A new Minneapolis Fed report suggests that banning or taxing Bitcoin could help governments sustain long-term budget deficits.
A new research paper from the Federal Reserve Bank of Minneapolis suggests banning or taxing Bitcoin to help governments maintain permanent primary deficits. The paper, titled "Unique Implementation of Permanent Primary Deficits?" explores how governments can sustain ongoing spending beyond their tax revenues and manage debt using nominal debt and continuous fiscal strategies. However, the presence of fixed-supply assets like Bitcoin poses challenges to these strategies, according to the report.
The paper explains that Bitcoin, referred to as a "private-sector bubble asset," could create a "balanced budget trap." This situation arises when the existence of alternative assets forces the government to balance its budget, limiting its ability to engage in long-term deficit spending. The authors argue that without such assets, governments could more easily sustain permanent primary deficits through strategic fiscal policies.
"Bitcoin here is used as a metaphor for a private-sector security that is in fixed supply and not a claim to any real resources," the report explains, indicating the broader risks such assets may present to fiscal sustainability.
To address this issue, the authors suggest that governments could impose financial repression mechanisms, such as outright bans or taxes on Bitcoin, to ensure their fiscal policies remain effective. "A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits," the report notes, adding that a tax on Bitcoin could also serve the same purpose.
Critics, such as Matthew Sigel from VanEck, highlighted that the paper's approach mirrors other central banks' efforts to limit the growth and adoption of Bitcoin. "New paper claims governments can run permanent deficits if consumers don’t adopt new money like Bitcoin. Fantasizes about 'legal prohibition' & extra taxes on BTC," Sigel commented.
This paper follows similar efforts from other financial institutions, including a recent report by the European Central Bank (ECB), which also raised concerns about Bitcoin's impact on fiscal policies and the economy. The ECB paper argued that Bitcoin holders profit at the expense of newer investors and called for legislation to prevent Bitcoin’s price appreciation or to eliminate it entirely.
As governments grapple with rising deficits—such as the U.S., which currently has a national debt exceeding $35 trillion—the debate over how to manage public finances in a world increasingly influenced by Bitcoin is expected to continue.
