As a seasoned analyst with years of experience navigating the dynamic world of finance and technology, I find myself at odds with the recent suggestions by the Federal Reserve Bank of Minneapolis to ban or heavily tax digital assets like Bitcoin.
According to a recent study published by the Federal Reserve Bank of Minneapolis, they propose that digital assets such as Bitcoin may need to be prohibited in order for governments to effectively manage their ongoing budget shortfalls. In their recently released report on October 17th, the Minneapolis Fed argues that in economies where governments attempt to sustain a constant deficit through nominal debt, the existence of Bitcoin can cause complications.
The Federal Reserve pointed out that Bitcoin could potentially lead governments into a “balanced budget dilemma,” requiring them to maintain a balanced budget. To illustrate, they used Bitcoin as an example of a “fixed-supply financial asset” without any “underlying real assets.” They proposed either prohibiting it or imposing taxes to tackle this problem. Furthermore, they provided the following details about Bitcoin:
Restricting the use of Bitcoin or imposing taxes on it could encourage governments to adopt singular strategies for perpetual budget deficits.
Managing Primary Deficit
A primary deficit arises when a government’s expenditures exceed its income from taxes and other non-debt-related sources. It’s important to note that “permanent” in this context refers to a situation where the government consistently spends more than it collects over an extended period, essentially planning for ongoing overspending.
To date, the national debt of the United States amounts to approximately $35.7 trillion. At present, the annual discrepancy between income from taxes and spending, often referred to as the primary deficit, is roughly $1.8 trillion. According to a recent report by Reuters dated October 19, the main cause of the projected fiscal deficit for 2024 – the largest outside the COVID-19 era – is an increase in interest costs for Treasury debt, which reached $1.13 trillion. This surge was primarily due to rising interest rates and increased borrowing.
Matthew Sigel, who leads digital asset research at VanEck, made a remark about the paper on October 21st, emphasizing that the Minneapolis Federal Reserve shares similar criticisms of Bitcoin as the European Central Bank. Additionally, he mentioned:
Dreams of making Bitcoin subject to legal restrictions and imposing additional taxes, believing this would help keep government debt as the sole ‘risk-free investment.’
Instead, Dan McArdle, co-founder of Messari, referenced a paper published by the Federal Reserve Bank of Minneapolis in 1996. This paper, known as the “Minneapolis Fed Paper,” was released 12 years before the creation of Bitcoin and characterizes money as an item that does not undergo production, has a fixed supply, and serves as a primitive form of memory.
Last week, on October 12th, a paper was published by the European Central Bank (ECB) stating that long-term Bitcoin holders have been gaining advantage over newer investors. The paper proposed either regulating Bitcoin to prevent price hikes or banning it entirely due to concerns about wealth redistribution at the expense of non-holders. Jürgen Schaaf, an ECB senior management adviser, supported this stance by saying, “It’s important for non-Bitcoin holders to understand that its rise is based on wealth redistribution happening at their expense. There are strong arguments in favor of policies aimed at limiting or eliminating Bitcoin altogether.
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2024-10-21 13:45