Fed Paper Advocates Taxation or Prohibition of Bitcoin to Address Government Deficits

A new research paper from the Federal Reserve Bank of Minneapolis has raised concerns about Bitcoin’s impact on government fiscal policies, suggesting that the cryptocurrency may need to be taxed or banned to help governments manage deficits.

The paper, released on October 17, 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 what it calls a “balanced budget trap,” which forces governments to balance their budgets.

Bitcoin Disrupts Traditional Fiscal Policy

Bitcoin, with its fixed supply and lack of direct claims on real resources, disrupts traditional fiscal policy by providing an alternative financial asset.

The researchers proposed that either a tax on Bitcoin or an outright legal prohibition would be necessary to counter this effect.

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

A primary deficit occurs when a government’s expenditures exceed its revenue, excluding interest payments on existing debt.

The key distinction made in the paper is the idea of a “permanent” primary deficit, where governments plan to continue outspending indefinitely.

The U.S. national debt has now reached $35.7 trillion, with the primary deficit currently standing at $1.8 trillion.

A significant portion of this deficit has been driven by increased interest costs on Treasury debt, which jumped 29% to $1.13 trillion this year due to rising interest rates and growing debt levels, according to an October 19 report by Reuters.

The paper has drawn sharp criticism from Bitcoin advocates.

Fed’s Paper Echos ECB’s Stance on Bitcoin

Matthew Sigel, head of digital asset research at VanEck, said that the Minneapolis Fed is now echoing the European Central Bank’s (ECB) critical stance on Bitcoin.

He noted that the paper fantasizes about imposing legal prohibitions and extra taxes on Bitcoin to ensure government debt remains the only “risk-free” security.

Adding to the controversy, Messari co-founder Dan McArdle pointed to a 1996 Minneapolis Fed paper titled “Money is Memory,” which paradoxically described Bitcoin’s characteristics 12 years before its creation.

I prefer the 1996 Minneapolis Fed which produced the "Money is Memory" paper; an intellectual exercise that (without knowing it) made the case for Bitcoin 12+yrs before the Genesis block. https://t.co/Y8IJMLnYcy https://t.co/65TIjyAN1J pic.twitter.com/xjTT3PgGYL

— Dan McArdle (@robustus) October 21, 2024

The paper described money as a fixed-supply object that does not enter production, a concept that aligns closely with Bitcoin’s design.

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 the paper fails to address the broader context of monetary inflation.

For example, public sector debt in the UK reached nearly 98% of GDP in 2023-2024, the highest level since the 1960s.

In the U.S., the national debt has ballooned to $35 trillion, driven in part by a 41% increase in the M2 money supply since 2020.

The paper’s contradictory claims—that Bitcoin lacks intrinsic value yet poses a destabilizing threat—ignore the inflationary pressures that Bitcoin was designed to counteract.

As traditional currencies lose purchasing power, Bitcoin’s role as a store of value continues to attract both institutional and retail investors.