A recent paper by the Federal Reserve Bank of Minneapolis suggests that assets like Bitcoin may need to be taxed or banned for governments to sustain ongoing budget deficits. The study, published on Oct. 17, argues that Bitcoin creates challenges for policy implementation in economies where governments rely on permanent deficits funded by nominal debt.

The report describes Bitcoin as contributing to a “balanced budget trap,” a situation where the government is forced to balance its budget. The researchers used Bitcoin as an example of a fixed-supply private asset that lacks real resource claims. To resolve this issue, they proposed banning or taxing Bitcoin, stating, “A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”

A primary deficit occurs when a government’s spending exceeds its revenue, excluding interest payments on debt. The term “permanent” implies that the government plans to continue spending more than it collects indefinitely. Currently, the U.S. national debt stands at $35.7 trillion, with the primary deficit— the annual gap between spending and revenue— around $1.8 trillion. Reuters reported on Oct. 19 that a 29% increase in interest costs for Treasury debt was the main contributor to this year’s deficit, the largest outside of the COVID-19 period.

Commenting on the paper, Matthew Sigel, head of digital asset research at VanEck, noted on Oct. 21 that the Minneapolis Fed has joined the European Central Bank in targeting Bitcoin, suggesting that the Fed “fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’”

Messari co-founder Dan McArdle highlighted a 1996 Minneapolis Fed paper titled “Money is Memory,” which interestingly made arguments aligned with Bitcoin’s characteristics, defining money as an object that does not “enter production,” has a “fixed supply,” and functions as a form of memory.

The European Central Bank (ECB) has also recently scrutinized Bitcoin. On Oct. 12, the ECB released a paper alleging that older Bitcoin holders profit at the expense of newer ones and suggested regulating or banning Bitcoin to prevent its price from rising. ECB adviser Jürgen Schaaf echoed these sentiments on Oct. 20, advocating for policies to curb Bitcoin’s growth or eliminate it entirely.