The US Infrastructure Bill and its impact on the crypto-industry

It was a relatively obscure reference to crypto-assets on a White House Fact Sheet on the Infrastructure Bill that set off alarms in the crypto community last week.

The hotly debated bipartisan Infrastructure Bill, with its proposed US$ 1 trillion of spending, needs to be financed somehow. Either through new taxes, reduced spending or better enforcement of existing tax obligations.

The Bill looks at the latter option for crypto-assets: the Bill would be financed through various measures, including ‘strengthening tax enforcement when it comes to crypto currencies’, according to the White House fact sheet.

Seemingly innocuous, this reference soon turned out to target greater tax disclosure obligations for crypto ‘brokers’. And the definition of brokers in the initial language was very broad, setting off a frantic wave of behind-the-scenes talks and open letters between crypto advocates and Senate staffers to narrow the scope of the definition.

Who is a ‘broker’ in the world of crypto-assets? How do you copy-paste a concept from traditional finance to the crypto world, particularly DeFi?

The original language defined brokers as:

‘any person who (for consideration) regularly provides any service or application (even if noncustodial) to facilitate transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace.’

This very broad definition of brokers resulted in a lot of push-back.

Compound’s Jake Chervinsky tweeted that the bill ‘expands the Tax Code’s definition of “broker” to capture nearly everyone in crypto, including non-custodial actors like miners, forcing them all to KYC users.’

‘That includes PoW miners & PoS validators, since “providing a service to effectuate transfers of digital assets for consideration” seems to fit both. It might include a huge range of DeFi market participants too, like DEX LPs, liquidators, protocol governors, etc. Depending what “for consideration” means, it might also extend to non-economic actors like node operators or wallet developers.’

The US-based Blockchain Association published a short reaction on its website the day after the news broke, followed by an open letter to Congress signed by twelve regional US blockchain associations.

Over the weekend, talks continued.

Jerry Brito from Coin Center, one of the witnesses who testified in the US Senate Banking Committee just last week, tweeted an update on the bill’s proposed language.

The definition of ‘broker’ was narrowed down to:

‘any person who (for consideration) is responsible for regularly providing any service effectuating transfers to digital assets on behalf of another person.’

A proposal to change ‘person’ to ‘customer’ was rejected, but the explicit language to ‘any decentralized exchange or peer-to-peer marketplace’ was deleted. That doesn’t necessarily mean DEXes and P2P market places are excluded from the Bill’s scope. It only means we’re not sure if they are. It is also unclear how some crypto participants could comply with the rules, if adopted. For example, how can a DEX collect tax information on its users?

Brito tweeted: ‘We didn’t get the language we wanted in the final bill text. It’s better than where it started, but still not good enough to clearly exclude miners and similarly situated persons.’

Do miners fall under this definition? As @jorgerpereira tweeted, the new language ‘would seem to exclude miners, because they don’t effectuate transfers themselves and merely verify/validate transfers effectuated by those who hold the private keys, right?’

Brito’s response was: ‘That’s what miners will have to argue in court if the IRS demands they report, but it would be better to avoid that possibility. If Congress intends to exclude them, they can do so very easily.’

The current language can still be interpreted by Treasury to cover ‘miners, lightning nodes, and the like’, he tweeted.

Adam Cochran also thinks the current draft language is still far from ideal: ‘The clarifications improve the crypto portion of the infra bill, it still creates issues: 1) The definition is still so broad, that things like OpenSea [a secondary market for NFTs] could easily be considered a broker. 2) Could still cover wallets and front ends. 3) Impossible reporting reqs for dexes,’ he tweeted.

The wording of the bill was finalized on Sunday and will be introduced in the Senate. Senate Majority Leader Chuck Schumer expects the Senate will be able to ‘finish the bill in a matter of days’.

This short timeline explains why crypto advocates acted so swiftly as news of the proposed new rule broke. We’ve seen several crypto-related bills come and go. Many don’t get very far. The Infrastructure Bill is different, as it will be pushed through Congress as a matter of priority. Because the crypto provision is only one tiny part of a draft hundreds of pages long, crypto advocates feared it could pass without serious discussion on its potential far-reaching ramifications.

That explains the sense of urgency that kept US-focused crypto Twitter active throughout the weekend.

According to NYT, crypto lobbyists ‘believe that they have assurances from top lawmakers, such as Senator Rob Portman, Republican of Ohio, about the intent of the law, but they are still seeking similar assurances from the Treasury Department, which will have broad discretion to implement the law if it is passed and signed by President Biden.’

Why is this relevant to anyone outside the US?

Legal scrutiny over crypto-assets has been intensifying. At the same time, the US Infrastructure Bill shows how lawmakers can focus their attention on crypto-assets as a potential source of new government revenue to plug deficits created by pandemic stimulus measures.

The Bill also highlights how difficult it can be to transpose well-known legal concepts from financial law to the world of crypto-assets.

Where do miners fit in? Are they intermediaries, to be scrutinized more closely, as Angela Walch suggested in her testimony to the US Senate Banking Committee last week? Are they more like internet service providers, to be kept outside of financial markets disclosure rules?

The discussions on the US Infrastructure Bill bring to the fore a discussion that has long been simmering.

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