The 9 words that could determine crypto’s future

The US House of Representatives is set to vote on the White House-backed, $1 trillion infrastructure bill next month.

It already passed the Senate earlier this month, but in a quintessentially 2021 twist, a single clause about cryptocurrency has become the 2,702-page bill’s most contentious provision. It held the legislation up in the Senate for several days in early August.

The clause asks a simple question, which the crypto community says will make or break crypto development in the US: Who counts as a crypto broker?

How we got here

The US government must, in theory, find a way to pay for the hundreds of billions that the infrastructure bill allocates to high-speed broadband, transportation infrastructure, bridge repairs, and more. 

One such “pay-for” in the must-pass bill is a proposal to implement stricter tax-reporting requirements for cryptocurrency brokers. The thought process: Crypto “brokers” should report transactions to the IRS just like traditional stockbrokers. This measure could bring ~$28 billion into government coffers over the next decade, per the Joint Committee on Taxation. 

The catch? The bill’s original language, authored by Sen. Rob Portman, widens the definition of “broker” in the US Tax Code to cover any entity “regularly providing any service effectuating transfers of digital assets.” Those nine words could be interpreted to mean virtually everyone in the cryptocurrency ecosystem: blockchain protocol developers, software wallet developers, hardware wallet manufacturers, bitcoin miners, and proof-of-stake node validators. 

Pushback

In early August, when the bill hit the Senate floor, the crypto language prompted a fusillade of blowback across the US. A common argument against the new crypto rules is that by forcing all these newly minted “brokers” to send 1099 tax forms to their “clients”—a technically impossible measure—the US would not outright destroy the crypto industry, but instead force development to foreign shores. 

Fight for the Future, a digital-rights advocacy group, issued a “crypto red alert,” declaring that the crypto provision “will expand US government surveillance of cryptocurrency.” The group claims to have facilitated more than 41,000 calls from US constituents to their lawmakers. 

Jerry Brito, executive director of the Coin Center, a Washington-based crypto think tank, suggested the reporting provision could be a slippery slope. Depending on the rule’s final interpretation, he tweeted, lawmakers or enforcement agencies could force developers to become intermediaries in networks that are inherently decentralized and peer-to-peer. 

“Bottom line, cryptocurrency networks are more clearly becoming a front in the ‘crypto wars,’” Brito said. “Crypto wars,” in this case, refers to governments’ quests to compel tech companies to build backdoors in their encrypted communications systems.  

Trying to rectify the perceived issue at the last hour, two groups of senators proposed a pair of dueling amendments.

The first, from Sens. Warner, Portman, and Sinema, would have only excluded proof-of-work validators (i.e., bitcoin miners) from tax-reporting requirements. Sen. Warner later amended the original language to also exclude proof-of-stake validators. The White House ended up throwing its weight behind this amendment. 

The second amendment, from, Sens. Ron Wyden, Cynthia Lummis, and Pat Toomey, introduced language that would explicitly exclude node validators, wallet makers, and protocol developers. By and large, the crypto community supported this amendment. 

Ultimately, due to procedural constraints, neither amendment was accepted. The original language of the crypto provision prevailed and was sent to the House. 

The Electronic Frontier Foundation, a group that defends online free speech, also came out swinging against the crypto rule. It provided criteria for crypto regulation, which largely encapsulates the argument against the language as-is. The EFF wrote that crypto regulation…

• “Should be technologically neutral;
• Should not apply to those who merely write and publish code;
• Should provide protections for individual miners, merchants who accept cryptocurrencies, and individuals who trade in cryptocurrency as consumers;
• Should focus on custodial services that hold and trade assets on behalf of users;
• Should provide an adequate on-ramp for new services to comply;
• Should recognize the human right to privacy;
• Should recognize the important role of decentralized technologies in empowering consumers;
• Should not chill future innovation that will benefit consumers.”

This week, the WSJ reported the US intelligence and national security communities—not exactly friends of the crypto world—are likewise bristling at the new rule because it would push activity out of their jurisdiction. 

Contrary to common narratives, blockchains (not named Monero) often offer more transactional transparency and traceability than traditional financial alternatives or cold, hard cash. If you transact through a US crypto exchange or touch a custodial wallet provider, those companies are using know-your-customer (KYC) and anti-money laundering (AML) measures. They can be court-ordered to hand over your identity and freeze your funds.  

• Recall that this summer, the FBI and DOJ were able to recover millions’ worth of crypto paid out by Colonial Pipeline to a ransomware group. 

And in the US political arena, lawmakers across the aisle—from Sen. Ted Cruz to Sen. Ron Wyden—have found common cause in vociferously opposing the reporting requirements.

What’s next? 

US Treasury officials say they won’t impose new requirements on non-brokers, per Bloomberg. The assurances have yet to be codified into any new Treasury rules. Still, spoken promises < written rules. Plus, the nascent industry and its Washington advocates don’t necessarily want to leave the interpretation of “broker” or “non-broker” up to agencies or presidential administrations. 

In any event, if the bill is signed into law, the rule wouldn’t go into effect until 2023. If the past two months are anything to go by, the crypto community will continue to fight tooth and nail, even if that means legal challenges in court.