Last week, Congress sent shockwaves across the crypto industry when it included new IRS reporting requirements in the bipartisan infrastructure package that threaten to sabotage American leadership in digital currency and send jobs overseas. Thankfully, several senators recognized the implications of this misguided policy and have been working with industry leaders to amend the bill and ensure and maintain a technology-neutral approach to regulating the burgeoning crypto economy.
However, just when it appeared as if common sense would prevail, an eleventh hour “compromise” amendment emerged that would do even more damage to America’s nascent crypto industry.
It is imperative that this amendment be rejected.
The problem with the infrastructure bill’s original crypto provision was that it imposed stringent reporting requirements across the entire industry that would ensnare innovators in red tape. By redefining most crypto stakeholders as “brokers,” the bill would require nearly everyone – including software developers and hardware manufacturers – to collect and store personal details about everyone that uses their products and report that information to the IRS.
For many crypto innovators, there is simply no way to comply with these rules because, for example, they only write the underlying code that facilitates a transaction; they do not have access to the information this amendment would require. This means they’d be forced to take their business, and the jobs and economic growth they support, overseas to jurisdictions that do not have such impossible-to-comply-with tax provisions.
To fix this, Sens. Ron WydenRonald (Ron) Lee WydenCongress needs to step up on crypto, or Biden might crush it Democrats face growing storm over IRS reporting provision Best shot at narrowing racial homeownership gap at risk, progressives say MORE (D-Ore.), Cynthia LummisCynthia Marie LummisCongress needs to step up on crypto, or Biden might crush it Senators preview bill to stop tech giants from prioritizing their own products GOP ramps up attacks on IRS proposal for spending package MORE (R-Wyo.), and Pat ToomeyPatrick (Pat) Joseph ToomeyBlack women look to build upon gains in coming elections Watch live: GOP senators present new infrastructure proposal Sasse rebuked by Nebraska Republican Party over impeachment vote MORE (R-Pa.) drafted an amendment to ensure that only those entities with the capabilities to comply will be required. This amendment would give innovators the room to grow and create jobs, while also ensuring actual brokers are fulfilling the proper reporting requirements.
It is important to note that this issue is not and never was about crypto investors and entrepreneurs dodging taxes. It is about unfairly targeting an industry with onerous requirements that are, for most, not possible to meet. The Wyden-Lummis-Toomey amendment would remedy this problem.
However, a dueling amendment spearheaded by Sens. Mark WarnerMark Robert WarnerPressure grows for breakthrough in Biden agenda talks Fill the Eastern District of Virginia GOP tries to take filibuster pressure off Manchin, Sinema MORE (D-Va.), Kyrsten SinemaKyrsten SinemaPressure grows for breakthrough in Biden agenda talks Sanders, Manchin escalate fight over .5T spending bill Biden gets personal while pitching agenda MORE (D-Ariz.) and Rob PortmanRobert (Rob) Jones PortmanMcConnell gets GOP wake-up call Biden shows little progress with Abraham Accords on first anniversary The Hill's Morning Report - Presented by Facebook - After high drama, Senate lifts debt limit MORE (R-Ohio) — and backed by the White House and the Treasury Department — would undo most of these fixes and provide even more uncertainty and regulatory obstacles than the initial bill.
To understand the problem, it’s important to understand the two ways of adding a new block to a blockchain: Proof of Work (PoW) and Proof of Stake (PoS). In PoW, individuals compete against each other to solve complex math problems in exchange for rewards (for instance, newly mined Bitcoins), whereas individuals take turns solving problems and earning rewards in PoS. Under Warner’s provision, only PoW validators and digital wallet providers are exempted from the requirements. That means that most other entities in the industry, such as software developers, as well as PoS and other types of validators, will still be burdened with strict standards that they cannot comply with.
This would do nothing to solve the problems of the original bill, as most crypto entities would still be unable to comply with the new requirements, forcing them to move to jurisdictions that would not impose such impossible standards. This would spur a massive brain drain of top technology innovators to our closest international competitors — even more, it would be a loss in revenue that the amendment attempted to raise for infrastructure projects.
By imposing strict regulations on PoS validators, this policy is putting its thumb on the scale and providing an unfair advantage to PoW validators. In effect, this will give a leg up to blockchain networks that use PoW. This is a lamentable example of the government picking winners and losers, and stifling the free market’s ability to grow our economy through fair competition. Conversely, the Wyden-Lummis-Toomey amendment is entirely technology neutral, meaning the market can decide which products and technologies are best.
This hastily drafted “compromise” will have real world effects on a growing market. According to a recent survey by NORC at the University of Chicago, “13 percent of Americans surveyed report purchasing or trading cryptocurrencies in the past 12 months,” a substantial number that will surely grow if the industry continues to develop in this country. Moreover, the study found that individuals who invest in cryptocurrency are “younger and more diverse in terms of race/ethnicity and gender” and have lower income and levels of education than those investing in traditional equity markets. This technology is democratizing markets, but it can’t continue to do so if the industry is undermined by this unwise, ill-drafted provision.
And we’ve barely touched on the impact this amendment will have on the number of people who currently work in this growing sector. According to one estimate, there are more than 1,400 crypto companies operating in the U.S. right now. An incalculable number of those businesses would be forced to consider leaving the U.S. if this provision moves forward.
At a time when our nation is scrambling to compete with China, we shouldn’t be forcing the best and brightest innovators away with burdensome regulations. We should instead provide a level playing field in crypto innovation so that the free market can prosper and drive America’s technological dominance in the 21st century.
Put simply, the so-called “compromise” amendment to the infrastructure bill is no compromise at all. Rather, it is nothing more than a few breadcrumbs meant to appease the crypto industry while the key components of the misguided provision remain the same. Senators should see this for what it is, and reject it soundly when it comes up for a vote.
Kristin Smith is the executive director of the Blockchain Association, a Washington, D.C.-based trade association. Follow @KMSmithDC and @BlockchainAssn on Twitter.