- The Fed claims Bitcoin weakens government spending and fiscal policy.
- Critics claim that the idea is an attack on Bitcoin and decentralized finances.
The Federal Reserve Bank of Minneapolis proposed banning or taxing Bitcoin as a means of maintaining chronic budget deficits. In a working paper published on October 17, the Minneapolis Fed warned that Bitcoin disrupts fiscal policy by creating a balanced budget trap. This forces governments to balance their budgets, restricting their ability to sustain long-term deficits.
The research paper classifies Bitcoin as a private-sector security with no claims to real resources. Bitcoin’s limited supply limits a government’s capacity to change spending to meet deficit demands. According to the Minneapolis Fed, establishing a legal prohibition or taxing Bitcoin might relieve this issue, allowing governments to continue spending more than they collect in taxes while effectively managing fiscal deficits.
A primary deficit occurs when a government’s spending exceeds its tax receipts, excluding interest on debt. The proposal suggests that maintaining budgetary flexibility requires a persistent primary deficit. The United States currently has a national debt of $35.7 trillion and a primary deficit of $1.8 trillion.
Global Debate on Bitcoin Regulation Intensifies
The decision attracted immediate criticism from cryptocurrency proponents. Matthew Sigel, VanEck’s head of digital asset research, blasted the document, alleging that the Federal Reserve’s advice is specifically aimed against Bitcoin. He contends that the proposal to ban or tax Bitcoin is part of a larger campaign to restrict decentralized financial systems.
Dan McArdle, Messari’s co-founder, highlighted a 1996 Minneapolis Fed piece that predicted many of Bitcoin’s features before it was created. That study defined money as an item with a fixed supply that does not enter production, a concept remarkably similar to Bitcoin’s structure.
The Minneapolis Fed’s proposal follows recent criticism from the European Central Bank. The European Central Bank has urged regulators to either regulate or ban Bitcoin, highlighting that its structure allows early adopters to profit disproportionately, often at the expense of newer investors.
As conflicts about Bitcoin’s role in fiscal policy continue, tensions between decentralized cryptocurrencies and centralized fiscal governance become more acute, with potentially far-reaching consequences for both. At the time of writing, BTC is trading at $67K and has declined to 0.87%. In the last 24 hours, Bitcoin has experienced a bull run and nearly hit $ 70K.
