Key Points
- The Federal Reserve Bank of Minneapolis suggests a ban or tax on Bitcoin to maintain primary deficits.
- The paper refers to Bitcoin as a “balanced budget trap” and a hindrance for policy implementation.
The Minneapolis Federal Reserve Bank recently put forth a paper advocating for a Bitcoin ban or tax to uphold primary deficits. This paper was published on October 17, encouraging governments to either legally restrict Bitcoin trading or impose a Bitcoin tax to sustain their ongoing primary deficits.
The paper, titled “Unique Implementation of Permanent Primary Deficits?” by Amol Amol and Erzo G.J. Luttmer, states that a legal prohibition against Bitcoin could restore the unique implementation of permanent primary deficits. This could also be achieved by imposing a tax on Bitcoin.
Bitcoin: A Balanced Budget Trap
The paper, spanning 40 pages, labels Bitcoin as a “balanced budget trap”. This term refers to a scenario where the government is compelled to balance its budget. The decentralization of Bitcoin is seen as a hurdle for policy implementation, particularly for governments striving to uphold their permanent deficits using nominal debt.
Bitcoin is described as a fixed-supply “private-sector security” without “real resource claims” by the researchers. They suggest that a ban or tax on Bitcoin could be the solution to this problem.
A primary deficit arises when government expenditure exceeds the money it has in the form of taxes and other revenues. When “permanent” is attached to primary deficit, it implies that the government plans to persistently spend more than its budget.
Views on the Paper
Matthew Sigel, the head of digital asset research at VanEck, perceives this paper as an “attack on Bitcoin”. Sigel believes the paper implies that governments can sustain permanent deficits if consumers don’t adopt new money like Bitcoin.
Sigel also quoted a post from Bitcoin analyst Tuur Demeester, who criticized a research paper by the European Central Bank. This paper claimed that older Bitcoin holders profit off of newer holders and argued that Bitcoin should be regulated to prevent its price from rising or banned outright. Sigel wrote in an October 21 post that the paper “fantasizes about ‘Legal Prohibition’ and extra taxes on BTC to ensure govt debt remains ‘Only Risk Free Security'”.