Earlier this week, the Senate failed to correct its own mistake in the trillion-dollar infrastructure bill, a mistake that could bring great harm to innovative financial technology being pioneered in the U.S. While a bipartisan amendment was forged in the final moments, Congress failed to include it in the final text. This is the same Congress that, as one senator noted, knows next to nothing about cryptocurrencies and blockchain technology.
Tucked away in the bill was a “pay for” provision where Congress claimed it could raise $28 billion in new revenue through expanded reporting requirements for any cryptocurrency firm deemed a “broker,” and changing how the IRS taxes “digital assets.” These provisions have been described as tightening the laws around taxing digital asset sales. But it was, in reality, a slapdash and poorly imagined way to help pay for the larger bill.
Yes, digital asset exchanges and brokers should have reporting requirements, and those that earn capital gains should pay their taxes, but the bill expanded the definition of a broker to “any person who (for consideration) regularly provides any service responsible for effectuating transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace.” That could include virtually every kind of participant in the industry, from miners and validators to software developers and node operators.
The fight revealed a fundamental misunderstanding of how this technology works and how best to regulate it.
None of these entities could comply with this law. Consider three types of players: miners, validators, and decentralized exchanges.
Miners verify transactions via a proof-of-work method, which requires them to donate computing power. In exchange, they may receive cryptocurrency. But they have nothing to do with onboarding buyers and sellers; they hold no data on the identities of participants.
Validators use a different method of confirming transactions, called proof of stake, where parties anonymously stake some of their assets to keep the network running. The more they stake, the more transactions they can validate. But like miners, they have no means of screening the identities of participants.
As for exchanges, traditional crypto brokers and exchanges such as Coinbase and Gemini should comply with new laws approved by Congress. But increasingly, exchanges are fully distributed. There is no central authority to identify and report on individual transactions on the network. Rather, a combination of mathematics, cryptography, and clever computer code perform all the functions of a financial intermediary, but in a transparent, decentralized, and highly auditable manner.
Imagine if Congress had classified modem owners as “private delivery service providers” in the 1980s and taxed them on the number of emails they exchanged to make up for the U.S. Postal Service’s lost postage revenue? Or if Internet service providers in the 1990s had to gather detailed information on every person using the web and report the data to the IRS? Only surveillance states like China have that capability.
This is no way to develop policy about digital assets and blockchain. Rather than rushing some ill-thought-out laws into an omnibus bill, we need a fulsome discussion engaging all stakeholders and covering the many interconnected elements in regulating the second era of the digital age.
This is a pivotal moment in the trajectory of blockchain technologies that hold so much potential for bringing about positive change to supply chains, health care, education, and creative industries, and every aspect of banking and financial services. We can’t allow this law to have a chilling effect on the whole industry and ultimately stunt the development of America’s innovation economy and the creation of new jobs.
What can be done?
First, lawmakers in the House must find a way to amend these provisions before passing the infrastructure bill. Sen. Pat Toomey (R-Pa.)Explained quite cogently why the amendment was a sensible way of proceeding: “We are not proposing anything sweeping or anything radical…[A] broker means only those persons who conduct transactions on exchanges where consumers buy, sell, and trade digital assets.”
The near-unanimous Senate vote on the crypto amendment showed there is emerging broad bipartisan agreement, so the House should craft clearer language that sets more reasonable regulation and taxation.
Second, we need an educational campaign so that lawmakers in Washington and across the states understand this new Internet of Value.
Third, the White House should initiate broad policy discussions of blockchain and digital assets that results in a national blockchain strategy.
It’s not too late. But there’s much policy and advocacy work to be done before the vote.
Don Tapscott is a bestselling author, cofounder and executive chairman of the Blockchain Research Institute, and coauthor of New Directions for Government in the Second Era of the Digital Age: Strategy, Policy, and Action for the Biden-Harris Administration. Follow him on Twitter.
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