US infrastructure law could brace up digital assets — but first some fixes

In August, there were some dire warnings about what the Biden Administration's proposed infrastructure bill could do to the cryptocurrency and blockchain sector by expelling crypto miners from the United States, crippling America's leadership role. etc. In response, the cryptocurrency industry mobilized a court-wide lobbying press on legislators. However, it was too late to remove the haunting language of digital assets, and in November the infrastructure bill was signed into law.

The good news is that the infrastructure law will not take effect until January 2024, allowing plenty of time to correct its deficiencies. The downside is that its worrisome aspects, in particular an expanded definition of who or what a "broker" is and some new digital asset reporting requirements, have not gone away. As Charles Hoskinson, founder of Cardano, indicated in mid-November, shortly after the bill was signed, the “bad [crypto] language ”is now enshrined in law.

Most recently, Kristin Smith, CEO of the Washington-based Blockchain Association, told Cointelegraph: “We remain concerned about the lack of clarity of the corridor provision in the now signed infrastructure bill. [...] If the provision remains unchanged, it could have a detrimental impact on the growth of the US-based mining sector. "

Cautious optimism?

There have been times in the last three months when it seemed like the sky might be falling due to pending US legislation. "It will be a shocking loss for America and our ability to remain the epicenter of world innovation," warned venture capital firm Andreessen Horowitz. But things don't seem so hectic now.

There are signs on both the regulatory and legislative fronts that the bill's potentially negative effects could soon be mitigated. Several amendments have been made in Congress and the United States Department of the Treasury appears to be listening seriously to objections from industry. In hindsight, were some of those ominous warnings exaggerated?

“There was a lot of initial concern about which crypto-related entities (miners, exchanges, open source software developers, self-custodial wallet developers, etc.) would be included in the 'broker' language,” Will Evans, Principal United States manager for cryptocurrency exchange CEX.IO, told Cointelegraph. "However the [U.S.] Treasury [Department] went on to say that the language only applies to those 'who can comply', which excludes miners, hardware developers and the like ”, although it still includes crypto exchanges and some investors. Evans added:

"While all entities in the cryptosphere are not out of the woods, the number that was originally thought to be affected is apparently mitigated."

Chris DePow, Senior Financial Institution Regulatory and Compliance Advisor at Elliptic, told Cointelegraph that "it is still too early to say what the collateral effects of the big picture might be," although as with any new regulatory initiative, one should consider its impact on continuous technological innovation. "We remain cautiously optimistic that some of the more challenging parts of the infrastructure bill related to cryptocurrencies will be resolved over time through guidance letters and regulatory comments."

"Concerns about the feasibility of the proposed reporting rules are absolutely valid," Olya Veramchuk, director of Tax Solutions at Lukka, a provider of cryptographic data and software, told Cointelegraph, adding that although the law's provisions do not They are effective until 2024. "The crypto community has limited time to continue dialogue with regulators at the Treasury Department to create practical and workable rules and guidelines."

Veramchuk was asked about the most disturbing aspect of the law, its overly broad definition of a "broker." The $ 10,000 Crypto Transaction Reporting Requirement for Businesses? For her: "Without proper guidance from the Treasury, both reporting provisions could be extended beyond the intended use case." He further added that, "This broad definition could mean that individuals have to meet reporting requirements for brokers, which is not a productive solution to address reporting."

A possible felony

Abraham Sutherland, an adjunct professor at the University of Virginia School of Law, told Cointelegraph that the law's amendment to section 60501 of the tax code is "a major threat to digital assets." The law would require "anyone" who receives more than $ 10,000 in digital assets to verify the sender's personal information, including social security number, and sign and submit a report to the government within 15 days, according to Sutherland. Non-compliance could be a serious crime.

“Miners, stakeholders, lenders, decentralized applications and market users, traders, companies and individuals run the risk of being subject to this information requirement, although in most situations the person or entity on the receipt you are not in a position to provide the required information, " wrote Sutherland in a September report.

Referencing recent legislative efforts in Washington to moderate the effects of the law, such as that of Rep. Patrick McHenry "Keep Innovation in America Act" filed Nov. 17: Sutherland told Cointelegraph that the bipartisan effort "should be something for the industry to mobilize because it forces a debate on the issue."

Related: Lines in the Sand: The US Congress is Bringing Partisan Politics to Cryptocurrencies

"The biggest fear lies in forcing fiat to crypto - and crypto to fiat - ramps into outdated regulatory molds that don't take into account the nuances of the ecosystem," Evans said, adding: "Most of the concern here for the investors and exchanges refers to reporting profit, loss, and cost bases. As an exchange, it can be difficult to precisely define a customer's cost base if using a self-custodial wallet and DeFi apps; and it can be difficult for investors. investors arrive at an exact value for their profit and loss in the same case. " Reporting these kinds of things incorrectly, even by accident, can have huge consequences for all parties, he added.

Are there remedies at hand?

Could the key encryption provisions be changed during the implementation period, that is, as regulations are developed, published and commented on? Alternatively, are there other legislative options that look promising?

There is still plenty of time to adjust to how the law is formed before the first report expires, Evans responded. As noted, the Treasury Department is reviewing provisions in the bill and industry lobbies are still engaged.

"Coinbase spent almost $ 800,000 last quarter on lobbying, and other groups have also increased spending by 50% to 100% over the same time period," Evans continued. "The culmination of all of this will certainly come with modifications to some extent during the implementation period."

"It is important that legislators work to modify the law so that only those entities or individuals that are truly responsible for conducting crypto activities on behalf of a third party are covered," DePow said. Meanwhile, US Senators Lumis and Wyden, "both strong advocates on this front," are working on an amendment to change the language of the law.

Smith added that his group was "encouraged by recent developments at the IRS and the Treasury, indicating that they may have a receptive view of the issue during the rulemaking process," while Veramchuk noted that tax laws and regulations "always they are a work in progress, and Congress will undoubtedly look for opportunities to provide clarity as the rules are established. "

Discourage innovation?

There were concerns that the law could delay cryptocurrency and blockchain innovation in the US, especially at a critical time when China, its main global rival, appears to be giving up some ground in cryptocurrency competition.

Representative McHenry alluded to something like that in his bill, suggesting that the US had a chance to steal a pass from the Chinese, so to speak, if it handled its crypto regulation wisely:

“The recent Chinese government ban on cryptocurrency transactions provides the United States with an opportunity to further enhance its role as a leading nation in developing innovative blockchain technologies. Providing clear rules for both consumers and developers of digital assets is essential to seize this opportunity. "

Meanwhile, Smith warned that "punishing this still fledgling industry with shortsighted rules only threatens the potential growth of the crypto economy and, as a result, our nation's global innovation leadership."

"It is important to note that cryptocurrencies are a global phenomenon," stated Evans. "Passing laws that shut the US off of positive developments originating outside its borders can harm the industry and the country alike," he added:

"This is the first time that shocking regulation has been applied to cryptocurrencies and it is being done through the back door of a mostly unrelated bill."

A long-term profit for cryptocurrencies?

Problematic language and unwieldy crypto reporting requirements aside for a moment, is there something positive for the crypto and blockchain community in the law?

"The introduction of this bill is forcing regulators to take a closer look at cryptocurrencies," Evans said, adding: "Objectively speaking, major US regulators are looking to really understand the industry for the first time." . The establishment of regulations for matters such as tax obligations and the purchase and reporting of crypto could also encourage new entrants to the market, he opined.

"Many industry participants see the need for regulation as a sign that cryptocurrencies and other digital assets are here to stay, and it's a great perspective to keep," Veramchuck added. "Although not without growth problems, the benefits of a good regulatory structure in place would far outweigh the burdens."

Related: The scourge of stablecoins: regulatory hesitancy can make adoption difficult

"The bill's transparency and consumer protection goals will likely help build trust in cryptocurrencies," DePow said. It may even help expand the industry by "providing retail and institutional investors with the assurance that they are not doing business in the 'Wild West', but rather are engaged in a well-regulated and secure part of the overall FinTech sector," according to he.

In short, the crypto industry does not want to take its foot off the pedal with regard to this historic American legislation. The default, if nothing else happens, is a regulatory hodgepodge and would sow confusion in the blockchain industry in the US More regulatory clarity is needed.

But a longer view is also useful. Taking a look at digital assets, fleeting as it may be, US lawmakers have tacitly acknowledged that this nascent technology has a long-term place in the infrastructure landscape - a significant trade-off.