Bitcoin & Crypto Facing The End? This Law Should Put An End To The Industry
Source: Medium, Lukas Wiesflecker
Photo: Lucas Sankey on Unsplash
A law is currently looming on the horizon that, if waved through, would “kill” bitcoin mining and the entire cryptocurrency industry in the US.
A bridge collapses somewhere in suburban Minnesota. Meanwhile, faulty pipes make drinking water unsafe in urban Michigan. At the same time, the Internet goes down in rural Kansas.
The answer to these $550 billion problems is the bipartisan infrastructure bill currently in the works in the Senate.
What does all this have to do with cryptocurrencies?
Apparently purely nothing, but actually quite a lot. Because the price for all this is to be paid by the crypto industry, among others, and in a way that could kill the industry as we know it.
But let’s go in order and take a closer look at the whole mess.
It’s akin to a bitcoin mining ban in the U.S.
The bill in question contains a provision that expands the tax law definition of a broker to include “any person who is responsible (for a fee) for conducting transactions of digital assets and regularly provides services.”
This definition is so broad that, if interpreted literally, it could apply to almost any economic actor in the crypto industry in the United States.
In practice, this could mean that any PoW miner, PoS validator, and possibly even those operating in decentralized financial markets will need to meet this definition of IRS reporting requirements and file so-called 1099 forms.
To complete Form 1099, customer data such as name, address, and tax identification number must be collected. Data that many of the above players wouldn’t even be able to get to if they wanted to. They wouldn’t be able to comply with this requirement.
Jake Chervinsky of Compound correctly summed it up on Twitter as follows:
It is literally impossible for non-custodial actors like Miner to get the information they need to file Form 1099. In practice, this could mean a de facto ban on mining in the US.
Depending on what “for consideration” means, the definition of a “broker” could also extend to non-economic actors such as node operators or wallet developers.
$28 billion to be squeezed out of crypto industry this way
It all sounds pretty crazy, and it’s not the first attempt of its kind either.
For example, in the Trump era, the Treasury Department proposed regulation for crypto wallets. This stipulated that banks and money services companies would be required to file reports, keep records, and verify the identity of customers for every transaction of cryptocurrencies to a private wallet.
What we are currently seeing, however, could be a whole lot worse. Because while most bills regulating cryptocurrencies go nowhere and are therefore easy to ignore, this time is different.
This provision is part of the bipartisan and otherwise popular infrastructure bill quickly moving through Congress and will most likely pass.
Such a bill must include so-called “pay-for” provisions. Their purpose is to generate additional revenue to help cover the costs associated with implementing the bill.
There are three main ways to accomplish this:
By increasing existing taxes,
an introduction of new taxes
or improving tax compliance.
The “broker” definition is one of the “pay-for” provisions in the Senate bill and ostensibly falls into the third category. Indeed, Congress argues that there are many tax evaders in the cryptocurrency space. A statement, however, that is not proven by anything.
In any case, lawmakers expect that this provision can lead to $28 billion more in revenue. How they arrive at this sum is also completely unclear.
A hidden offensive against cryptocurrencies
The question that may arise for one or two attentive readers is how such a provision is supposed to generate additional revenue. Especially when complying with it is simply impossible for most players in practice.
The logical consequence would be that such a law would drive the entire industry out of the country. In conclusion, therefore, no additional revenue would be generated, but the revenue from an entire industry would be destroyed.
Again, Chervinsky aptly sums it up. Therefore, we will quote his conclusion here:
It defies logic to pass a regulation that is literally impossible to comply with unless the goal is to kill the industry.
Obviously, in the guise of a larger issue, an attempt is being made here to use a back door to push certain interests. The wording is probably intentionally so woolly. They create the opportunity to get rid of an industry troublesome to some stakeholders in the U.S. after the fact.
Evan Greer, director of digital rights group Fight for the Future, told news platform Decrypt:
‘It appears to be a sneaky backdoor way to enact the recently delayed FATF guidelines without a real democratic process.’
He referred to the Financial Action Task Force’s (FATF) draft guidance for virtual asset providers. Namely, this v0r stipulates that even companies that do not hold cryptocurrencies must collect data on the use of cryptocurrencies by others and report it to the government.
Policy changes that impact civil liberties, privacy, and the future of the Internet should be discussed in public, not tacked on at the last minute to an infrastructure bill that absolutely must pass.
There is still hope
There is no doubt that this is a deeply misguided provision. If adopted, however, it will harm U.S. interests far more than it will help them. The latter is the glimmer of hope we currently have left.
Above all, economic reasons could prevent the provision from being included in the final draft.
Chervinsky, in his extensive Twitter thread on the subject, lists five main reasons why it is not in the U.S. interest to wave through such a provision.
First, it defies all logic to enact a provision that is literally impossible to comply with. Unless, of course, the goal is to destroy the industry.
Second, it would be a major foreign policy failure. By China making the geopolitical mistake of driving Bitcoin miners out of their country, the U.S. now has the opportunity to take significant market share in this important sector.
Third, the provision makes little economic sense. For every new dollar in tax revenue, several are lost.
The U.S.-based crypto industry will either largely cease operations or migrate abroad. Meanwhile, U.S. citizens will be motivated to move to unregulated platforms. So the IRS will not gain more control but lose it.
The fourth point is that since President Biden took office, the Financial Crimes Enforcement Network (FinCEN) has done a lot of solid work on AML regulation of cryptocurrencies. Imposing a KYC requirement through the back door of the tax code would undermine all of these efforts.
The fifth and most crucial point is that this attempts to restrict the right to privacy in a shady way massively.
If the provision is waved through in this way, it would be an indictment of the USA. A state that calls itself democratic and freedom-loving.
No reason to panic yet
The infrastructure bill passed yesterday in a 66–28 vote. Senators continue to work on revising the bill. A final vote will be held next week before Congress goes into recess on Aug. 9.
But that’s no reason to panic yet. This provision is not yet final, so changes are still possible.
In addition, even if Congress passes the bill in its current form, it is unlikely to take effect until 2023 at the earliest. Accordingly, there would still be plenty of time to undo it in Congress or court.
Things around cryptocurrencies are moving fast, which can often be scary. After all, it’s rarely clear where things are headed.
Still, it’s important to keep your nerve in these times. It would help if you didn’t let saber-rattling drive you out of such a promising industry. Neither as an active player nor as an investor.
Moreover, we can currently observe something positive. Because in such cases, the entire industry stands united to defend itself against attacks like these.
The industry includes some of the brightest minds globally and is also now a multi-trillion dollar industry. That’s why, no matter what the outcome in the short term, the last word has not yet been spoken.