On the morning of August 10th, the Senate passed a $1 trillion infrastructure bill. It holds far-reaching implications for crypto.
Ever since President Biden selected Gary Gensler as the Chairman of the U.S. Securities and Exchange Commission, those in the crypto landscape have been holding their breath. Many of them considered Gensler’s appointment a positive (and necessary) step towards widespread blockchain adoption. But the events surrounding the bill over the past week suggest a grim, limited future for American blockchain initiatives.
On August 3, 2021, Gensler officially announced that the SEC will regulate crypto markets to the maximum extent possible. He furthermore called on Congress to extend powers allocated to the SEC so that his division could possess more scope and resources to oversee this growing sector. Gensler’s resistance to crypto could be a result of his recent public statement, in which he described crypto as an “asset class [that is] rife with fraud, scams, and abuse.” The heart of his dissatisfaction stems from a lack of investor protection, so Gensler argues Congress should seek to mandate it on crypto exchanges. Gensler is suggesting crypto regulations should parallel traditional finance regulations.
For having extensive experience in the crypto and fiat worlds, Gensler’s approach is a big mistake. Crypto regulations that take their cues from traditional finance will only stifle a growing market before it reaches its full potential. DeFi simply cannot meet the reporting requirements Congress is asking for — these transactions can’t be tied to any individual. We, therefore, need crypto-specific regulation, as opposed to simply shoe-horning legacy finance regulations onto crypto.
Nevertheless, Congress moves forward with the crypto tax amendment.
Supporters of increased crypto regulation have indicated that adding targeted requirements may serve to ease complex and unclear transactions within the market because currently there is not much transparency around it. While this is intentional given blockchain’s underlying tech, the senators who drafted the infrastructure bill tried to appease these concerns by introducing a crypto tax amendment, aimed at generating $28 billion for structural improvements. The amendment stipulates that brokers (anyone “responsible for and regularly providing any service effectuating transfers of digital assets on behalf of another person”) are subject to tax reporting requirements.
The word “broker” has created a lot of noise and confusion over the past few days. The definition of the term is so broad that actually putting the amendment into practice would stifle innovation and drive development outside of the U.S. This is unfavorable for a number of political and economic reasons, but the most important takeaway is that Congress is incorrectly dealing with an emerging technological trend.
This takeaway has been echoed by prominent fintech businesses like Square, Coinbase, and RibbitCapital. All of these companies have sent a joint letter to Congress addressing the bill’s shortcomings and proposed legislation alternatives. Senator Lumis (R-WY) put it best: “Developers are the lifeblood of innovation, and subjecting them to tax reporting would have far-reaching implications on privacy, and on the evolution of technology in this country–not to mention, most developers would not have access to useful data [for the IRS].”
Taking these opinions into account, several senators collaborated to suggest two versions of the pre-existing crypto tax amendment: the Wyden-Lummis-Toomey Bill and the Warner-Portman-Sinema Bill. Both of these consolidated behind the backlash about the definition of “broker,” so more specific parties should be taxed. Yet the two bills determined different entities should be taxed. Senators Cynthia Lummis (R-WY), Ron Wyden (D-OR), and Pat Toomey (R-PA) proposed an amendment that releases parties from the need to report data that would be difficult or impossible for them to collect. On the other hand, Senators Mark Warner (D-VA), Rob Portman (R-OH), and Kyrsten Sinema (D-AZ) proposed an amendment where Proof-of-Work systems like Bitcoin are exempt from the financial reporting requirements, but Proof-of-Stake systems are not (referring specifically to altcoins).
Altcoins are the future of crypto, so unfortunately neither of the proposed changes to the original text of the amendment were passed in the Senate. This has serious implications for the crypto market because it encroaches upon the industry’s DeFi protocol.
Congress has always put off answering questions of fintech regulation. In this case, the Senate failed to make informed decisions around the future of finance, so our hope at present is that the House votes judiciously.