US Congress Fires Opening Shot on Cryptocurrencies
- The long-awaited regulatory offensive on cryptocurrencies has begun
- The crypto community was involved in its first major political battle, this month, as the US Senate introduced new reporting requirements as part of the $1tn Infrastructure Investment and Jobs Act
- The response from the crypto community sparked a political drama that unfolded until the final vote on the bill
- The new requirements may have important consequences for crypto operators in the US
- The legislative process is not over as the bill moves to the House of Representatives
It was a matter of time before the US government expanded its regulatory reach into cryptocurrencies. Murmurs of a regulatory framework have been around since at least 2013. These murmurs became louder and better-defined with the advent of the Biden administration this year.
In the American Families Plan Tax Compliance Agenda released in May, the US Treasury mentioned crypto assets as part of narrowing the tax gap. The tax gap is the difference between the taxes the government receives and the amount it is legally owed.
The IRS started putting pressure around the same period. In May, they received court authorisation to seek out the identities of taxpayers who carried out transactions worth at least $20,000 on Kraken between 2016 and 2020. This followed a similar ruling against Coinbase a few years earlier. On June 8th, in a Senate Finance Committee hearing, Republican Senator Rob Portman of Ohio asked Charles Rettig, the Chairman of the IRS, what further tools he required. In response, Rettig requested additional Congressional authority to strengthen their efforts in collecting taxes on crypto assets.
In July, the Chairman of the Federal Reserve also expressed a desire for further regulation in the crypto space and, in early August, the chair of the SEC called for more regulations of the ‘Wild West’ of cryptocurrencies. By the time the infrastructure bill was introduced, the White House, Treasury, IRS, SEC and Federal Reserve were in lockstep regarding further crypto regulation. The political stage was set.
Senator Rob Portman, the same senator who induced Rettig into asking for more congressional authority, drafted the infamous provision regarding cryptocurrency reporting and included it into the 2,700-page infrastructure bill at page 2,433. The poorly drafted provision implies that a whole range of actors in the crypto space will be caught up in the regulatory dragnet the various agencies will have crafted for themselves.
As per section 80603 (a)(3) of the bill, a ‘broker’ subjected to these new reporting requirements includes ‘any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.’ This ill-conceived definition broadens the term to include almost anyone involved in the handling and mining of cryptocurrencies, including those who have no access to information regarding the parties executing transactions. It could thus include developers, miners, validators, stakers and node operators in addition to what are regularly considered to be financial intermediaries and brokers. The phrasing of the provision seems to reflect no understanding of how a decentralized financial network operates.
This provision stirred an immediate and forceful reaction from a wide-ranging cast of characters in the crypto space from Jack Dorsey to Andreesen Horowitz, Elon Musk and Gene Simmons. If the crypto community was surprised by the inclusion of the reporting provision in the infrastructure deal, it is safe to say that the Washington was equally surprised by the blowback. In addition to mobilising public support, the crypto industry was able to unleash the growing lobbying infrastructure they have been building over the past year.
In response, one of the nearly 300 amendments tabled for the bill was put forward by a bipartisan group of senators. Democrat Senator Ron Wyden was joined by Republican colleagues Lummis and Toomey to rein in the provision and limit it to the traditional interpretation of financial brokers. This new definition would only include ‘businesses who conduct transactions on exchanges where consumers buy, sell and trade digit assets.’
Republican Senator Pat Toomey of Pennsylvania accompanied this initiative with a short, yet powerful statement that said ‘Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences… Simply put, the text is unworkable.’
One of the co-sponsors of the amendment, Republican Senator Ted Cruz, added to the offensive with an impassioned speech on the Senate floor. He implored his colleagues to reach a ‘brief, shining moment of common sense’ and reconsider this ‘devastating new regulation’. He resumed the issue in a simple question: ‘Do we destroy cryptocurrencies - Yes or No?’ Senator Cruz went so far as to suggest striking the entire section from the bill and discussing the issue at a different occasion with more time and information.
The Wyden-Toomey-Lummis amendment eventually failed as Republican Senator Richard Shelby of Alabama refused to support it unless it was tied to a completely unrelated amendment requesting $50 billion in additional defence spending. Predictably, this led Democratic Senator Bernie Sanders to strike it down thereby killing the entire amendment. The infrastructure bill thus passed with the poorly written provision as it was originally drafted.
On the other hand, such a directive is not as predictable as a piece of legislation and could be prone to change. Should these assurances not provide sufficient comfort or clarity, the consequences of the bill could be consequential for the crypto sector and the role the US plays in it. It could push innovators to more accommodating jurisdictions and make US entities even more undesirable for financial institutions around the world. Driving out such innovation and capital does not seem to be a wise move when considering the size and potential impact of this emerging industry.
In addition to this it has the potential of destroying swathes of smaller players in the industry who will not have shoulders broad enough to comply with the added regulatory requirements. This would consolidate the industry around larger players with deeper pockets and handicap the smaller entities who have historically driven the industry forward.
Furthermore, the Congress' Joint Committee on Taxation estimates this provision will raise $28 billion in additional tax revenue over the next decade. This figure is highly speculative and may end up being far lower. Even assuming their estimate is accurate, this potentially devastating provision would only provide a fraction of the envisaged spending program, which will be tied to the broader $3.5tn spending package that the Democrats intend to bring forward in the House.
Finally, in a space as difficult to monitor as the world of cryptocurrencies, hardened tax evaders will likely go deeper underground making it harder for authorities to track them and thus just burdening law-abiding citizens and companies with penalties and costs.
The crypto community will want to watch this battle closely. Those who wish to keep the US at the forefront of this industry will have to hold the line and remain steadfast.
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