New US Bill threatens Crypto Industry

Crypto being attacked!?

A twitter user called Jake Chevinsky has sounded the alarm regarding what appears to be some nasty anti-crypto legislation making its way through the American system:

This is an ongoing process with many prominent politicians, crypto exchanges and high net worth individuals getting involved. The below by Jake is a good basis to understand some of the stuff in this bill that is problematic for the crypto space:

Jake Chervinsky @jchervinsky

1/ 🚨 Here's the deal with the US infrastructure bill: A new provision has been added that expands the Tax Code's definition of "broker" to capture nearly everyone in crypto, including non-custodial actors like miners, forcing them all to KYC users. This is not a drill 👇

Jake Chervinsky @jchervinsky

2/ The bill expands the definition of a "broker" to include "any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets." Earlier drafts said "even if non-custodial" & explicitly included DEX & P2P markets.

Jake Chervinsky @jchervinsky

3/ This definition is so broad, it could apply to nearly every economic actor in the US crypto industry, if read literally. That includes PoW miners & PoS validators, since "providing a service to effectuate transfers of digital assets for consideration" seems to fit both.

Jake Chervinsky @jchervinsky

4/ It might include a huge range of DeFi market participants too, like DEX LPs, liquidators, protocol governors, etc. Depending what "for consideration" means, it might also extend to non-economic actors like node operators or wallet developers. The scope here could be massive.

Jake Chervinsky @jchervinsky

5/ The Tax Code requires brokers to comply with IRS reporting requirements. Most importantly, they have to give Form 1099s to their customers & file them with the IRS too. To fill out Form 1099s, brokers have to collect customer data including name, address, phone number, etc.

Jake Chervinsky @jchervinsky

6/ This means brokers have to KYC customers to comply with IRS reporting requirements. As a result, the provision functions as a surveillance mandate, just like the one Sec. Mnuchin proposed in the final days of the Trump administration. As before, this is a very bad idea.

Jake Chervinsky @jchervinsky

7/ As those who understand crypto already know, users are pseudonymous & access is permissionless. It's literally impossible for non-custodial actors like miners to get the information they need to do Form 1099s. In practice, this could mean a de facto ban on mining in the USA.

Jake Chervinsky @jchervinsky

8/ This sounds insane, but it really might happen. Most crypto legislation goes nowhere, so it's easy to ignore. Not this time. This provision is part of the bipartisan & otherwise popular infrastructure bill, which is moving quickly through Congress & is highly likely to pass.

Jake Chervinsky @jchervinsky

9/ What does crypto have to do with infrastructure, you may ask? The bill has to include "pay-for" provisions to raise revenue for new spending so that it's revenue-neutral as a whole. The "broker" definition is one of the pay-for provisions in the Senate draft of the bill.

Jake Chervinsky @jchervinsky

10/ There are three main ways to raise revenue in a bill like this: increase current taxes, add new taxes, or improve tax compliance. This allegedly falls in the third category—making people pay taxes they already owe. Congress thinks crypto is full of tax evaders. (It isn't.)

Jake Chervinsky @jchervinsky

11/ The infrastructure bill is estimated to cost > $1 trillion. Congress scored the new "broker" definition at $28b in added tax revenue. I have no clue how they got this number, or how it's even possible to calculate. Regardless, this is no way to handle major new regulations.

Jake Chervinsky @jchervinsky

12/ This is a deeply misguided provision that, if adopted, will do far more harm than good to US interests. I'll give you my top five reasons why. First, it defies logic to adopt a regulation for which compliance is literally impossible, unless the goal is to kill the industry.

Jake Chervinsky @jchervinsky

13/ Second, it'll be a huge foreign policy failure. After China made the geopolitical blunder of forcing miners out of their country, many of us hoped the US would take market share in this crucial sector. We can't make the same mistake China did. We have to stay in the game.

Jake Chervinsky @jchervinsky

14/ Third, it won't work. For every new dollar of tax revenue, we'll lose two (or ten) as the US crypto industry shuts down or goes offshore. And instead of getting more insight into taxable crypto gains, the IRS will get less, as more users "go dark" on unregulated platforms.

Jake Chervinsky @jchervinsky

15/ Fourth, it short-circuits the discussion we've been having with FinCEN. Since President Biden took office, FinCEN has done a ton of solid work on crypto AML regulation. We should keep that process going, not cut it off by sneaking KYC in through the Tax Code's back door.

Jake Chervinsky @jchervinsky

16/ Fifth, the burden it'll place on civil rights is unacceptable. Our 4A right to privacy limits how much surveillance government can mandate without a warrant, & in a post-SolarWinds world, the last thing we need to do is expose more sensitive information to a security breach.

Jake Chervinsky @jchervinsky

17/ So, what can we do? To start, don't panic. This provision isn't final yet & still can be changed. Even if it passes as-is, it shouldn't take effect until 2023 at earliest, so at least we'll have time to try to undo it, in Congress or the courts. This may be a long fight.

Jake Chervinsky @jchervinsky

18/ If you're a US citizen, call your Members of Congress, especially Sen. Portman if you're in Ohio. If anyone says "this won't help" after we held off FinCEN & the FATF, I'll lose my mind. Find your House Rep: house.gov/representative… Find your Senator:

senate.govU.S. Senate: Contacting U.S. Senators

Jake Chervinsky @jchervinsky

19/ If you're the leader of a US crypto company & aren't involved in this yet, reach out to me or the team at @BlockchainAssn (after you call your Members of Congress). Your voice is especially important. Lastly, everyone, top up your donations to @coincenter. They may need it.

Jake Chervinsky @jchervinsky

20/ For my part, as usual, I'll be working with @BlockchainAssn, @fund_defi, & others on a lawsuit challenging the provision, if it comes to that. I don't think the courts will take kindly to a law forcing non-custodial actors to surveil US citizens on behalf of the IRS.

Jake Chervinsky @jchervinsky

21/ Things are moving fast, which can feel scary. But as it was with FinCEN's proposed rule, it's been amazing to see the entire industry come together this week to fight against this. We really do have some of the best & brightest on our side. Stay tuned for updates. [end]

In early August policymakers confirmed their intention to redefine the ‘broker’ definition to make it more specialised which should iron out some of the issues and mean only exchanges are targeted by the new regulations. Legislators have confirmed they don’t want to target Proof-of-Work blockchain (Bitcoin) whilst in the same breath taken aim at Proof-of-Stake (Ethereum)….

The Wealth Gap View: It’s a big thread but an interesting read. It is also a highly predictable road of travel for politicians who don’t understand crypto to take. Even if the worst version of this legislation was passed it only delays the rise of Bitcoin. As the Nigerian government has discovered, you can’t put a lid on Bitcoin, their only option is to start behaving themselves. More on this next week so stay tuned!

The good news is that we don’t need to panic too much because while it’s great for creating headlines this is just how the american system works. They announce they are working on a new bill, everyone piles on blowing whistles and raising alarms and they make the amendments they want. This particular infrastructure Bill wont be passed until 2023 so there is plenty of time for everyone to have their say.

Until Next Time

The Wealth Gap Team