Biden’s major bipartisan infrastructure plan struck a rare chord of cooperation between Republicans and Democrats, but changes it proposes to cryptocurrency regulation are tripping up the bill.
The administration intends to pay for $28 billion of its planned infrastructure spending by tightening tax compliance within the historically under-regulated arena of digital currency. That’s why cryptocurrency is popping up in a bill that’s mostly about rebuilding bridges and roads.
The legislation’s vocal critics argue that the bill’s effort to do so is slapdash, particularly a bit that would declare anyone “responsible for and regularly providing any service effectuating transfers of digital assets” to be a broker, subject to tax reporting requirements.
While that definition might be more straightforward in a traditional corner of finance, it could force cryptocurrency developers, companies and even anyone mining digital currencies to somehow collect and report information on users, something that by design isn’t even possible in a decentralized financial system.
Now, a new amendment to the critical spending package is threatening to make matters even worse.Unintended consequences
In a joint letter about the bill’s text, Square, Coinbase, Ribbit Capital and other stakeholders warned of “financial surveillance” and unintended impacts for cryptocurrency miners and developers. The Electronic Frontier Foundation and Fight for the Future, two privacy-minded digital rights organizations, also slammed the bill.
We stand with @Square, @RibbitCapital, @coincenter, and @BlockchainAssn about the digital asset provision in the infrastructure bill. And we applaud @ronWyden @senLummis @senToomey in proposing a thoughtful amendment to get the tech right.
Read our official statement ↓ pic.twitter.com/YrkohsDny7
— Coinbase News (@CoinbaseNews) August 4, 2021
Following the outcry from the cryptocurrency community, a pair of influential senators proposed an amendment to clarify the new reporting rules. Finance Committee Chairman Ron Wyden (D-OR) pushed back against the bill, proposing an amendment with fellow finance committee member Pat Toomey (R-PA) that would modify the bill’s language.
The amendment would establish that the new reporting “does not apply to individuals developing block chain technology and wallets,” removing some of the bill’s ambiguity on the issue.
“By clarifying the definition of broker, our amendment will ensure non-financial intermediaries like miners, network validators, and other service providers—many of whom don’t even have the personal-identifying information needed to file a 1099 with the IRS—are not subject to the reporting requirements specified in the bipartisan infrastructure package,” Toomey said.
Wyoming Senator Cynthia Lummis also threw her support behind the Toomey and Wyden amendment, as did Colorado Governor Jared Polis.
There is an anti-#Crypto provision hidden in the massive infrastructure bill that would allow mass-surveillance of the crypto-economy. The Senate should adopt the Wyden/Toomey amendment to fix it.
Roads/bridges/trains = good
Destroying the digital token economy = not good
— Jared Polis (@jaredpolis) August 5, 2021
The Wyden-Lummis-Toomey amendment is simple. It clarifies in law what most of us already believe—that validators of distributed ledger data like miners & stakers, hardware wallet providers & software developers should NOT be required to report transaction data to the IRS. pic.twitter.com/cMtoHMehiU
— Senator Cynthia Lummis (@SenLummis) August 5, 2021
Picking winners and losers
The drama doesn’t stop there. With negotiations around the bill ongoing — the text could be finalized over the weekend — a pair of senators proposed a competing amendment that isn’t winning any fans in the crypto community.
That amendment, from Sen. Rob Portman (R-OH) and Mark Warner (D-VA), would exempt traditional cryptocurrency miners who participate in energy-intensive “proof of work” systems from new financial reporting requirements, while keeping those rules in place for those using a “proof of stake” system. Portman worked with the Treasury Department to author the cryptocurrency portion of the original infrastructure bill.
Wow. Sen. Warner and Portman are proposing a last minute amendment competing with the Wyden-Lummis-Toomey amendment. It is a disastrous. It only excludes proof-of-work mining. And it does nothing for software devs. Ridiculous!
Here is all it excludes: pic.twitter.com/FA7K6NU2s0
— Jerry Brito (@jerrybrito) August 5, 2021
Rather than requiring an investment in computing hardware (and energy bills) capable of solving increasingly complex math problems, proof of stake systems rely on participants taking a financial stake in a given project, locking away some of the cryptocurrency to generate new coins.
Proof of stake is emerging as an attractive, climate-friendlier alternative that could reduce the need for heavy computing and huge amounts of energy required for proof of work mining. That makes it all the more puzzling that the latest amendment would specifically let proof of work mining off the hook.
Some popular digital currencies like Cardano are already built on proof of stake. Ethereum, the second biggest cryptocurrency, is in the process of migrating from a proof of work system to proof of stake to help scale its system and reduce fees. Bitcoin is the most notable digital currency that relies on proof of work.
The Warner-Portman amendment is being touted as a “compromise” but it’s not really halfway between the Wyden-Toomey amendment and the existing bill — it just introduces new problems that many crypto advocates view as a fresh existential threat to their work. Prominent members of the crypto community including Square founder and Bitcoin booster Jack Dorsey have thrown their support behind the Wyden-Lummis-Toomey amendment while slamming the second proposal as misguided and damaging.
We support @SenToomey and @RonWyden’s effort to amend the provision. The infrastructure bill’s current tax reporting language would put unworkable requirements on #Bitcoin node runners, developers, and miners. This is the way: https://t.co/n3OWAig0ty
— jack (@jack) August 3, 2021
Now isn’t the time for the IRS to pick winners and losers with a new technology.
Crypto has the potential to be the future of the internet.
How foolish to crush it over a tax provision that possibly raises just $500 million per year more in a $1.2 TRILLION bill.
— Senator Pat Toomey (@SenToomey) August 6, 2021
Unfortunately for the crypto community — and the promise of the proof of stake model — the White House is apparently throwing its weight behind the Warner-Portman amendment, though that could change as eleventh hour negotiations continue.
— Pat Ward (@WardDPatrick) August 6, 2021