A recent research paper from the Federal Reserve Bank of Minneapolis has raised concerns about Bitcoin’s impact on government fiscal policies. The paper suggests that Bitcoin may need to be taxed or even banned to help governments manage deficits more effectively.
Released on October 17, the paper argues that Bitcoin complicates efforts to maintain permanent government deficits, especially in economies dependent on nominal debt. The Minneapolis Fed highlights that Bitcoin creates what they call a “balanced budget trap,” forcing governments to balance their budgets.
Bitcoin Disrupts Traditional Fiscal Policy
Bitcoin, with its fixed supply and lack of direct claims on real-world resources, presents an alternative financial asset that disrupts traditional fiscal policies. The paper proposes either a tax on Bitcoin or an outright legal prohibition to counter its effects.
The research states, “A legal prohibition against Bitcoin can restore the unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
A primary deficit occurs when a government’s spending exceeds its revenue, excluding interest payments on its debt. The paper focuses on the concept of a “permanent” primary deficit, where governments plan to continuously outspend their revenue indefinitely.
Currently, the U.S. national debt has skyrocketed to $35.7 trillion, with the primary deficit at $1.8 trillion. Rising interest costs on Treasury debt, which jumped by 29% to $1.13 trillion this year, are a key contributor to the deficit, according to a Reuters report from October 19.
Criticism from Bitcoin Advocates
Bitcoin supporters have voiced strong opposition to the paper’s conclusions. Matthew Sigel, head of digital asset research at VanEck, criticized the Minneapolis Fed for echoing the European Central Bank’s (ECB) critical stance on Bitcoin. He noted that the paper envisions a future where legal prohibitions or taxes on Bitcoin would ensure government debt remains the only “risk-free” security.
Dan McArdle, co-founder of Messari, pointed out that a 1996 Minneapolis Fed paper titled “Money is Memory” accurately described many characteristics of Bitcoin—12 years before its creation. The paper described money as a fixed-supply object, similar to Bitcoin’s design.
Similar Concerns Raised by the ECB
The Minneapolis Fed’s paper mirrors earlier calls from the ECB to regulate or ban Bitcoin. Jürgen Schaaf, Senior Management Adviser at the ECB, reiterated the need for policies to curb Bitcoin’s growth due to concerns over wealth redistribution. Critics argue that such measures fail to address the broader context of monetary inflation, which Bitcoin was designed to counter.
For example, public sector debt in the UK has soared to 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 partly by a 41% increase in the M2 money supply since 2020.
Bitcoin proponents believe that, despite these critiques, Bitcoin’s role as a store of value remains critical, especially as traditional currencies continue to lose purchasing power. Both institutional and retail investors are increasingly drawn to Bitcoin as a hedge against inflation and economic instability.
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