Biden's Infrastructure Bill Shouldn't Undermine Cryptocurrency Infrastructure In The Process
There was a reasonable uproar from the cryptocurrency community this weekend as it appeared that the long fought for Biden infrastructure bill would change some definitions to create a mess for the wider cryptocurrency space.
Language in the bill would require crypto brokers to report customer information to the Internal Revenue Service. More importantly, over the weekend it broadened the definition of what's considered a broker" to anyone responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person" which doesn't exclude miners, software developers, stakers and other individuals in the crypto economy who don't have customers.
The language gives a lot of power to define what should be included in the reporting requirement," Oppenheimer analyst Owen Lau. It says any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person - which can mean anything. If I transfer bitcoin for you, then it can mean I become a broker."
The potential for mischief was certainly quite high:
The proposed legislation, if passed, would have a significant impact on both investors and exchanges. Exchanges will need to undertake significant efforts to comply with the reporting regime. Investors, on the other hand, won't have to do" anything. But under the new law, all of the information that the IRS would normally receive when an investor sells a share of Amazon stock will now be sent to the IRS when an investor sells one Bitcoin, one Ethereum, or the like. There's a lot to be sorted out: what will happen with crypto stored in cold storage, wallets not on exchanges, so-called self custody." The proposed legislation does not address this self-custody" cryptocurrency, because it is analogous to cash under a mattress. It is difficult to trace and even more difficult to devise an information reporting scheme that would encompass such an asset. Individual cryptocurrency owners and investors must still pay attention, however, because it is even more likely that the IRS will be made aware of their transactions and expect them to be reported on a tax return.
Lots of folks began to notice some problems with this, including Senator Wyden, who noted it was yet another example of politicians not understanding technology:
The Republican provision in the bipartisan infrastructure framework isn't close to being that solution. It's an attempt to apply brick and mortar rules to the internet and fails to understand how the technology works.
- Ron Wyden (@RonWyden) August 1, 2021
Others in the Senate spoke up about problems with the language as well, and it appears that some last minute changes are being made in response:
The final legislative text included some changes to alleviate concerns of the cryptocurrency industry, which expressed alarm last week about new requirements that would define most of the participants in the sector as brokers and force them to turn over information to the I.R.S. The provision was projected to raise $28 billion over a decade.
After receiving pushback from cryptocurrency lobbyists, lawmakers revised that section of the bill to clarify" the definition of a broker rather than expand upon it.
The legislation also removed language that explicitly targeted any decentralized exchange or peer-to-peer marketplace." It replaced that with a broader definition that characterizes brokers as anyone responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person."
There's an important balance here. Obviously, some aspects of cryptocurrency are used to hide money transfers, or to otherwise engage in scammy or illegal behavior. So you can understand the interest in better, more accurate reporting. But, treating cryptocurrency the same as other currencies also will have profound downstream effects, at a time when cryptocurrency still represents a key hope for bringing back the kind of internet we were once promised -- one that is more decentralized, and where more of the power is pushed out to the ends of the network, rather than controlled by a few large central players.
While I get that some people are hugely skeptical of the entirety of the cryptocurrency space, there's a real risk of destroying the vast potential to build a better internet if we focus just on the scams and the illegal uses. Thoughtful regulations around cryptocurrency have to recognize what it actually entails -- and the initial version of the infrastructure bill seemed to do the opposite. And that would be unfortunate, seeing as how getting cryptocurrency right can help reinvigorate the very important internet infrastructure.