By Jack Chervinsky, Legal Director, Compound
Reference reading:
Reference reading:Interpretation of the latest U.S. encryption bill: exchanges, stablecoins are under pressure but it is too early to pass
1. The U.S. Infrastructure Act (Digital Asset Market Structure and Investor Protection Act) added a new provision that expanded the definition of "broker" in the tax law to cover almost everyone in the encryption industry, including miners, etc., forcing them to All become KYC users. Note, this is not a drill!
2. The Bill expands the definition of "broker" to include "any person (for consideration) who is responsible for and regularly provides any service to effectuate the transfer of digital assets". An earlier draft said "even non-custodial," and explicitly included DEXs and P2P marketplaces.
3. This definition is so broad that if taken verbatim, it could apply to almost every economic participant in the U.S. crypto industry. This includes POW miners and POS validators, since "providing services to enable the transfer of digital assets" seems to fit both.
4. It may also include a wide range of DeFi market participants, such as DEX LPs, liquidators, protocol administrators, etc. Depending on what "FYI" means, it may also extend to non-economic actors such as node operators or wallet developers. The range here can be huge.
5. Tax laws require brokers to comply with IRS (Internal Revenue Service) reporting requirements. On top of that, they must hand over the 1099 form to the client and file it with the IRS. In order to fill out 1099s, brokers must collect customer data, including names, addresses, phone numbers, and more.
6. This means that brokers must submit reports to KYC clients to comply with IRS reporting requirements. Therefore, this regulation has played a supervisory role. Mnuchin also made the suggestion in the final days of the Trump administration. As before, this is a very bad idea.
7. As those who understand the crypto industry already know, users are pseudonymous & access is permissionless. For non-custodial actors like miners (individuals who control 100% of the private keys), getting the information they need from the 1099 form is next to impossible. In practice, this could mean a de facto ban on mining in the United States.
8. It sounds crazy, but it can happen. Most past encryption legislation didn't work, so it's easy to ignore. But this time is different. The rule was bipartisan and is part of the popular infrastructure bill that is moving quickly through Congress and is likely to pass.
9. You may ask, what does cryptocurrency have to do with infrastructure? The bill must include a "pay-for" provision to boost revenue for new spending, making it overall tax-neutral. The definition of "broker" is one of the payment provisions in the draft Senate bill.
10. There are three main ways to increase revenue in a bill like this: increasing existing taxes, raising new taxes, or improving tax compliance. This falls into the third category, getting people to pay the taxes they already owe. Congress thinks the cryptocurrency industry is full of tax evaders (it's not).
11. Infrastructure costs are estimated to exceed $1 trillion. Congress defined the new "broker" as $28 billion in additional tax revenue. I don't know how they got that number or how it was calculated. In any case, this is not the way to deal with major new regulations.
12. This is a grossly misguided provision that, if adopted, would do far more harm than good to U.S. interests. I'll tell you my top five reasons. First, it is illogical to adopt a regulation that simply cannot be complied with unless its purpose is to kill the industry.
13. Second, it would be a colossal policy failure. After China forced miners out of the country, many of us hoped that the U.S. would gain market share in this critical sector. We cannot be the same as China, we have to stay in the industry.
14. Third, it doesn't work. For every dollar of tax increase, we lose two (or ten) dollars as the US crypto industry shuts down or goes overseas. Instead of getting more insight into taxable crypto gains, the IRS will get less as more users transact on unregulated platforms.
15. Fourth, it reduces our discussions with FinCEN. Since President Biden took office, the FIU has done a lot of solid work on crypto AML regulation. We should allow this process to continue, not cut KYC by sneakily bringing it in through the back door of the tax code.
16. Fifth, the burden it places on civil rights is unacceptable. Our right to privacy limits the kind of surveillance governments can enforce without warrants. And in the post-SolarWinds world (a massive cyberattack where hackers implant vulnerabilities), the last thing we need is to expose more sensitive information to a security breach.
17. So, what can we do? First, don't panic. This provision is not final and can still be changed. Even if it passes as is, it won't go into effect until 2023 at the earliest, so at least we'll have time to try to undo it in Congress or the courts. This could be a long battle.
18. If you are a US citizen, call your congressman.
19. If you are the leader of a US crypto company and are not already involved, please reach out to me or @BlockchainAssn's team (after your call to Congressman). Your voice is very important. Finally, folks, add your donations to @coincenter. They may need it.
20. For my part, as usual, I will be working with @BlockchainAssn, @fund_defi and others on a lawsuit challenging this provision, if it comes to that. I don't think the courts will accept a law that would force non-custodial actors to be surveilled by the IRS.
21. Things move so fast, it's scary. But as with FinCEN's proposed rules, it was surprising to see the entire industry come together this week to oppose it. We do have some of the best and brightest on our side. Stay tuned for the latest news. (picture from cryptonomist)
