Summary:
Federal Reserve and ECB propose banning Bitcoin to address budget deficits.
Bitcoin creates a balanced budget trap for governments.
ECB economist warns of societal impacts from Bitcoin's rising prices.
Critics in the crypto community see these proposals as an attack on Bitcoin.
Experts predict Bitcoin could reach $2.9 million by 2050 despite regulatory pressures.
Industry experts are calling the recent regulators' paper one of the most aggressive in recent history. The Federal Reserve Bank of Minneapolis and European Central Bank (ECB) economists have made bold proposals aimed at potentially "eliminating" Bitcoin.
Feds Propose Bitcoin Ban
On October 17, the Federal Reserve Bank of Minneapolis released a paper suggesting that banning Bitcoin and imposing taxes on it could help governments sustain ongoing budget deficits.
A primary deficit occurs when government spending exceeds revenue, excluding interest payments on existing debt. The paper emphasizes the notion of a “permanent” primary deficit, where governments intentionally continue outspending indefinitely.
The researchers argue that Bitcoin creates a “balanced budget trap”, forcing governments to balance their budgets. Its decentralized nature is viewed as a challenge to fiscal policy, particularly for governments wanting to maintain permanent deficits. With its fixed supply and links to natural resources, Bitcoin acts as an alternative financial asset, complicating traditional fiscal strategies.
The paper suggests either banning Bitcoin or introducing taxes as a form of financial repression, stating:
“A legal prohibition of bitcoin or a tax on bitcoin are forms of financial repression that may be useful when the ability of the government to use consumption taxes is limited.”
ECB Economist Warns of Bitcoin’s Societal Impact
On October 20, ECB economist Jürgen Schaaf raised concerns regarding the rising price of Bitcoin, arguing it disproportionately benefits early adopters. He warned that latecomers or non-holders could face significant economic disadvantages.
“The societal impact is real: “missing out” on Bitcoin is different than just a lost opportunity; it means actual impoverishment compared to a world without Bitcoin.”
Schaaf suggested that non-holders should recognize that Bitcoin’s growth is fueled by wealth redistribution, which occurs at their expense. He called for policies to curb BTC’s expansion or eliminate it, warning that pro-Bitcoin politicians could skew wealth distribution further, threatening societal stability.
Crypto Industry Responds
These reports have ignited reactions from the crypto community, with several experts viewing them as a direct attack on Bitcoin. Matthew Sigel, Head of Digital Assets Research at VanEck, remarked that the Minneapolis paper signifies an escalated effort to target Bitcoin.
Despite the proposals, Sigel maintains that they do not alter VanEck’s forecast of Bitcoin adoption by central banks in the future. In July, VanEck predicted Bitcoin could reach $2.9 million by 2050, becoming integral to the global financial system.
Bitcoin analyst Tuur Demeester expressed concern about the ECB’s paper, warning it could lead to stricter taxation and regulation of cryptocurrencies. He stated:
“In all the years I’ve been monitoring the bitcoin space, this is by far the most aggressive paper to come from authorities. The gloves are off.”
[Editor’s Note: Over 57% of all Bitcoin is held by private individuals, while governments own roughly 2%. Attempts to ban Bitcoin in the past have failed to hinder its growth due to its security design.]
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