Back in August, there were some dire warnings about what the Biden Administration’s proposed infrastructure bill might do to the cryptocurrency and blockchain sector by driving crypto miners out of the United States, crippling America's leadership role, etc. In response, the crypto industry mobilized a full-court-lobbying press on lawmakers. However, it was too late to excise the troubling digital-asset language, and, in November, the infrastructure bill was signed into law.
The good news is that the infrastructure law won’t take effect until January 2024, which allows lots of time to patch up its shortcomings. The downside is that its worrisome aspects — particularly an expanded definition of who or what is a “broker” and some new digital-asset reporting requirements — haven’t gone away. As Charles Hoskinson, founder of Cardano, noted in mid November shortly after the bill’s signing, the “bad [crypto] language” is now enshrined in law.
More recently, Kristin Smith, executive director of the Washington-based Blockchain Association, told Cointelegraph: “We remain concerned with the lack of clarity of the broker provision in the now-signed infrastructure bill. [...] If the provision remains unchanged, it could have a detrimental impact on the growth of the U.S.-based mining sector.”
There were moments in the past three months when it sounded like the sky might be falling because of the pending U.S. legislation. “It will be a stunning loss for America and our ability to remain the innovation epicenter of the world,” forewarned venture capital firm Andreessen Horowitz. But, things don’t seem so agitated now.
There are indications on both the regulatory and legislative fronts that the bill’s potentially negative effects might soon be mitigated. Several amendments have been introduced in Congress, and the U.S. Treasury Department appears to be listening seriously to the industry’s objections. In retrospect, were some of those ominous warnings overdone?
“There was a lot of initial concern over which crypto-related entities — miners, exchanges, open source software devs, self-custody wallet developers, etc. — would be included in the ‘broker’ language,” Will Evans, managing director in the U.S. for CEX.IO cryptocurrency exchange, told Cointelegraph. “However, the [U.S.] Treasury [Department] followed up by saying the language only applies to those ‘who can comply,’ which excludes miners, hardware devs, and the like” — though it still includes crypto exchanges and some investors. Evans added:
“While all entities in the cryptosphere aren’t out of the woods, the number originally thought to be impacted is seemingly mitigated.”
Chris DePow, senior adviser for financial institution regulation and compliance at Elliptic, told Cointelegraph that’s “it's still too early to tell what the big-picture knock-on effects might be,” though as with any new regulatory initiatives, one has to consider its impact on continued technological innovation. “We remain cautiously optimistic that some of the more challenging parts of the infrastructure bill related to crypto will be ironed out over time through guidance letters and regulatory commentary.”
“Concerns about the workability of the proposed reporting rules are absolutely valid,” Olya Veramchuk, director of Tax Solutions at Lukka, a crypto data and software provider, told Cointelegraph, adding that even though the law’s provisions don’t go into effect until 2024. “The crypto community has limited time to continue the dialogue with the regulators at the Treasury Department to create workable, practical rules and guidance.”
Veramchuk was asked about the most disturbing aspect of the law, its overly broad definition of a “broker?” The $10,000 crypto transaction reporting requirement for businesses? For her: “Without the appropriate guidance from the Treasury, both reporting provisions could extend past the intended use case.” She added further that, “this broad definition could mean that individuals have to meet reporting requirements intended for brokers, which is not a productive solution to address reporting.”
A potential felony
Abraham Sutherland, adjunct professor at the University of Virginia School of Law, told Cointelegraph that the law’s amendment to tax code section 60501 is “a major threat to digital assets.” The law would require “any person” who receives more than $10,000 in digital assets to verify the sender’s personal information, including Social Security number, and sign and submit a report to the government within 15 days, according to Sutherland. Failure to comply could be a felony.
“Miners, stakers, lenders, decentralized application and marketplace users, traders, businesses and individuals are all at risk of being subject to this reporting requirement, even though in most situations the person or entity in the receipt is not in the position to report the required information," wrote Sutherland in a September report.
Referencing recent legislative efforts in Washington to temper effects of the law — like Rep. Patrick McHenry’s “Keep Innovation in America Act” introduced on Nov. 17 — Sutherland told Cointelegraph that the bi-partisan effort “should be something for the industry to rally around because it forces the issue to be debated.”
“The biggest fear rests in forcing fiat to crypto — and crypto to fiat — ramps into dated regulatory molds that don’t take the nuances of the ecosystem into consideration,” said Evans, adding: “Most of the concern here for investors and exchanges pertains to reporting losses, gains and cost bases. As an exchange, it can be difficult to accurately define a client’s cost basis if they use a self-custody wallet and DeFi applications; and it can be difficult for investors to accurately arrive at a value for their losses and gains in the same instance.” Wrongly reporting these types of things, even by accident, can have huge consequences for all parties, he added.
Are remedies at hand?
Could key crypto provisions still be modified in the implementation period, i.e., as regulations are developed, published and commented upon? Alternatively, are there other legislative options that seem promising?
There is still plenty of time to adjust to how the law is shaped before first reporting is due, answered Evans. As noted, the Treasury Department is looking at provisions in the bill and industry lobbyists are still engaged.
“Coinbase spent nearly $800,000 last quarter on lobbying, and other groups have also amped up spending by 50% to 100% over the same time period,” continued Evans. “The culmination of all of this will certainly come with modifications to some extent over the implementation period.”
“It’s important that the legislators work to modify the law so that only those entities or individuals who are truly responsible for conducting crypto activity on behalf of a third party are covered,” said DePow. Meanwhile, U.S. Senators Lumis and Wyden, “both strong advocates on this front,” are working on an amendment to modify the language in the law.
Smith added that her group was “encouraged by recent developments at the IRS and at Treasury, indicating they may take an amenable view of the issue during the rulemaking process,” while Veramchuk noted that tax law and regulations “are always a work in progress, and Congress will undoubtedly be looking for opportunities to provide clarity as rules are established.”
There was concern that the law could set back crypto and blockchain innovation in the U.S., especially at a critical time when China — its top global rival — appears to be yielding some ground in the crypto competition.
Rep. McHenry alluded to something of the sort in his bill, suggesting the U.S. had an opportunity to steal a step on the Chinese, as it were, if it managed its crypto regulation wisely:
“The Chinese government’s recent ban of cryptocurrency transactions provides the United States an opening to further enhance its role as the leading nation in the development of innovative blockchain technologies. Providing clear rules for both consumers and developers of digital assets is essential to taking advantage of this opportunity.”
Meanwhile, Smith warned that “punishing this still-nascent industry with short-sighted rules only threatens the crypto economy’s potential growth and, as a result, our nation’s global lead in innovation.”
“It’s important to note that crypto is a global phenomenon,” declared Evans. “Passing laws that close the U.S. off from positive developments that originate outside its borders can harm the industry and the country alike,” adding:
“This is the first time crypto is having impactful regulation applied to it and it’s being done through the backdoor of a mostly unrelated bill.”
A long-term win for crypto?
Putting aside for a moment the troublesome language and unwieldy crypto reporting requirements, are there any positives for the crypto and blockchain community in the law?
“The introduction of this bill is forcing regulators to take a deeper look at crypto,” said Evans, adding further: “Objectively speaking, major U.S. regulating bodies are looking to really understand the industry for the first time.” Establishing regulations for matters like tax obligations and the purchasing and reporting of crypto might also encourage new market participants, he opined.
“Many industry participants view the need for regulation as a sign that crypto and other digital assets are here to stay, and it’s a great perspective to maintain,” added Veramchuck. “Although not without growing pains, the benefits of a good regulatory structure in place would far outweigh the burdens.”
“The bill’s goals of transparency and consumer protection will likely help build confidence in crypto,” said DePow. It may even help to expand the industry by “providing retail and institutional investors assurance that they are not doing business in the ‘Wild West,’ but rather are engaging with a well-regulated and secure part of the broader FinTech sector,” according to him.
In sum, the crypto industry doesn’t want to take its foot off the pedal with regard to this landmark U.S. legislation. The default — if nothing more happens — is a regulatory mishmash and would sow confusion in the blockchain industry in the U.S. More regulatory clarity is needed.
But, a longer view is useful too. In casting its glance upon digital assets, however fleeting, U.S. lawmakers have tacitly acknowledged that this nascent technology has a long-term place in the infrastructural landscape, a significant concession.