Minneapolis Fed researchers label Bitcoin a threat, suggest heavy taxation or banning

The Federal Reserve Bank of Minneapolis has recommended a tax or ban on Bitcoin. In a recently published working paper, the Minneapolis Fed described this as necessary for the government to maintain a permanent primary deficit.

According to the 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 will fix this problem.

It said:

“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”

This research abstract noted that in an economy where consumers have sufficient risk aversion, it is theoretically possible for the government to implement a permanent primary deficit. However, such implementation fails because of Bitcoin.

A primary deficit is when the government spends more than it generates in revenue, excluding interests on its debts. The US had a primary deficit of $1.13 trillion in the 2024 fiscal year, far below its national debt of $35.7 trillion.

By adding permanent, the researchers envision a scenario where the government plans to keep outspending its revenue annually. While this is possible, Bitcoin introduces a “balanced budget trap,” forcing the government to balance its budget.

Research describes Bitcoin as a useless piece of paper

Meanwhile, the paper described Bitcoin as “useless pieces of paper” because its value is not attached to tangible resources. The researchers noted that Bitcoin represents a “metaphor for a private-sector security that is in fixed supply and that is not a claim to any real resources.”

Despite describing Bitcoin as useless, the paper acknowledged that government securities are not different from Bitcoin as they also represent “a claim to nothing.” This comparison does not ignore that government stocks yield dividends, as the researchers noted that the government ends up printing “more claims to nothing at some rate that will be the nominal interest rate.”

With the comparison established between Bitcoin and government securities, the researchers fear that Bitcoin could become an alternative to government stocks. Hence, there is a need for a ban or tax.

It said:

“When there are laws against private-sector bubble assets, it is easy for the government to design policies that uniquely implement a permanent primary deficit, assuming there is enough idiosyncratic risk to make such deficits possible in the first place.”

However, the researchers noted that an outright ban is unnecessary as long as the government taxes Bitcoin at a large enough rate, enabling the continuous implementation of a permanent primary deficit.

Crypto community reacts to Central banks calling for Bitcoin ban

The Minneapolis Fed research comes only a few days after the European Central Bank (ECB) researchers called for a Bitcoin ban or cap on its prices. They claim that it causes unequal wealth distribution due to Bitcoin’s rise in value by enriching the early holders and making everyone else poorer.

Unsurprisingly, the crypto community has reacted, noting that it highlights how traditional financial systems see Bitcoin as a threat. Investment strategist Lyn Alden noted that this research might have finally revealed the unspoken concern of traditional financial systems about Bitcoin.

Meanwhile, VanEck’s Head of Research, Matthew Sigel, noted that the researchers only push for a ban or tax on Bitcoin so that government debt remains the only risk-free security. He added that the paper finally identifies a problem governments have been grappling with: consumers cannot keep funding government debts when there is an alternative asset to invest in.

However, some praised the paper as better technically than the ECB paper. A pseudonymous user on X Bitcoin Economist noted that the model proposed by the paper is likely correct but only reveals what has been known for a while.

He said:

“Technically much better paper. This model is likely correct but we have known this all along. This is the whole point – the problem is it will become more obvious BTC is the escape hatch. Gensler has always known this. Look at the Hilary speech. Same point.”

Meanwhile, others took the opportunity to refer to earlier works of the Minneapolis Fed, noting the bank’s change in tone. Messari co-founder Dan McArdle noted that the Fed published the “Money is Memory” paper in 1996, stating that the purpose of money should include the ability to keep records and track of all transactions, something Bitcoin has been able to achieve.