The cryptocurrency industry is lobbying hard this week against language in the Senate’s bipartisan infrastructure bill proposal that could choke a vast amount of the crypto ecosystem.
Language in the bill would require crypto brokers to report customer information to the Internal Revenue Service. More importantly, over the weekend it broadened the definition of what’s considered a “broker” to anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” which doesn’t exclude miners, software developers, stakers and other individuals in the crypto economy who don’t have customers.
“The language gives a lot of power to define what should be included in the reporting requirement,” Oppenheimer analyst Owen Lau. “It says any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person – which can mean anything. If I transfer bitcoin for you, then it can mean I become a broker.”
Senate Majority Leader Chuck Schumer (D-NY) speaks to reporters about the bipartisan infrastructure bill at the U.S. Capitol in Washington, July 28, 2021.
Elizabeth Frantz | Reuters
As of Monday, the language hasn’t been finalized, and there’s still time to fix it before it is, or even through a later bill, according to Kristin Smith, executive director of the Blockchain Association, a crypto trade association that works to change public policy at the federal level.
Bitcoin fell more than 5% Monday, and ether lost 1.8%, according to Coin Metrics, with some of the uncertainty around the bill weighing on sentiment.
The biggest worry is that the language would “detract people from wanting to invest or participate in crypto networks in the United States,” Smith told CNBC.
Jake Chervinsky, a lawyer experienced in crypto-related securities litigation and government enforcement defense matters who is now general counsel at the decentralized finance (DeFi) firm Compound Labs, said it would also be detrimental to existing businesses that would be unable to comply.
“In practice, your only options would be to shut down or move offshore,” Chervinsky said. “That’s what this bill threatens to do to U.S. crypto companies by forcing them to report information to the IRS that they don’t have and can’t get.”
What does crypto have to do with infrastructure?
Because the infrastructure bill is so expensive, it has to include a huge number of “pay-fors” – or provisions in a bill that generate revenue for the government to offset new spending in other parts of the bill – to keep it revenue neutral and ultimately get support of Republicans in the Senate, Chervinsky explained.
“Crypto is less a target of the bill and more an innocent bystander caught in the crossfire of the broader politics surrounding it,” he said.
Lau said Congress is being “very smart” about it.
“If they want more money, they just opened the net to include more companies so their tax revenue can increase to more than the $28 billion they are looking for,” he said.
The language wouldn’t affect centralized exchanges like Coinbase, or other public companies where consumers can buy cryptocurrencies like Robinhood, Square and PayPal. As public companies they have clearly identified customers and work with them on reporting requirements due to the IRS.
Still, “they’re strongly opposed to the crypto pay-for provision because they know it could wreak havoc on the broader crypto markets, which would damage their business as well,” Chervinsky said.
Coinbase, for example, spent $80 million earlier this year to acquire Bison Trails to power its staking service. Much of the company’s revenue is based on trading fees but CEO Brian Armstrong has said he expects to diversify those revenue streams, which includes beefing up its staking offerings.
Smith said the goal of having reporting for centralized exchanges is a worthy one the Blockchain Association supports so long as it’s limited to the appropriate companies.
Bitcoin miners, who also don’t have customers whose information they can report, could get hurt too if the bill passes with the existing language deeming them brokers. That’d be a blow to the sector, which has been keen to take more market share after the Chinese crackdown on mining that moved more than half of bitcoin’s mining operations out of China, much of it to the U.S.
“We haven’t given up hope that this can get fixed yet,” Smith said Monday afternoon. “There’s definitely a pretty intense advocacy effort going on to get that changed.”