Crypto allies rally to soften the more problematic parts of the congressional infrastructure bill.
First, the Brief:
- Bank of America’s research highlights the pros of El Salvador's bitcoin law
- Federal Reserve Governor Lael Brainard discusses the need for a U.S. CBDC
- Bank of China intends to continue significant pressure on crypto
- No sign of a slowdown in U.S. bitcoin mining industry
- Kentucky as the fifth state to stop BlockFi
- Lastly, a record week for NFTs and the emergence of a new institutional narrative
Our main discussion centers on the ongoing battle surrounding a crypto provision within the highly debated infrastructure bill. The original language of the draft targeted crypto intermediaries, from hardware wallet manufacturers to miners, mandating that they report transactions made through their services. Doing so would be virtually impossible and hinder the U.S. crypto industry.
In response, the community rallied for an updated bill with more forgiving standards. Crypto allies, from industry heavy hitters like Coin Center’s Jerry Brito to Sen. Ron Wyden of Oregon, expressed their discontent with the original language of the draft. With an amendment process underway, will these statements be enough to make a significant change?
The Breakdown is written, produced by and features NLW, with editing by Adam Levine and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Razor Red” by Sam Barsh. Image credit: Samuel Corum/Getty Images, modified by CoinDesk.
What's going on guys, today is Monday, August 2, and there was a flurry of activity this weekend as crypto advocacy groups, legal experts and other industry supporters pounded the pavement to try to change language in the draft infrastructure bill that could have massive implications for crypto in the United States. So, were they successful? Well, partially. Full story on that in a minute, but first, let's do the Brief and today's Brief is going to be just a little bit different. There are a ton of updates on ongoing stories I've been covering, so I'll do a few more than normal with slightly less depth.
Let's kick it off with something positive. Most of the world of traditional finance has not been super enamored of El Salvador's decision to make bitcoin legal tender. The World Bank famously denied a request from El Salvador to help with the implementation. This is why it's all the more encouraging to see a Bank of America global research brief call the move "financial digitization with a progressive touch," they point to a couple things. First, they point out that the plan could attract foreign direct investment by bringing mining and other crypto related businesses to El Salvador. They did share some skepticism around the cost of electricity, but we know that there's all sorts of volcano plans going on so Bitcoin mining in El Salvador might be on the menu. They also came down strongly on the side of this Bitcoin Bill increasing consumer choice.
Here's the statement: "One could make the case that adopting bitcoin as legal tender is about giving more choice to consumers, embracing innovation and doing more business with American companies. Consumers will not be forced to use it and businesses can decline to accept it if they lack the technology to do so. We disagree with the notion that it is coercive that businesses will be legally bound to accept Bitcoin as a form of payment as long as they have the proper technological infrastructure. In this case, the seller/payee can automatically convert the payment to dollars using the electronic wallet which is linked to the clearing house though transaction costs may apply." Effectively, Bank of America is saying that the El Salvadoran government solution to the compulsion, which is to say that sellers have to accept Bitcoin, but effectively they never have to see Bitcoin because it can be automatically converted through the government fund, is sufficient to mean it's not coercive. Overall, I think it's good to see some optimism and encouragement from a global bank, rather than more scornful dismissiveness or ridicule and hat tip to Michael Rinko for sharing that report with me.
Next up, let's look at some of the latest CBDC chatter. Federal Reserve governor Lael Brainard discussed CBDCs at the Aspen Institute Economic Strategy group on Friday, saying basically that other countries having CBDCs sort of forces the U.S.'s hand, quote, "The dollar is very dominant in international payments. And if you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the U.S. doesn't have one, I just, I can't wrap my head around that." Brainard also said that the proliferation of stablecoins in the absence of a digital dollar could fragment the payment system, which creates another motivation. Finally, she repeated some of the pro-access and pro-inclusion arguments for a CBDC, saying that it could help people who didn't have bank accounts access government aid. Brainard's thoughts on this are worth paying attention to because, among other reasons, she has been speculated as a possible replacement for Jerome Powell when his term as Fed chair is up.
Speaking of the country she's clearly talking about when she's discussing CBDCs, over in China, the People's Bank of China reported the conclusions of recent meetings focused on monetary policy for the first half of the year. Their big banner conclusion was that the clamp down on private finance in the name of financial stability has been seen as a success and will be continued. They intend to continue to keep significant regulatory pressure on crypto trading, among other things. Now, this isn't really anything new. But if you start to look around, you'll notice that the crypto conversation regarding China has shifted from this big banner mining ban discussion to the question of whether their actions are effectively drying up a major source of crypto trading demand. In other words, will Chinese traders come back to crypto or have they abandoned the industry forever? In his monthly investor update, Travis Kling writes about this secular shift away from Chinese investors as one of the big question marks in what happens in markets next. How much of that demand that used to be from China is just never coming back? This is a big question to watch over the next few months.
Speaking of China and the follow up from its decisions, North American mining continues to double down, despite the threat posed by the new language in the infrastructure bill. Las Vegas based Marathon has contracted to buy nearly $121 million worth of Bitcoin mining machines from Bitmain. The 30,000 machines will be delivered in the first half of next year and altogether, Marathon will have 133,000 Bitcoin miners. Clearly, there is no sign of slowing down in the U.S. mining industry. Now, as I just intimated, if anything can slow down the U.S. crypto industry, it's regulation.
Embattled BlockFi has now heard from a fifth state in the U.S., Kentucky has ordered the company to stop signing up new interest accounts claiming that their securities, Kentucky has now joined New Jersey, Alabama, Vermont and Texas and turning regulatory scrutiny on BlockFi because this was a true cease and desist order. Even though BlockFi believes that its interest account product does not constitute a security, It immediately suspended new account registrations from Kentucky.
We're gonna come back to U.S. regulation in just a minute. But first, let's talk about the monster weekend NFTs just had. On Friday night, Twitter noticed that a huge number of CryptoPunks had been purchased in one fell swoop, the 10,000 unique characters were one of the early NFT projects on Ethereum, setting a template for many that followed. As I've noted before, there are many different dimensions to NFTs and in the future, it strikes me as highly likely that we'll need to break the space apart into its relevant subcategories. What does crypto art have to do with digital sports memorabilia and commemorative fandom have to do with ticketing on the blockchain.
But, either way, the relevant point for the conversation about what happened over the weekend is that crypto punks are foundational OG crypto art project, when someone rolled out millions of dollars to buy 100 at once, a ton of people noticed, especially when those same wallets started to scoop up other NFTs from projects like Art Blocks as well. Rumor soon hit that it was Zhu Su and Kyle Davies Three Arrows Capital aping in and there are still debates going on currently about whether it actually is them or not. In fact, that lack of clarity is actually fueling the fire of discussion around this even now. Now, to get a sense of how relatively small this market still is, and how much of thunder a whale can shave prices, check out this tweet from Michael Tan who has been keeping track of this he wrote: "Since Three Arrows Capital ramped up its buying, price floors in these projects have skyrocketed. Punk floor from 22 ETH to 34 ETH Autoglyph floor went from 120 ETH to 385 ETH Fidenza Floor went from 19 ETH to 37 ETH Ringer floor from 17 to 35 ETH Eternal Pump floor from 65 ETH to 250 ETH."
You're not expected, by the way, to know what any of those projects are. I think the key thing is the trend line that this handful of specific buying actions reset the price floor for absolutely everything in the space. This contributed to an overall record week, trading volume hit $171 million which was up 338% from the same week, a month earlier. And if the marketplace OpenSea saw record volume as well and the average price of a crypto punk now stands at 66 ETH, or about $175,000.
So, what's going on? Well, certainly a part of it is some mainstream coverage. Fortune magazine did a most influential list for the NFT space. And while the list is sort of suspiciously full of accessible VC types to me, they do feature some anons as well who feel pretty clearly more at the center of that world. The coolest part of the Fortune piece might have been the cover, which is created by artists pplpleasr and featured a boatload of the avatars of anons and crypto Twitter folks. The New Yorker also published a piece titled "Why Bored Ape Avatars Are Taking Over Twitter." Subtitle was: "NFT clubs are all the rage among cryptocurrency enthusiasts. Are they a get-rich-quick scheme or the future of culture?" So, it's entirely possible that institutional capital saw not one but two mainstream pieces and said, this is good mimetic fodder to fuel FOMO. So we're going to get in. In other words, you see a couple of mainstream publications about an NFT space that you've kind of been lurking around the sides of, and you figure why not ape in now because the combination of that focus from mainstream media, plus the seeming appearance of institutional capital moving into the space totally resets the prices in the space and boom, that's exactly what we saw.
That may be a little bit of a speculator cynical version. And of course, the longer duration thesis for many is that collectible digital art is going to be a thing and that these early projects that have big devotion and high visibility You're going to be long term winners. Now the world of NFTs is deep and weird. And when I've covered it before, it's primarily been in the context of its potential to disrupt the power of the traditional entertainment industry, in particular, music. And that continues to be the aspect of the industry that I find most interesting. When it comes to crypto punks, and Bored Apes, the thing that I think is really fascinating is what happens when we introduce commerce and markets on top of internet culture. If you think Robin Hood is all about meme investing, what happens when you actually invest in memes? What happens when the investing itself propagates the memes?
Lots of fun, very meta things to think about. But I want to get back to the infrastructure bill. For those of you who missed it last week, on Wednesday, the Senate voted to begin debate on the infrastructure bill. The bill was much reduced from where Democrats originally proposed it, but still represented a $550 billion outlay, expected to total over $1 trillion by the time other transportation spending was factored in. As part of this bill, authors were required to identify where sources of revenue that could cover these new costs could come from, one that they proposed was capturing an estimated $28 billion in crypto tax revenue that they said wasn't reported. Now the original language in the draft proposal would have effectively required every actor in the crypto ecosystem, from miners to decks operators to wallet builders to KYC and report transactions on everyone who touched their services. In effect, everyone in these decentralized networks would be labeled as brokers for tax reporting purposes.
This is in many cases structurally impossible. It would de facto make operating crypto networks in the U.S. illegal as we know it. So as you might imagine, there was a lot of outcry. Even heading into the weekend, people were trying to clarify what the issues really were. Neeraj from Coin Center tweeted, "People are framing the infrastructure bill as 'Oh, crypto people are just mad about taxes.' That's not the issue at all. It expands the definition of a broker to all sorts of individuals who would never be considered one in any other context, and in most cases can't even comply. This is not about paying taxes. It's about who has to file 1099 as a broker, the definition we saw would expand those obligations to nearly every actor using cryptocurrency networks. How is a miner going to fill a 1099? They don't have customers, it doesn't make sense. Meanwhile, it does make sense for actual brokers to be treated like brokers, no one is complaining about that. In fact, here's Bryan Armstrong literally asking for that in 2017"
So to be clear, what's happening here is that the crypto industry is responding to reporting requirements from people who don't actually interact with end users the way that intermediaries in the current financial system do. On Saturday, we got some comments from Senator Rob Portman on this. His spokesperson said in a statement quote, "This legislative language does not redefine digital assets or cryptocurrency as a security for tax purposes, impunge on the privacy of individual crypto holders or force non-brokers such as software developers and crypto miners to comply with IRS reporting obligations. It simply clarifies that any person or entity acting as a broker by facilitating trades for clients, and receiving cash must comply with a standard information reporting obligation." So when I read that and my response, and what I tweeted was, that's great if that's what he believes, that's much closer to being in line with where we are. However, that's not what the language says. And that's pretty much the response that I saw from others.
Jake Chervinsky tweeted, "I'm glad Senator Rob Portman is talking about this. It means our message is getting through. Progress. Unfortunately, he's wrong about the bill: the draft language isn't limited to persons 'facilitating trades for clients and receiving cash.' If that's the goal, let's write it in! I'm not sure we even have to change the Tax Code's "broker" definition to achieve the Senator's goal. Aren't people facilitating trades for clients & cash already subject to current law? We only need to add a good definition of "digital asset," which this draft bill also lacks."
Coin Center's executive director Jerry Brito referred to the same quote and said, "If Senator Portman means what a spokesperson says in the statement, then there is an easy fix. Put the words in this statement, facilitating trades for clients, into the current language. What reason is there not to do it? Companies like Coinbase, Kraken, Gemini etc have clients and no one is suggesting they should not have to report. Indeed, they've been pleading for guidance on how to. Miners, nodes, DEX protocols don't have clients or better, use customers which are defined in the code." One bright spot came from Senator Ron Wyden, a democrat from Oregon, who is the Senate Finance chairman. He tweeted, "Americans avoiding paying the taxes they owe through cryptocurrency is a real problem that deserves a real solution. The Republican provision in the bipartisan infrastructure framework isn't close to being that solution. It's an attempt to apply brick and mortar rules to the internet and fails to understand how the technology works."
Now, some will argue that the setup of his tweet, that lots of Americans are avoiding paying taxes on crypto, is problematic. But the fact that he is at least isolating that is something to be explored on its own terms, not duped into this bill at the 11th hour, is pretty serious progress. So after all this battling, where did we end up? Brito again sums it up saying "We didn't get the language we wanted in the final bill text. It's better than where we started but still not good enough to clearly exclude miners and similarly situated persons. Starting tomorrow, there will be an amendment process where changes to the bill can still be made. We're working with our friends and allies in the Senate to make that happen. Please know that there is a committed group of crypto orgs and firms working together very hard to fix this. I'm very proud to be working with them."
Jake Chervinsky adds, "We've made progress, but the language is still unacceptable. Next, we'll advocate for an amendment on the Senate floor. If that fails, we'll take our fight to the House." Nic Carter retweeted Jerry's summary, identifying the threat to mining saying, quote, "Banning mining in the U.S. would be an act of legislative stupidity on a par with prohibition. Hopefully, Congress is able to meet a higher standard than the CCP, but I'm not optimistic. Also, there's something like 10 to 15 billion of publicly traded miners in the U.S. Where are they on this? For an existential threat like this, they should be absolutely flooding Washington with lobbying and money."
So, TLDR things are better, but we're not out of the woods. I think one of the lessons with this is that political risk isn't just blustery curmudgeons who hate us like Brad Sherman, but callous and opportunistic politicians who don't spend time thinking about us unless there's a buck to be made. It's also a reminder of the value of taking time to make allies when times are good so that you can deploy them when there is a need, something to chew on particularly for those who don't think engaging with the powers that be is ever worth the time. For now, though, thanks to all the people in this industry who have been working hard to make these changes. Your efforts do not go unappreciated. Let us know what we can do to help and until tomorrow, guys, be safe and take care of each other. Peace!