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With its limited supply and decentralized nature, Bitcoin is disrupting traditional economic models and forcing some players to consider radical measures. In this context, the Federal Reserve Bank of Minneapolis recently released an explosive report suggesting that in order to maintain permanent deficits, governments should either tax or outright ban Bitcoin. Such a shocking statement comes at a time when the United States is trying to reduce its national debt, which is reaching record levels, and the regulation of cryptocurrencies is becoming a sensitive issue.
Drastic recommendations from the Minneapolis Fed
In a report released on October 17, 2024, the Federal Reserve Bank of Minneapolis doesn’t mince its words. In order for governments to run permanent deficits, bitcoins must be taxed or banned. “Bitcoin’s legal ban can restore a unique implementation of permanent primary deficits, just as a bitcoin tax would,” the report said. The paper is based on mathematical modeling that provides insights into what the Fed calls the “balanced budget trap” caused by the existence of private assets like Bitcoin. In other words, the decentralized, fixed-supply nature of Bitcoin prevents states from effectively handling their public debt, forcing them to balance their books, a scenario the Fed considers unsustainable in the long term.
The report comes as the United States faces a national debt that exceeds $35.7 trillion, with a primary deficit of $1.8 trillion. This situation is exacerbated by the increase in interest costs on debt, which is estimated to be 29% for fiscal year 2024. According to the Fed, the rise of assets such as Bitcoin is the main obstacle to managing these deficits by creating an attractive alternative to the traditional financial system that justifies solid hits.
Reaction and implications for the crypto sector
Reactions to the Fed’s report from Minneapolis did not take long. Matthew Sigel, head of cryptocurrency research at VanEck, has condemned what he calls a coordinated attack on Bitcoin. “The Minneapolis Fed is fantasizing about legal ban and additional taxes on Bitcoin to ensure that government debt remains the only risk-free asset,” he said. The comment echoes similar positions currently 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 removed from the traditional financial market.
Such recommendations raise further questions about the future of Bitcoin. While some see these calls for taxation or banning as evidence of the danger the cryptocurrency poses to existing financial systems, others believe that such regulation could instead boost Bitcoin’s adoption as an active resistance to 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 policy or, conversely, slow its adoption in jurisdictions where authorities are taking punitive measures.
The Minneapolis Fed’s report takes the debate surrounding cryptocurrency regulation to another level as it openly calls for radical measures against Bitcoin to keep public debt viable. However, the consequences of such policies are far from simple. While some governments might be tempted to go this route, the question remains: how far are they willing to go to counter the rise of cryptocurrencies? In the coming months and years, the battle between traditional finance and decentralized innovation will only intensify, and regulators will face a crucial choice: adapt to a phenomenon that seems inexorable, or fight it.
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A graduate of Sciences Po Toulouse and holder of the blockchain consultant certification issued by Alyra, I joined the Cointribune adventure in 2019. Convinced of the potential of blockchain to transform many sectors of the economy, I made a commitment to raise awareness and inform the general public about this ever-evolving ecosystem. My goal is to enable everyone to better understand blockchain and take advantage of the opportunities it offers. I strive every day to provide an objective analysis of current events, decipher market trends, convey the latest technological innovations, and put into perspective the economic and social issues of this ongoing revolution.
DISCLAIMER OF LIABILITY
The comments and opinions expressed in this article are solely those of the author and should not be considered investment advice. Before making any investment decision, do your own research.
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