Policymakers are forced to listen as backlash to the infrastructure bill continues.
This episode is sponsored by NYDIG.
The infrastructure bill’s crypto provision had the industry scrambling to lobby for change. On this episode of “The Breakdown,” NLW covers the continuing saga of the bill, including:
- A recap on the bill’s crypto provision and subsequent backlash
- Crypto industry’s resistance going mainstream
- Regulatory battles to come
A last-minute addition to the infrastructure bill met with fierce resistance from figures across the crypto sector, from industry executives to crypto-friendly lawmakers. These statements called out the destructive nature of the bill as it would require non-broker crypto intermediaries to comply with strict IRS reporting standards, a nearly impossible task.
The extensive lobbying has not gone unnoticed. Mainstream media picked up the story as more and more statements called out the potential dangers of the bill. Policymakers are now forced to face the angry cyber-hornets headed their way.
The infrastructure bill battle is the first of many regulatory clashes to come. For example, debate is currently raging on crypto Twitter about the implications of SEC Chairman Gary Gensler’s speech on crypto today. Will the crypto industry tackle future regulatory collisions with a similar ferocity?
The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell 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 “Only in Time” by Abloom. Image credit: iLexx/iStock/Getty Images, modified by CoinDesk.
What's going on guys? It is Tuesday, August 3, and today we are talking about the Senate meeting the cyber-hornets. I know, I know, it has been a lot of days with a focus on this developing infrastructure bill story. But first, hopefully by now you grok how big the implications are for the industry. Second, it is an extremely fast-moving story. There were new, relevant events that happened between when I finished recording yesterday and when the podcast was actually released. And three, there are some larger dimensions to it that have implications even beyond just this bill. So, at least for a little while, you're stuck with this story.
And where we left off yesterday was the furious lobbying of the crypto industry over the weekend had made some progress. The language in the bill was softened. As Coyne Center's Jerry Brito put it, "It's better than where we started, but still not good enough to clearly exclude miners and similarly situated persons." Now, if you happen to be just tuning in for the first time, just hearing about this for the first time, effectively, the issue here is that at the last minute, the folks writing the key infrastructure bill added crypto tax payments as a part of it. Specifically, they put a new definitions of who constitutes a broker for the sake of tax reporting, in order to get back taxes that they claimed were going unreported. The problem is that the definition of broker was so wide that it could implicate a huge number of people in the crypto industry that don't look at all like brokers in any reasonable way.
So that's the issue again, Jerry Brito's quote, "It's better than where it started, but still not good enough to clearly exclude miners and similarly situated persons." And what he means is to exclude them from this definition of being a broker. Now, Rob Portman, one of the Republicans who drafted the bill, keeps saying over and over that the intent isn't to target these miners and wallet developers. A Washington Post article about this this morning reads, "Portman, who drafted the measure, has denied that cryptocurrency miners and software developers would be targeted under the new provision. He's expected to deliver remarks on the Senate floor affirming that the plan does not apply to these groups." The issue here though, is that it well and truly does not matter what Portman thinks the words mean, it matters what future officials who interpret them think the words mean. That's the whole thing about law and the reason it has to be articulated in such exacting, excruciating detail is that in the future, people will be called upon to interpret that law. And if the words literally allow for Thing X to be true, it doesn't matter that the drafters of the law say yeah, but that's not the intent of thing X. Frankly, it is mind boggling that a Senate leader wouldn't get this, or perhaps a better word is unbelievable.
Many in crypto clearly don't believe it. As Jerry Brito writes about that statement, "A speech saying you don't mean to cover miners is nice, but if you really mean it, there is a simple fix. Take an amendment that adds a line 'Nothing in this section shall be construed to include miners, wallet makers, devs, etc.'" Caitlin Long echoes this frustration: "Congress is so broken," she writes. "Senator Rob Portman is trying to create a legislative record that the infrastructure bill doesn't cover node operators, miners and validators. Why not just say that? Answer: the bill wouldn't pass. So, Congress shirks its responsibility, and hands career agency staff more power"
Here's where it gets really interesting though. It's not just crypto folks spreading this message. We discussed Ron Wyden, the Democratic Senator from Oregon yesterday. He tweeted on Sunday, "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." The story got picked up by outlets like politics-focused Roll Call who published a piece called "Wyden Wants Tweaks to Infrastructure Bill’s Cryptocurrency Rules: Senate Finance chair concerned about impact to blockchain technology developers." Here's the key paragraph in that piece. "Wyden supports reporting rules for cryptocurrency exchanges, which is what the provision aims to do according to an aide. His concern is that the language lacks clarity and could mean the developers of blockchain technologies, such as wallets, which allow users to manage different crypto transactions have to provide information to the IRS, which could pose technological challenges and cause unintended consequences. Wyden hasn't ruled out putting forward his own amendment as a fix."
It's also not just Ron Wyden. Republican Pat Toomey has called the proposal unworkable. He tweeted, "The bipartisan infrastructure package includes a hastily-designed tax reporting regime for cryptocurrency. Simply put, the text is unworkable. I plan to offer an amendment to fix it." What's more, his full statement makes it even clearer that he gets it. Quote, "Congress should not rush forward with this hastily-designed tax reporting regime for cryptocurrency, especially without a full understanding of the consequences. By including an overly broad definition of broker the current provision sweeps in non-financial intermediaries like miners, network validators, and other service providers. Moreover, these individuals never take control of a consumer's assets and don't even have the personal identifying information needed to file a 1099 with the IRS. Simply put, the text is unworkable. I plan to offer an amendment to fix it."
Importantly, this has jumped out of the realm of some small industry thing to mainstream news. A headline in the Washington Post this morning reads "GOP Senators Feud Over Cryptocurrency Plan as Lawmakers Seek Funding for Infrastructure Deal." That piece has a few additional details. First, another bit of clarification that Republican lawmakers are going for, quote "Republican lawmakers involved in negotiations have also asked the Treasury Department to issue informal guidance, clarifying that miners and software developers will not be subject to the new rules according to a GOP official familiar with the matter," but also, we got some insight into how this thing happened in the first place. Quote, "The late haggling over the cryptocurrency provisions comes on top of months in which the White House in a bipartisan group of senators have struggled to figure out how to pay for the infrastructure package, even changes as smallest tougher tax enforcement on things like bitcoin could prove thorny as lawmakers try to guide any proposal into law. Targeting cryptocurrencies, which have relatively little political clout in Washington, emerged last week as a possible compromise after Republicans ruled out taxing the rich and more aggressive IRS pursuit of tax cheats."
So basically, the bill had to find some ways to say it would pay for itself. Republicans killed the unpalatable approaches Democrats had advanced and what was left was them targeting things without a lot of power in Washington. I wonder if right now, any of these senators that thought this was a good idea, and that we were a little pushover community are sitting there just asking themselves, what is the actual tarnation they've gotten themselves into. Senators: meet the cyber-hornets.
Jake Chervinsky explained a little bit about why this is working. He tweeted, "Senators Ron Wyden and Toomey already have more engagement on their tweets criticizing the infrastructure bill than nearly any other tweet this year. It sounds silly, but this matters. Elected officials need to know we're a big part of their constituency, and when needed, we go hard." Later in the day, the Electronic Frontier Foundation picked up the cause and framed it in terms of surveillance and an affront to liberty and privacy. They tweeted, "Here are 6 reasons we hate the new cryptocurrency surveillance provision buried in Biden's infrastructure bill: #1 It will require new surveillance of everyday users of cryptocurrency. #2 It could force software creators and others who do not custody cryptocurrency for their users to implement cumbersome surveillance systems or stop offering services in the United States. #3 It will create more honeypots of private information about cryptocurrency users that could attract malicious actors. #4 It will create more legal complexity to developing blockchain projects or verifying transactions in the United States—likely leading to more innovation moving overseas. #5 It is impossible for miners and developers to comply with these new reporting requirements. #6 It creates uncertainty about the ability to conduct cryptocurrency transactions directly with others via open source code, for example through smart contracts and decentralized exchanges. Any smart cryptocurrency regulation should safeguard privacy, innovation, and decentralization. This fast-moving provision fails those standards." Couldn't have said it better ourselves, EFF.
So, where are things now? Well, Jake Chervinsky again writes "Tuesday morning infrastructure bill update. We're working to get the bill amended on the Senate floor. Several senators have already expressed public support for an amendment, details are taking shape." So, on the bill itself, there was some positive momentum but, what about the broader assessment of the crypto industry and its relationship to Washington? Well, there's still some amount of dismissiveness from some critics who are claiming it's the crypto industry complaining about having to pay taxes. That's total bulls**t, though. And at any point, any reporting that frames at this way that frames the pain out provision is just trying to get the U.S. government's fair share of what's owed is either one incredibly lazy, which is going to be the vast majority of cases; or two, outright malicious. As Neeraj from Coin Center put it, "Let's try this again. No one is complaining about paying crypto taxes. No one is complaining about a broker like Coinbase being treated like a broker. What we don't want is a miner slash staker to be treated like a broker, because they are brokers by any stretch of the imagination. At this point, we have made our position explicitly clear, getting this wrong is inexcusable."
Still, it is abundantly clear, and this is the real point that I want to make, that the crypto industry has put Washington on notice. A New York Times headline reads: "Cryptocurrency in the infrastructure bill: The industry won last-minute concessions." This is really powerful. I tweeted about this this morning and Jake Chervinsky responded and said he was really proud of this industry, that it's punching above its weight class. And that's a good thing because we're going to need it in the many, many fights to come.
Remember how I told you about that massive comprehensive crypto regulation bill put forth by Congressman Don Beyer? Well, here's some tea: yesterday, in an appearance on CoinDesk TV, Representative Tom Emmer, who has been deeply engaged with the crypto space for years now, basically dropped a 'Who the hell is this guy.' Quote: "Don Beyer hasn't been involved in this space at all that I know of. And all of a sudden, he comes out with this proposal that will give the Federal Reserve complete control over creating a central bank digital currency, and all kinds of related authority to it? Call me suspicious if you want, but I think that sometimes someone at Janet Yellen’s Treasury would call a long-time ally like Don Beyer and say, ‘Look, we really need to push back on these Republicans,’”
So, as I mentioned, that legislation is massive, but it's still not the only thing floating around. There's also Gary Gensler. In an interview with Bloomberg today, the new SEC Chairman made clear that his interest in the crypto space does not mean he's going to give it an easy pass. Quote, "While I'm neutral on the technology, even intrigued, I spent three years teaching it, leaning into it, I'm not neutral about investor protection." Before we get nervous, though, here are a few things to keep in mind. There are two languages regulators are using around crypto right now, investor protection and systemic risk. Investor protections are just, are there enough safeguards in the system? Now these can have a big impact on what tools are available to people, for example, whether retail users are allowed to trade a certain asset or a certain type of derivative. But ultimately, when we're talking about investor protections, there's lots of room to work and debate and nothing is an existential threat.
Assigning crypto the label of systemic risk is a whole different thing. That's the type of language that leads to repressive regulatory regimes, extreme compliance burdens and outright bans. That's also the language starting to be picked up by folks like Elizabeth Warren. Gensler is using the investor protection language, which by the way, is his mandate. And that's the other thing that's important to note. Of course, he has to remind people that his mandate is investor protection. If everyone perceived him to be in the pocket of crypto or overly favorable to crypto, he would have no credibility to actually help crypto. Now, as I was recording this, news started to break of a speech that Gensler gave earlier today, where he had much more aggressive language towards the industry. CoinDesk is reporting it as "SEC Chairman Gensler agrees with predecessor, every ICO is a security."
Katherine Wu, crypto lawyer, former VC, former founding team at Massari writes, "Gensler really went live today to give us all a huge 'f**k you.' In all seriousness, though, this is the most aggressive and hostile stance regarding U.S. crypto legislation to date from the SEC, magnitudes more than anything before." Jake Chervinsky doesn't agree, Nic Carter says it's significant. It's confusing, but it's definitely a little bit different from the story that I was just telling you. Unfortunately, I had to go back and add this because it came out after I was done recording, which means you probably know what we're talking about tomorrow. For now, though, what I'll say as I wrap up is this. What we're seeing is the emergence of a nascent crypto lobby, decentralized, coordinated when it needs to be effort to push the government to understand crypto on its own terms, not just smash its round peg into the square hole that it used to be. I think it's extremely positive. And while there's still a ton of work to do on this specific infrastructure bill, and then on the future cryptocurrency bill that was introduced by Beyer, I think we're starting to build not just the social immune system that people talk about so often, but the actual advocacy tools to turn that into different policies. I'm super appreciative of all the efforts that are going into this and I appreciate you guys listening, until tomorrow. Be safe and take care of each other, peace!