Published: August 6th, 2021
A spectre is haunting crypto, the spectre of heavy-handed state intervention.
The digital currency industry has lived for years under constant threat of new regulations designed to tame its wild ways. Financial regulators and lawmakers have promised to bring crypto into line with the rules of traditional finance, or smash it to smithereens.
Now the hammer finally looks set to drop, hidden in the clauses of an omnibus infrastructure bill making its way through the US Senate.
In a recent Twitter thread shared 4,500 times by Influential crypto lawyer Jacob Chervansky, he says 'this is not a drill' and details how the USD 550 billion price tag of the planned nationwide road, rail, and bridge programme could hobble US crypto firms.
They’ll feel the pain in the part of the bill that covers how all those new roads and bridges will be paid for. At least USD 30 billion of the price tag will come from levying new taxes on what the legislation describes as ‘crypto brokers’.
The problem is that the definition of broker is widely worded. Normally it would be used to describe an exchange like Binance or Coinbase or other trading intermediaries. In the bill, the definition could be applied to any business that touches crypto in any way.
The definition is so broad, Chervansky says, that it could impact ‘pretty much every economic actor in the American cryptocurrency industry’. The catch-all use of ‘broker’ could apply to DeFi startups, crypto miners, and even crypto investment firms, who will now be expected to file customer forms with the IRS, a requirement that blockchain technology will sometimes make impossible.
There’s a real risk is that America’s crypto industry could find itself in the same position as the online gambling industry ten years ago, when Washington effectively regulated it into oblivion. In the eyes of politicians and regulators, crypto companies, like internet casinos, look to be both rich and sinful. That makes them ideal fall guys for a tax revenue raid.
Of course, the distinction between games of chance and distributed ledgers is that crypto isn’t some dodgy new form of digital vice but rather a world-changing technology with far-reaching implications for finance, commerce, and society at large. It's a bit like the Internet.
While it may have opened the door to some questionable behaviours, so did the Internet. In the case of the worldwide web (WWW), American lawmakers eventually realised that it made long-term sense, strategically, to house the web on home shores rather than banish it from the country altogether.
Then there is the USD 28 billion tax revenue figure that the crypto industry is meant to cough up. How did the Senate committee tasked with drafting the bill settle on that figure? At the moment, the calculus they used is an unknown, but as critics of the provisions might say, legitimate revenue projections may not be the point.
The infrastructure bill is politically popular, and it provides lawmakers with a mechanism to cool down, if not kill, the boiling crypto industry. If crypto companies are harmed by building railroads, bridges, and interstate highways, who would complain?
Mark Gordon, governor of the crypto-friendly US state of Wyoming, said this week that crypto firms need to wake up and think again if they believe the issue will just go away on its own.
The crypto tax clauses are part of a USD 550 billion package that the Biden administration is pushing hard to get through congress un-touched. It could well be the White House’s landmark first-year accomplishment, and a full-court press is on to move it through committee to final enactment.
‘If the US crypto industry doesn’t want to be the roadkill on this highways bill,’ says Gordon, ‘they need to start calling their local representatives at the state and federal levels and make their case heard.’
If politicians are being opportunistic by promising new government spending and jobs in the aftermath of the pandemic, the crypto industry has perhaps not been opportunistic enough.
Crypto pundits like Chervanksy say the CEOs of crypto firms have behaved as if they’re above all the beltway hurly-burly and untouchable. That complacency could now come back to bite them.
A handful of companies like Uniswap have begun a serious lobbying effort to help crypto build political capital, but they've faced criticism from some industry quarters for suggesting they could move to a more centralised model.
Alan Konevsky, general counsel for blockchain company tZERO, told the Washington Post this week that the industry is now mobilising like never before, and its warring factions are putting their differences aside to battle a common enemy.
But they're 'running out of runway’ as House and Senate Democrats push hard to pass the infrastructure bill by the end of August.
“The worry is that the definition could still be applied to businesses like node operators, miners, and software developers,” he said.
Ironically, the sector’s hopes might lie with the normally finance-averse progressive caucus of the Democratic party, who are threatening to crater the entire bill unless leaders add a raft of progressive spending programmes aimed at addressing inequality.
Barring a Democratic party implosion, however, the US crypto industry needs to push for a rewrite of the bill’s broker definition before it’s too late. Beyond that, Konevsky says the next step will be to kick off a rear-guard action and try to halt the bill’s crypto provisions in the courts. That might be enough to stop the worst parts of the law from killing the industry when it takes effect in 2023.
It’s a regulatory perfect storm that’s been brewing for years. Arguably the industry should have seen it coming. Hopefully, it's not too late to take cover.