A recent research paper by the Federal Reserve Bank of Minneapolis has suggested that assets such as Bitcoin would need to be taxed or banned for governments to maintain deficits. 

In an economy where the government tries to maintain permanent deficits using nominal debt, the presence of Bitcoin ( BTC ) creates problems for policy implementation, the Minneapolis Fed stated in a working paper released on Oct. 17.

Bitcoin introduces a “balanced budget trap,” an alternative state where the government is forced to balance its budget, the Fed claimed. 

The researchers used Bitcoin as an example of a fixed-supply “private-sector security” without “real resource claims.” They concluded that it needed to be banned or taxed to solve the conundrum. 

“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
Governments must tax or ban Bitcoin to maintain deficits: Minneapolis Fed image 0

The central bank used a lot of complicated math to propose a Bitcoin tax. Source: Minneapolis Fed

A primary deficit occurs when a government spends more than it collects in taxes and other revenue, excluding interest payments on its debt.

The term “permanent” for the primary deficit is key as it means the government plans to keep spending more than it collects indefinitely. 

The United States has amassed a whopping $35.7 trillion in total accumulated national debt. However, the primary deficit, the annual gap between spending and tax revenue, is currently around $1.8 trillion.

The biggest driver of the year’s deficit, the largest outside of the COVID-19 era, was a 29% increase to $1.13 trillion in interest costs for Treasury debt due to higher rates and more debt to finance, reported Reuters on Oct. 19. 

Head of digital asset research at VanEck, Matthew Sigel, commented on the paper on Oct. 21, stating that the Minneapolis Fed has joined the European Central Bank in its attack on Bitcoin, adding that it:

“Fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’”

Meanwhile, Messari co-founder Dan McArdle dug up a 1996 Minneapolis Fed paper called “Money is Memory,” which, in an interesting twist, argued the case for Bitcoin 12 years before the genesis block. 

The paper defined money as an object that does not “enter production,” is “available in fixed supply,” and is “equivalent to a primitive form of memory.”

Related: Bitcoin-hating European Central Bank isn't doing much to stop scammers

On Oct. 12, the ECB released a paper claiming that older Bitcoin holders are profiting at the expense of newer holders. It argued that the asset should be regulated to prevent its price from rising or banned outright.

ECB Senior Management adviser Jürgen Schaaf joined the calls to kill Bitcoin in a post on X on Oct. 20.

“Non-holders should recognize that Bitcoin’s rise is fuelled by wealth redistribution at their expense,” he said before adding, “There are compelling reasons to advocate for policies that curb Bitcoin’s growth or even eliminate it.”

Magazine: Bitcoin $233K forecast, SEC X account hacker arrested, and more: Hodler’s Digest, Oct. 13 – 19