Bitcoin, with its limited supply and decentralized nature, is disrupting traditional economic models and forcing some players to consider radical measures. It is in this context that the Federal Reserve Bank of Minneapolis recently released an explosive report which suggests that to maintain permanent deficits, governments should either tax or outright ban Bitcoin. Such a shocking statement comes as the United States is struggling to contain its national debt, which is reaching record levels, and the regulation of cryptos is becoming a sensitive subject.
Drastic recommendations from the Minneapolis Fed
In a report published on October 17, 2024, the Federal Reserve Bank of Minneapolis does not mince its words. To allow governments to maintain permanent deficits, Bitcoin must either be taxed or banned. “A legal ban against Bitcoin can restore the unique implementation of permanent primary deficits, just as a tax on Bitcoin would,” the report reads. This document is based on mathematical modeling which provides information on what the Fed calls a “balanced budget trap” caused by the existence of private assets like Bitcoin. In other words, the decentralized and fixed-supply nature of Bitcoin prevents states from effectively manipulating their public debt, forcing them to balance their books, a scenario that the Fed considers unsustainable in the long term.
The report is released in a context where the United States faces a national debt that exceeds $35.7 trillion, with a primary deficit that reaches $1.8 trillion. This situation is compounded by an increase in interest costs on debt, estimated at 29% for fiscal year 2024. According to the Fed, the rise of assets like Bitcoin represents a major obstacle to managing these deficits, through the creation of an attractive alternative to the traditional financial system, which justifies firm intervention.
Reactions and implications for the crypto sector
Reactions to the Minneapolis Fed report were not long in coming. Matthew Sigel, head of crypto research at VanEck, has denounced what he calls a coordinated attack on Bitcoin. “The Minneapolis Fed fantasizes about a legal ban and additional taxes on Bitcoin to ensure that government debt remains the only risk-free asset,” he said. This comment echoes similar positions currently being taken by the European Central Bank, which has also suggested that Bitcoin could be regulated in a way that slows its growth or even be eliminated from the traditional financial market.
Such recommendations raise further questions about the future of Bitcoin. While some see these calls for taxation or a ban as proof of the danger that crypto represents for existing financial systems, others believe that such regulation could on the contrary strengthen the adoption of Bitcoin as a active resistance against centralized finance. In the long term, this regulatory pressure could push Bitcoin to reposition itself as an escape tool in the face of inflationary monetary policies, or on the contrary slow down its adoption in jurisdictions where the authorities take repressive measures.
The Minneapolis Fed report takes the debate around crypto regulation to another level, as it openly calls for radical measures against Bitcoin to preserve the viability of public debts. However, the implications of such policies are far from simple. While some governments might be tempted to follow this path, the question remains: how far are they willing to go to counter the rise of cryptos? In the months and years to come, the battle between traditional finance and decentralized innovation will only intensify, and regulators will face a crucial choice: adapt or fight against a phenomenon that seems inexorable.
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