or even banned to help manage governmental deficits.
The paper argues that Bitcoin complicates efforts to maintain permanent government deficits, especially in an economy reliant on nominal debt.
According to the Minneapolis Fed, Bitcoin creates a “balanced budget trap” that compels governments to balance their budgets.
With its fixed supply and lack of direct claims on real resources, Bitcoin disrupts traditional fiscal policy by presenting an alternative financial asset. The researchers proposed that either a tax on Bitcoin or a legal prohibition would be necessary to mitigate this effect.
They stated, “A legal prohibition against Bitcoin can restore the unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
The paper distinguishes between regular primary deficits—when a government’s expenditures exceed its revenue, excluding interest payments—and a “permanent” primary deficit, where governments plan to continue outspending indefinitely.
Earlier this month, the ECB also called for regulating or banning Bitcoin, citing concerns over wealth redistribution.
ECB Senior Management Adviser Jürgen Schaaf reiterated this view, advocating for policies to curb Bitcoin’s growth.
Critics of the ECB’s stance argue that such papers fail to consider the broader context of monetary inflation, noting that public sector debt in the UK reached nearly 98% of GDP in 2023-2024, the highest level since the 1960s.
In the US, the national debt has ballooned to $35 trillion, driven in part by a 41% increase in the M2 money supply since 2020.
