Fed And ECB Push For Bitcoin Ban To Enable Permanent Deficits

(October 22, 2024 - Jordan Finneseth)

(Kitco News) – After years of ignoring and belittling Bitcoin (BTC), and claiming that it is primarily a tool for criminals, the world’s two most prominent central banks have now come out even more forcefully against the top cryptocurrency, calling for high taxes or outright bans.

According to a new research paper from the Federal Reserve Bank of Minneapolis, Bitcoin’s impact on government fiscal policy is growing, and with the risks it poses to maintaining the sustainability of permanent budget deficits, the government should consider taxing or banning BTC.

“In an economy with incomplete markets and consumers who are sufficiently risk averse, we show that the government can uniquely implement a permanent primary deficit using nominal debt and continuous Markov strategies for primary deficits and payments to debtholders,” authors Amol Amol and Erzo G.J. Luttmer wrote. “But this result fails if there are also useless pieces of paper (Bitcoin for short) that can be traded.”

“If there is trade in Bitcoin, then there is no continuous Markov strategy for the government that leads to unique implementation,” they said. “Instead, there is a continuum of equilibria with distinct real allocations in which the price of Bitcoin converges to zero.”

Primary deficits occur when a government spends more than it collects in taxes and other revenue, excluding interest payments on its debt. A “permanent primary deficit” means the government plans to continue spending more than it collects indefinitely.

Said another way, the “balanced budget trap” is a state in which the government is forced to establish a balanced budget, which hinders its ability to spend beyond the income generated through taxation. Without Bitcoin as a competing currency, the authors argue that debt can increase indefinitely.

The analysis describes Bitcoin as a “private security with a fixed supply” not tied to real resources and suggests that taxation or a ban could mitigate the potential problem of limited spending.

Enforcing a legal prohibition could help restore the possibility of maintaining permanent primary deficits, the authors suggested, as could the imposition of a tax on Bitcoin, so long as the tax was high enough.

The report from Amol and Luttmer included pages of equations and graphs where they laid out their argument from a mathematical and hypothetical standpoint before ultimately concluding that “When there are laws against private-sector bubble assets, it is easy for the government to design policies that uniquely implement a permanent primary deficit, assuming there is enough idiosyncratic risk to make such deficits possible in the first place.”

“An outright ban is not necessary if the government can tax private-sector bubble assets at the rate (r-g) > 0. Without such taxes, Markov strategies can only implement permanent primary deficits if they are discontinuous,” they said. “For continuous Markov strategies, and absent a large enough tax on Bitcoin, unique implementation is not possible.”

“There is always a balanced budget trap and a continuum of equilibria near the targeted steady state,” they concluded. “The determinacy result of the fiscal theory of the price level comes with caveats when the government plans to run a permanent primary deficit.”

ECB joins the bash-Bitcoin bandwagon

The Fed paper follows another research paper released by the European Central Bank (ECB) that called for a ban on Bitcoin to stop its price growth, which the authors argue is leading to a social divide.

“The original promise of Nakamoto (2008) to provide the world with a better global means of payment has not materialized,” authors Ulrich Bindseil and Jürgen Schaaf wrote. “Instead, the focus has increasingly shifted to Bitcoin as an investment asset promising high capital gains. Promoters of this investment vision put little effort relating Bitcoin to an economic function which would justify its valuation.”

“While most economists argue that the Bitcoin boom is a speculative bubble that will eventually burst, we analyse in this paper the impact of a Bitcoin-positive scenario in which its price continues to rise in the foreseeable future,” they added. “What sounds intuitively promising or at least not harmful is problematic: Since Bitcoin does not increase the productive potential of the economy, the consequences of the assumed continued increase in value are essentially redistributive, i.e. the wealth effects on consumption of early Bitcoin holders can only come at the expense of consumption of the rest of society.”

“If the price of Bitcoin rises for good, the existence of Bitcoin impoverishes both non-holders and latecomers,” they argued. “While previous discussions on the redistributive effects of Bitcoin assumed that badly timed trading was a necessary condition for losses, this paper shows that neither poor timing of trades nor holding Bitcoin at all are necessary for impoverishment under a Bitcoin-positive scenario.”

Similar to the paper from the Fed, Bindseil and Schaaf called for Bitcoin to be heavily regulated or potentially banned, warning that earlier acquisition of Bitcoin at lower market prices will lead to an unequal distribution of wealth and potential social instability.

To prevent this outcome, the paper calls for the creation of legislation that “prevents Bitcoin’s price from rising or [makes] Bitcoin disappear altogether.”

The authors used the rising stature of Bitcoin in the U.S. election as support for their argument.

“The evolution of Bitcoin's price, lacking a stable intrinsic anchor, is heavily influenced by government attitudes and actions, including regulatory measures, legislation, and the potential establishment of a Bitcoin reserve – although this reliance on government obviously undermines the original concept of Bitcoin's independence from public policies and government intervention,” they wrote. “In a democratic context, where politicians are accountable to voters, this dependency implies that attitudes toward Bitcoin could sway election outcomes.”

“The ongoing U.S. presidential election campaigns illustrate strong efforts of some candidates to win over crypto voters,” they noted. “Early adopters have a vested interest in promoting Bitcoin values to redistribute wealth and consumption from Latecomers to themselves, maybe without being conscious of the redistributive nature of their vision.”

“In any case, current non-holders should realize that they have compelling reasons to oppose Bitcoin and advocate for legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear altogether,” they said. “Latecomers and non-holders and their political representatives should emphasize that the idea of Bitcoin as an investment relies on redistribution at their expense. Failing to do so could skew election results in favour of politicians who advocate pro-Bitcoin policies, implying wealth redistribution and fuelling the division of society.”

Early Bitcoin proponents have long touted BTC as offering the best wealth accumulation opportunity in a generation and predicted its price would continue to rise in a world of endless debt printing. Now, the authors are using that point to back up their argument calling for a ban, essentially saying that it’s unfair for the people who took the risk and saw the opportunity early on to capitalize on their foresight.

“[T]he sharing of real wealth has shifted from the Latecomers to the Early Birds and will remain as legacy of the initial disparity in Bitcoin holdings,” they wrote. “These redistributive effects can be significant in a long-term scenario characterized by ever-increasing Bitcoin prices.”

“The new Lamborghini, Rolex, villa, and equity portfolios by early Bitcoin investors do not stem from an increase in the economy’s production potential; rather, they are financed by diminishing consumption and wealth of those who initially do not hold Bitcoin,” they argued. “It’s like filling one bucket by draining water from another — the latecomers have to give up for the benefit of the early holders.”

“Thus, ‘missing out’ on Bitcoin is not merely a lost opportunity for wealth accumulation, but means real impoverishment compared to a world without Bitcoin,” they said. “This redistribution of wealth and purchasing power is unlikely to occur without detrimental consequences for society. Even if the Latecomers cannot attribute their loss of purchasing power, they will feel a malaise and frustration, that will contribute further to an ever more split society.”

Pushback from the crypto community

The response from the crypto community has been fierce, with most highlighting that the ideas put forward by Bindseil and Schaaf that current buyers would prosper at the expense of future investors or non-bitcoin holders could be applied to any financial asset, and instead see it as an attack on Bitcoin and crypto because they are not under the control of central banks.

“This new paper is a true declaration of war: the ECB claims that early #bitcoin adopters steal economic value from latecomers,” tweeted Tuur Demeester, an analyst and advisor for Blockstream. “I strongly believe authorities will use this Luddite argument to enact harsh taxes or bans.”

“Rather than praising Bitcoin as a tech paradigm shift à la petroleum and the internet, the authors introduce the blatantly Luddite argument that ‘early adopters’ ... ‘increase their real wealth and consumption’ ... ‘at the expense of [latecomers],’” he added. “Then they go on to brazenly advocate for legislation ... ‘to prevent bitcoin prices from rising or to see bitcoin disappear altogether’ in order to prevent ‘the division of society.’”

“In all the years I've been monitoring the Bitcoin space, this is by far the most aggressive paper to come from authorities,” Demeester said. “The gloves are off. It's clear that these central bank economists now see Bitcoin as an existential threat, to be attacked with any means possible.”

“Many of us have warned that this was coming: Bitcoin as a major political fault line both in national and international elections. Well here it is. It means that us HODLers must take action to ensure that governments respect our basic right to hold property,” he concluded. “And no, this won't be a war between haves and have-nots. Rather this will be a historic clash between those who stand for the natural rights of the individual, and those who clutch at the failed ideologies of collectivism and central planning.”

The response to the Fed report was similar, with many deriding the central bank's calls for permanent deficits, and highlighting that this is precisely the reason why Satoshi Nakamoto created Bitcoin in the first place.