How the infrastructure bill put the crypto industry at risk in the U.S.
The lack of major government oversight and regulation has always been one of the primary selling points of cryptocurrency, but that came under fire in recent weeks due to a bipartisan infrastructure bill quickly making its way through Congress. Prior to a recent amendment to its language, the bill threatened to drive U.S. crypto mining overseas – which would have taken any potential economic and technological advantages with it in the process.
Here is a closer look at what the infrastructure bill said about digital assets, what it could have meant for the industry, and why this will not be the last time crypto interests in the U.S. are threatened.
Update: Since this article’s initial publication, the U.S. Senate has voted 69-30 to pass the bipartisan infrastructure bill in its original language. No amendments were considered. The infrastructure bill will now go to the House of Representatives where it will still have the opportunity to be modified.
What is the infrastructure bill?
The highly popular bipartisan infrastructure bill proposes a $550 billion budget directed largely toward improving roads and bridges throughout the U.S. As mentioned, it is moving quickly through Congress and is expected to pass, and is also viewed as one of the signature milestones of President Biden’s first year in office.
What does the bill say about Bitcoin and other cryptocurrencies?
Language in the bill states that the government aims to cover $28 billion of this massive bill by taxing crypto companies and brokers. But it’s how the bill previously defined brokers that was particularly significant. A provision was added to the original bill that for a time expanded the Tax Code’s definition of a broker to essentially everyone in crypto – including non-custodial actors like miners.
Initially, the bill defined a broker as, “any person who (for consideration) regularly provides any service responsible for effectuating transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace.”
In an updated version of the bill, the broker definition was changed to, “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
Typically, the term “broker” is used to describe entities like Coinbase or Robinhood, but in the context of the bill’s previous language, it was used to describe essentially any entity that has anything to do with crypto.
Thankfully, the language has since been amended and narrowed to exclude miners, validators, hardware and software makers, and protocol developers from the broker definition. Still, the bill for a time could have had disastrous implications if not for the intervention of industry advocates due to its broad definition of brokers.
Why did the bill say that?
The bill includes provisions for taxing crypto participants for a few reasons – mainly to add new taxes, improve compliance, and increase current tax collections. What many do not realize is that bills like this must include “pay-for” provisions to generate revenue to offset and support the new spending that the legislation covers to make it revenue-neutral. So, in an effort to create new revenue streams to cover government spending, expanding the broker definition was one of the pay-for provisions that the Senate had identified in the initial draft.
A primary driver for this was that many legislators saw the high-worth and low-regulation of the crypto industry combined with a longstanding yet unfounded suspicion of tax evasion activity as an opportunity to rein in the market.
Candidly, this is no way to handle new and significant regulation. As a country, the United States has a unique opportunity to lead in this area and to show how innovative thinking can support several goals at the same time – from promoting new technologies and solutions that lead to positive environmental impacts to creating new wealth opportunities and supporting the economy. It does not have to be one or the other.
Why does this language matter?
The bill in its previous language defined “broker” so broadly that it could have applied to nearly every economic actor in the U.S. crypto space, including node operators, miners, and validators, since they provide a “service to effectuate transfers of digital assets for consideration,” as the definition stated. This definition might also have ended up including a large range of DeFi market participants.
The Tax Code requires brokers to comply with IRS reporting requirements, including giving 1099 forms to customers and then filing them with the IRS. To fill out 1099s, however, brokers need to collect customer data that includes name, address, phone number, and more, making the provision effectively function as a surveillance mandate – which goes against much of what crypto and blockchain have stood for since their beginning.
Furthermore, because users on crypto networks are pseudonymous and access is permissionless, it would have been impossible for non-custodial actors (like miners) to acquire the information necessary to complete and file 1099s in the first place.
If passed in its previous language, the effects of the bill on the crypto sector and surrounding innovation in the United States would have been colossal. Any expected revenue from the bill’s language would have never been seen if users, networks, and jobs were to move offshore, which could also have undone the hopes that the recently banned Chinese miners will migrate their operations to the U.S.
While it is important to get regulatory clarity for the crypto markets in order to further mainstream adoption, we must be careful not to hinder innovation or to punish early adopters in the process.
Why did the language change?
Because the provision in its previous language was not yet final, many in the industry began working together to change it to exclude miners and like parties. Groups including the Blockchain Association and the Chamber of Digital Commerce have been working tirelessly to ensure non-custodial actors like node operators, miners, and validators are ruled out of the broker definition.
The U.S. stands to play a globally leading role in future blockchain and crypto innovations, and this bill in its previous state could have effectively put an end to all of that. And while this storm has been weathered for the time being, this is certainly not the last time the cryptocurrency industry will face action and opposition from either side of the political aisle.
When this does happen again, citizens like yourself can also play a role in securing the future of crypto in the U.S. One of the best actions you can take is to call your member of Congress (see links below) and express the importance of crypto to the economic and technological future of our country and the world.
Join Compute North in the fight for the future of crypto
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Contact us today to learn more about what you can do to protect crypto in the U.S.