Coin World News Report:
The Federal Reserve Bank of Minneapolis has suggested taxing or banning Bitcoin. In a recent working paper, the Federal Reserve Bank of Minneapolis described this as a necessary condition for the government to maintain a permanent primary deficit.
According to researchers, Bitcoin makes it difficult for the government to maintain a permanent primary deficit because it provides an alternative. However, banning or taxing the flagship asset would solve this problem.
It states: “A legal ban on Bitcoin can restore the unique implementation of a permanent primary deficit, as can taxing Bitcoin.”
The research abstract points out that in an economy where consumers have enough risk aversion, it is theoretically possible for the government to implement a permanent primary deficit. However, this implementation has failed due to Bitcoin.
A primary deficit refers to government spending exceeding income, excluding debt interest. In the 2024 fiscal year, the primary deficit in the United States was $1.13 trillion, much lower than the $35.7 trillion national debt.
By increasing permanence, researchers envision a scenario where the government plans to spend more than its income every year. While this is possible, Bitcoin introduces a “balanced budget trap” that forces the government to balance the budget.
The research describes Bitcoin as useless paper. At the same time, the paper describes Bitcoin as “useless paper” because its value is unrelated to tangible resources. Researchers point out that Bitcoin represents “a metaphor for a privately secure entity with a fixed supply, rather than a claim on any real resources.”
Although Bitcoin is described as useless, the paper acknowledges that government securities are no different from Bitcoin because they also represent “nothingness.” This comparison does not ignore the fact that government stocks generate dividends, as researchers point out that the government will eventually print more money “for more people to claim against zero at a certain nominal interest rate.”
By comparing Bitcoin and government securities, researchers are concerned that Bitcoin may become a substitute for government stocks. Therefore, it is necessary to implement a ban or taxation.
It states: “When there is a law against private sector bubble assets, the government can easily design unique policies to implement a permanent primary deficit, provided that sufficient special risks make such a deficit possible.”
However, researchers point out that as long as the government taxes Bitcoin at a sufficiently high rate to sustain a permanent primary deficit, there is no need for a complete ban.
Cryptocurrency community reacts to central bank’s call to ban Bitcoin
The Minneapolis Fed’s research comes days after European Central Bank (ECB) researchers called for a ban or restriction on Bitcoin prices. They claimed that Bitcoin’s rising value made early holders rich and made others poorer, resulting in unequal wealth distribution.
As expected, the cryptocurrency community reacted, pointing out that this highlights the traditional financial system’s view of Bitcoin as a threat. Investment strategist Lyn Alden noted that this research may ultimately reveal potential concerns of the traditional financial system regarding Bitcoin.
Meanwhile, Matthew Sigel, Director of Research at VanEck, pointed out that researchers will only push for a ban or taxation on Bitcoin, making government debt the only risk-free security. He added that the paper ultimately identifies an issue that the government has been trying to address: consumers are unable to continue funding government debt when alternative assets are available for investment.
However, some praised the paper for being technically superior to the ECB’s paper. An anonymous user on X, a Bitcoin economist, noted that the model proposed in this paper may be correct, but it only reveals what has been known for some time.
He said: “Technically, this paper is much better. The model may be correct, but we have known this all along. That’s the point – the issue is becoming more apparent with Bitcoin. Gensler has always known it. Look at Hillary’s speeches. Same thing.”
Meanwhile, others took the opportunity to mention the early work of the Minneapolis Fed and noted a change in the bank’s tone. Dan McArdle, co-founder of Messari, pointed out that the Federal Reserve published a paper in 1996 titled “Money is Memory,” which stated that the purpose of money should include the ability to record and track all transactions, something Bitcoin has already achieved.
