Federal Reserve Paper Calls for Bitcoin Tax or Ban to Manage Deficits

Key Takeaways:

• A new paper from the Federal Reserve Bank of Minneapolis suggests Bitcoin may need to be taxed or banned to help governments manage fiscal deficits.
• The paper argues that Bitcoin disrupts traditional fiscal policy by providing an alternative financial asset.
• Critics argue that the proposal ignores Bitcoin’s role as a hedge against inflation and the growing national debt.

In a controversial new research paper, the Federal Reserve Bank of Minneapolis has called for Bitcoin to be taxed or banned to counter its impact on government fiscal policies. 

Economists Amol Amol and Erzo Luttmer, both associated with the University of Minnesota and the Minneapolis Fed, published the working paper “Unique Implementation of Permanent Primary Deficits?” on October 17.

Bitcoin’s Impact on Fiscal Policy and the ‘Balanced Budget Trap'

According to the authors, Bitcoin disrupts traditional fiscal policy by offering an alternative financial asset, complicating government deficit management. 

Unlike traditional fiat currencies, which governments can print or manipulate, Bitcoin has a fixed supply. This creates a “balanced budget trap,” forcing governments to either cut spending or raise taxes to close deficits, thereby losing the flexibility of fiat currency systems.

Amol and Luttmer propose two solutions to this issue, namely, the imposition of a tax on Bitcoin transactions or the implementation of an outright ban on the cryptocurrency. 

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

A permanent primary deficit occurs when a government continually spends more than it earns from regular income, excluding the interest on its debt. 

The United States is grappling with a staggering national debt of $35.7 trillion, fueled by soaring interest expenses on Treasury bonds. This has resulted in a budget deficit of $1.8 trillion for fiscal year 2024.

We have $35.6 trillion in national debt. We have an annual budget deficit of over $2 trillion.

We pay over $1.2 trillion per year in interest on the debt, about 25% of all govt rev goes to paying interest.

STOP sending aid to other countries.
We are broke. pic.twitter.com/flZrrNLU65

— Wall Street Silver (@WallStreetSilv) October 6, 2024

Criticism from Bitcoin Advocates and Comparisons to ECB Policies

The Minneapolis Fed’s paper has drawn immediate backlash from Bitcoin proponents, who see the proposal as echoing sentiments similar to those of the European Central Bank (ECB).

1/ This new paper is a true declaration of war: the ECB claims that early #bitcoin adopters steal economic value from latecomers. I strongly believe authorities will use this luddite argument to enact harsh taxes or bans. Check 🧵 for why: pic.twitter.com/qg31YenTSC

— Tuur Demeester (@TuurDemeester) October 19, 2024

Matthew Sigel, head of digital asset research at VanEck, criticized the Fed for fantasizing about imposing legal prohibitions and taxes on Bitcoin to ensure government debt remains the primary “risk-free” asset.

Dan McArdle, the co-founder of Messari, also shared a similar view with Sigel and pointed to a 1996 Minneapolis Fed paper titled “Money is Memory,” which paradoxically described Bitcoin-like characteristics long before the cryptocurrency’s 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 follows a growing trend of central banks, including the ECB, calling for stricter regulations or bans on Bitcoin. 

ECB Senior Management Adviser Jürgen Schaaf recently reiterated this stance, advocating for measures to curb Bitcoin’s growth due to concerns over wealth redistribution.