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Why Crypto Is Skeptical of Treasury's Assurances That We Should Trust It on Infrastructure Bill

The U.S. Treasury claims it will not target non-brokers, though the language of the bill differs with that claim.

Listen on:

On this episode

The U.S. Treasury claims it will not target non-brokers, though the language of the bill differs with that claim.

This episode is sponsored by NYDIG.

First, on the Brief:

  • OnlyFans’ reversal of its decision to ban sexuually explicit content
  • Budweiser’s NFT Twitter profile picture
  • The U.K.’s warnings to Binance

Last week, OnlyFans announced it would ban sexually explicit content from its platform, citing three major banks that had refused service because of “reputational risk.” Today, the company suspended the policy change and lauded the community’s rallying support for creators who use the platform. Will larger financial institutions continue to put pressure on OnlyFans or other platforms to make them more “moral”?

Budwieser is the latest to follow Visa’s footsteps into the NFT domain. The beer maker announced it bought a rocket ship from NFT artist Tom Sachs’ Rocket Factory. Last on the Brief, specifics of the U.K.’s quarrels with Binance have been released, primarily centered around a lack of supervision capabilities.

In the main discussion, NLW addresses a new angle to the infrastructure bill. The Treasury has claimed that it will not target non-brokers, like miners, even if the bill’s language includes them. Can the crypto community trust the Treasury’s statements of goodwill?

“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: Shawn Thew/EPA/Bloomberg, modified by CoinDesk.

Transcript

What's going on guys, it is Wednesday, August 25 and today we are talking about the latest in the infrastructure bill battle. First up, however, let's do the Brief. First on the Brief today, OnlyFans is back. Last week we discussed OnlyFans and in short, a story came out saying that they were having a hard time raising venture capital, despite making money hand over fist, or any other body part for that matter. Later that day, OnlyFans announced that it was making changes to its policies and that it would be banning sexually explicit content. Nudity, they said, was okay, if it followed some set of guidelines which were forthcoming, but sexually explicit content and again, it was anyone's guess and exactly what that would mean, would not be allowed starting October 1. There was a pretty big uproar around this. There was incredulity. I mean, this is sort of what made OnlyFans successful, was this just going to be Tumblr 2.0? There was also a lot of acrimony at payment processors who were cited as the reason for the change and that was certainly my main focus in the discussion. I am supremely, violently opposed to financial institutions being the moral arbiters of society. That position will shock you coming from me, I know. This was tempered only slightly by the feeling that OF itself as a platform wasn't some heroic freedom fighter but more of an opportunist that might be looking for an excuse to try and go more mainstream business anyway. 

Either way, yesterday, we got more information about what was going on behind the scenes. The founder and CEO of OnlyFans, Tim Stokely, told the Financial Times that "the change in policy, we had no choice." The short answer is banks. The Verge explains: "Stokeley named three major banks that refused service because of reputational risk associated with the U.K.-based OnlyFans sexual material: Bank of New York Mellon, Metro bank and JPMorgan Chase." Now, this is more granular than last week's reporting from Bloomberg, and Stokely also pointed to JPMorgan Chase as "particularly aggressive in closing accounts of sex workers or any business that supports them." Well, apparently, the saga continues because today, OnlyFans tweeted: "Thank you to everyone for making your voices heard. We've secured assurances necessary to support our diverse creator community and have suspended the planned October 1 policy change. OnlyFans stands for inclusion and we will continue to provide a home for all creators, and official communication to creators will be emailed shortly." 

So, reactions. Well, creators are still pissed. Many are tweeting about how many fans they lost through this series of hamfisted communiques. In the crypto sphere, some remain skeptical. Anderson Kill partner Preston Byrne said: A reprieve, not a pardon. The banks will be back. Someone, somewhere, needs to create the "Based Bank" and associated "Based Credit Card Rail" that won't deplatform legal businesses." Ryan Selkis finds a bit more room for optimism: "If OnlyFans can pressure the banks (and by extension the government) to keep them open for adult content, Then crypto can exert pressure on elected reps to ensure they take action to preserve the fastest growing sector of American tech from Treasury’s and SEC’s overreach." Now, to be fair, from my vantage, I've seen no evidence that this represents an act of pressuring the banks back versus just finding other payment processors willing to work with OnlyFans, but I like Ryan's energy so I'm going to shout it out. 

Next up on the Brief today is a follow up from Monday's discussion of institutions and NFTs. My argument then, which I stick with, is that Visa buying a Punk was not a domino of big institutions getting into NFTs as a reserve asset. That is different, of course, than brands messing around with NFTs as marketing, which has already been happening quite a bit. The latest on that front comes from Budweiser, who changed its U.S. Twitter picture profile to be that of a rocket ship from NFT artist Tom Sachs. An Anheuser-Busch InBev spokesperson said Budweiser is taking its first steps into the NFT universe. "We're excited to support Tom Sachs and his Rocket Factory Project and join this incredible community. The Rocket was bought for around 8 ETH or $25,000. And meanwhile, Budweiser also bought the "beer.eth" domain name for around 30 ETH or $95,000. Last month, the VP of global brands for AB InBev told CoinDesk that they were investing in a NFT media company run by Gary Vaynerchuk, so in many ways, I don't think this is surprising. 

Now let me give a take that may sound cynical but really isn't meant to be, at least when it comes to NFTs themselves. The group that I believe is least likely to help mainstream NFT adoption is consumer brands adopting it for marketing purposes. Some might do well, and the fact that there are people deep in the NFT space helping with that could mitigate some of the bad parts, but in general, brands leech off of cultural credibility, and often signal that a thing which was once cool is now too widely exposed to be cool anymore. Brands also dramatically overestimate how much people give a crap about them, and so are likely to produce kind of boring, uninteresting copycat, dumb, marketing NFTS. Now, the proof will be in the pudding of how they execute and obviously, brands sucking in NFTs doesn't compromise the project as a whole. But I'm just saying, no one ever saw a big brand do something and thought to themselves, "man now I really need to do that too."

Last one on the Brief today, we're talking about a bit of regulation from the U.S. perspective next, but first, a quick foray to the U.K. The U.K.'s Financial Conduct Authority has been on a nearly year-long push to limit crypto trading in the country. Recently, they've had their set site on Binance. They posted a warning that Binance wasn't regulated to operate in the country. But, more recently, a memo from around the same time they made those statements, dated June 25 this year, came to light outlining the actions and restrictions the FCA planned to put on Binance. The big conclusion was really that the FCA doesn't have the capacity to keep track of them: "Based upon the firm's engagement to date, the FCA considers that the firm is not capable of being effectively supervised. This is a particular concern in the context of the firm's membership of a global group, which offers complex and high risk financial products which pose a significant risk to consumers." Alongside the notice, the FCA also requested info from Binance, which, according to the Financial Times, was something that Binance had previously been cagey about. I wonder to what extent that's changing now as pressure mounts and Binance starts a charm offensive saying that they're going to be a great regulated partner for the future.

Let's shift to our main topic and let's check on the status of the battle around the infrastructure bill. The best way in a single episode to learn what happened is to go listen to my conversation with Jake Chervinsky who was involved throughout the fight. But the super TLDR for the sake of this show is, at the last minute a few weeks ago, a provision was inserted into the infrastructure bill to try to pay for part of it by closing tax reporting requirements around crypto. The original language was written extremely broadly, as we later found out, this was pushed by the Treasury, to give them max authority to write the rules as they saw fit and potentially with an eye to reining in DeFi. There was a huge uproar in crypto, the rules seem to include validators, miners, you name it, basically people who couldn't actually comply with the reporting requirements, and those would be definitionally in violation of the law simply by doing what they do in the context of crypto networks. The nascent crypto lobby proved to be quite a bit louder and more effective than anyone assumed. He wants some allies who tried to write an amendment that would clarify who was included. That amendment caused its own fight and eventually produced a counter amendment and Janet Yellen, the treasury secretary was on the phone lobbying senators to support her amendment, and not our amendment, and the whole thing was insane. At the end of the day, debate was cut off and no amendments were added. And from there, the fight turned to the House. 

Which brings us to yesterday's news, which Politico summed up this way: "Crypto lobbyists handed setback as House blocks tax rules changes, the House Committee agreed to a process that would prohibit any amendments from being considered for the infrastructure bill. So, this vote that they're referring to yesterday, a 220 to 212 vote to lock the bill from amendments, sets up a floor vote on September 27 with the original language. This is obviously a bummer, although not really unexpected. As Ryan Selkis again put it: "They won’t impede a 'must pass' $3.5 trillion spending + infra bill to fix language in a pay for representing 1% of the bill. They already believe it will be clarified in rule-making. Congress (as usual) will cede its authority to the exec branch, so the battle is just starting." 

Interestingly, Treasury continues to push the line that I took such umbrage with during this whole process that of course, it's not going to go after people who can actually comply with these requirements because that would be dumb. CNBC ran a piece yesterday called "Treasury Will Not Target Non Brokers Like Miners, Even if the Crypto Tax Provision Is an Amendment Discussing Our Fears." Basically, the piece said that a Treasury official who talked to them said those fears were unwarranted. Quote, "The U.S. Treasury Department will not target non-backers, such as minors, hardware developers and others, even if the provision is amended, a treasury official tells CNBC. Reporting requirements would only be extended to those able to comply like certain decentralized exchanges, for example, if written into tax law. Prior to establishing the law, the Treasury plans take the time to undergo research to understand who might be asked to comply and to verify whether they'd be capable of doing so, according to the Treasury official. This process could take years."

As he's done throughout this crisis, Coin Center's Jerry Brito pre perfectly captures my attitude about this, tweeting: "I'm glad to hear that Treasury officials are telling reporters on background that they don't intend to target miners if the infrastructure bill's crypto tax provision becomes law, but I'm afraid that is little comfort, let me explain. First, it's a little strange to assure folks that you will not target non-brokers because by definition, only brokers can be subjected to reporting obligations. Of course, Treasury will never target non-brokers, whoever's targeted will have been interpreted to be a broker. It's doubly strange when the point of the bill is to expand the definition of brokers such that Treasury could interpret it to cover non-middlemen, who would not qualify as brokers today. For example, the article says the Treasury officials said they did intend to target certain decentralized exchanges. Well, if an exchange qualifies as a broker under current law, then I'd say it's not decentralized. So it's not clear who these certain decentralized exchanges refer to. The only kind of entity I can think they mean are software developers who do not broker transactions and the common understanding of that word. Second, the expanded definition of broker is only one of the concerns we have with the Portman crypto tax provision. We have other concerns that have not gotten as much attention because they weren't the subject of the bipartisan senate amendment effort. For example, the bill would allow the Treasury to require reporting from brokers not just on trades, but on your transfers, and not just broker to broker but from a broker to a non-broker, i.e., a person with a self-hosted wallet. That's similar to the Mnuchin Midnight Rule. The bill would also create an obligation for all crypto transactions over $10,000 to be reported to the IRS, along with personal information of the counterparty. This is a massive change to make outside of regular order. Again, I appreciate that it seems to be the Treasury's intention to get this right. And we look forward to engaging in any regulatory process in the years to come. But please don't accept the narrative that folks in crypto are overreacting about this provision." 

Here, f**king here, Jerry, what's clear to me is that the challenge is now set squarely on the Treasury Department. Today's Washington Post ran a long piece called "Cryptocurrency Advocates Find Treasury's Yellen to Be a Tough Sell." The piece doesn't really add anything new to the discussion, but it certainly centers on the key actor here. But, key actor doesn't mean only actor. The Wall Street Journal published today a piece on the national security scenes take on the issue. The piece was called "Infrastructure Bill's Cryptocurrency Measures Risk Pushing Criminals Further Underground" and here's how Neeraj from Coin Center summed it up. "Natsec officials are wary of driving cryptocurrency further underground with heavy-handed regulation. from what i hear, they have a certain level of comfort with their existing visibility into the system." One of those officials quoted in the piece was Sigal Mandelker, Treasury's former Undersecretary for Terrorism and Financial Intelligence who is now at Ribbit Capital. She said, "The U.S. has to make a decision if it wants to be a center of transformational technology that can bring many more people into the financial ecosystem." Because, as she put it, if regulations push innovation out of the country, within five years, quote, "The U.S. will really get left behind and that is the threat here." So now obviously, I'm just picturing the handshake arm class mean between crypto and the national security apparatus, the strange times we live in, but continued affirmation of what Lawrence of Arabia was so fond of saying, nothing is written. Until tomorrow, be safe and take care of each other. Peace!

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