30s Summary

A study by the Federal Reserve Bank of Minneapolis suggests Bitcoin could force governments into a ‘balanced budget trap’, whereby they must balance their budgets due to inability to manage primary deficits, which occur when governments spend more money than they earn. Bitcoin’s existence and its status as a fixed supply private-sector security could necessitate its banning or taxing in order to resolve constant deficits. Responses to the study varied, with some criticizing potential regulation or banning of Bitcoin, and others citing past reports endorsing Bitcoin. The European Central Bank has also argued for regulation or banning of Bitcoin to stop its price rise.

Full Article

Looks like Bitcoin may cause trouble for the government if it doesn’t start taxing it or ban it altogether, according to a recent study by the Federal Reserve Bank of Minneapolis.

Whenever a government is constantly spending more money than it makes, it deals with an issue known as a primary deficit. Because Bitcoin exists, governments could be forced to balance their budgets, a situation the Minneapolis Fed refers to as a ‘balanced budget trap’.

Bitcoin was used in the research as an example of ‘private-sector security’ with a fixed supply. According to researchers, it potentially has to be banned or taxed to solve the problem of dealing with constant deficits.

A primary deficit is basically when governments spend more than they earn through taxes and other sources of income. When a government plans on doing this forever, they term it as a ‘permanent’ primary deficit.

At this point, the United States has accumulated a ginormous debt of $35.7 trillion. The annual gap between spending and tax revenue, a.k.a the primary deficit, is right now around $1.8 trillion.

Surprisingly, most of the deficit happened outside the COVID-19 era. Higher interest costs for Treasury debt due to higher rates resulted in a whopping 29% increase to $1.13 trillion.

Head of VanEck’s digital asset research, Matthew Sigel, criticized the Fed’s paper stating that the Minneapolis Fed, along with the European Central Bank, is going after Bitcoin and fantasizes about banning it and placing additional taxes on it.

In the meantime, Dan McArdle, the co-founder of Messari, found an old Minneapolis Fed paper from 1996 which argued in favor of Bitcoin.

On a different note, the ECB recently released a paper claiming that older Bitcoin holders are making money while newer ones suffer. It suggests that Bitcoin should be regulated to stop its price from increasing or it should be completely banned.

Source: Cointelegraph