The last-minute cryptocurrency provisions added to the United States infrastructure bill sought to “capture DeFi,” argues Compound general counsel Jake Chervinsky.
Appearing on the Bankless State of the Nation podcast on Tuesday, Chervinsky — who is also DeFi chair of the Blockchain Association — said the industry had been “blindsided” by the infrastructure bill’s crypto tax provisions that were announced just nine days prior to when it was expected to pass through the Senate.
While Chervinsky seemed willing to give most elected officials the benefit of the doubt, noting that previous discussions surrounding the infrastructure bill had “nothing to do with crypto,” he attributed more sinister motives to the Treasury Department’s role in influencing the legislative process.
Conceding he may have donned a “tin-foil hat,” Chervinsky argued that the Treasury Department was looking for an alternate way to invoke the harsh reporting requirements former Treasury Secretary Steve Mnuchin had sought to impose on self-custodied crypto wallets.
“This is all about DeFi [...] This is the Treasury Department trying to work out how to get jurisdiction over DeFi [...] and also expand its warrantless surveillance over a peer-to-peer financial system.”
Chervinsky stated he was informed that the Treasury Department had initially opposed exempting network validators and software developers from stringent third-party reporting requirements under the bill, as it was concerned the altered legislation would not “adequately capture DeFi.”
“That’s why we couldn’t get the language changed to only capture the centralized exchanges,” he concluded:
“We found out very quickly that it wasn’t just a senator’s misunderstanding [...] The Treasury Department had played an important role in drafting the language and also [ensuring] that any revision we proposed was going back to the Treasury Department for their approval or rejection.”
Chervinsky’s understanding is that Treasury feared the industry would argue that decentralized exchange liquidity providers and other decentralized finance (DeFi) participants are involved in validating transactions and should therefore be exempted from the regulation.
“As I understand it, that’s why we then got a competing amendment that specifically said the exemption is only for proof-of-work miners,” Chervinsky added.
“The idea that you would carve out an exemption for what is viewed as the really bad, horrible climate change-causing, ocean-boiling proof-of-work mining but then not have that exemption for proof-of-stake validators just made absolutely no sense.”
Despite the Treasury Department backing down on its position after realizing it could not “steamroll the industry,” Chervinsky emphasized he was concerned unelected Treasury officials have too much influence on the legislative process.
“The idea that secretly, behind the scenes, it isn’t senators we’re negotiating with [...] it’s some unknown bureaucrat buried in the Treasury Department — to me, that’s a deeply troubling situation to be in,” he said.
But Chervinsky celebrated the achievements of the crypto lobby in pushing back against the provisions:
“The entire industry basically without exception banded together to fight this [...] Yes, this bill is a threat, but more important [...] was how effectively the industry was able to rally and defend itself in D.C.”