Cryptocurrency Policy
It’s Not 1995 for Crypto, It’s 1739.
How Politics is Shaping Legislation and Regulation of Crypto in 2022
You Thought It Was 1995 for Crypto? Try 1739
It’s 1739, and you’re tending to your livestock in the field, minding your own business when this guy named Benjamin Franklin comes along and captures lightning with a kite. Okay, he didn’t do that until a few years later–he was busy making counterfeit paper banknotes at the time. Those fraudulent notes became the U.S. dollar you know today. The banknotes were considered nothing more than a passing scam similar to how many view crypto today.
In terms of national adoption, cryptocurrency isn’t in its 1995 stage. It’s in its 1739 stage, except that we don’t yet have an Alexander Hamilton-type leading the political charge for a new monetary system. Instead, we have a somewhat random assortment of politicians on both the left and the right making decisions about crypto, some of them good, some not so good, and others basically meaningless. So where might they be steering us?
Most people in the crypto or DAO space don’t consider their work to be political. After all, fiat currency is not a partisan issue — at least not the currency itself, which is just a mechanism for payment. However, monetary policy has always been pulled in very different directions by either side of the aisle. We haven’t gotten that far yet with crypto, because it hasn’t yet been fully adopted, nor banned, by the U.S. government.
There are two types of people in the U.S. — those who try to shape politics to make the world what they want it to be and those who sit on the sidelines while others make decisions for them. Political theater is heating up when it comes to crypto, which inevitably leads to legislation and regulation. Some laws and rules may be for the better, and some probably won’t be.
Congress Is Active, But It Isn’t Telling Us Much
Legislation for crypto roughly takes one of three forms:
- Restrictions or new reporting requirements;
- Protection or exemption from existing financial regulation; or
- Facilitating access and use.
At the federal level, there’s a lot of activity. Bloomberg reports that more bills were introduced related to the regulation of crypto in 2021 than in any prior year. For instance, the bipartisan Congressional Blockchain Caucus has introduced legislation that excludes digital tokens from being considered securities, but it has not yet gained much traction. Neither have most of the bills introduced last year. Bloomberg also notes that no major laws regulating finance have been passed by Congress since 2010’s Dodd-Frank Act, which, among other things, clamped down on the credit default swaps that caused the Great Recession in 2008 (most of this regulation was gutted in the last administration though). So, for the moment, Congress isn’t giving us much to go with in terms of which way crypto may be leaning politically.
It appears that the states are giving us the best indicators of where crypto-politics is heading in the U.S.
By the end of 2021, 33 states and Puerto Rico had introduced legislation related to crypto. Though the majority of these bills just call for studies, task forces, or only adds language to existing law to include crypto, there are some interesting highlights. Curiously, they seem to rarely use the word “cryptocurrency” and prefer “digital assets”, “virtual currency”, or similar names in legislation. It might be because they think there’s a negative association with the word “crypto” and crime, cyber attacks, etc. Or perhaps politicians just really want their own name for it.
The Direction Red States Are Steering: New DeFi Entities and Making Crypto Legal Tender
Overall, the most tangible activity appears to be coming from “red” states that usually have GOP-controlled legislatures. Even in the states with Democrat-controlled legislatures, the legislation usually comes from GOP members. Below are some of the highlights:
Kentucky
One bill in Kentucky would establish a property classification for crypto and regulate the ownership and transfer of tokens, even calling a portion of the bill the “Kentucky Utility Token Act”. A second bill proposes “special purpose depository institutions” described as banks that cannot lend money but are designed to facilitate banking for “blockchain innovators” who have been unable to access services through traditional savings and loan banks. While the state is proposing new reporting requirements, it also appears to be facilitating connections between crypto markets and traditional banks, which could also provide some risk mitigation for investors and easier off-ramps to fiat. (See SB 177 and SB 178)
Nebraska
Going even further, Nebraska passed and signed a law into effect last May that creates a “digital asset depository institution.” This new DeFi structure only holds crypto but can’t make loans, just like the pending bill in Kentucky. We’re about to find out if these will be a boon to crypto and DeFi or not. The latter bill was drafted by a company called Telcoin, which has an app for transferring both fiat and crypto among users. Perhaps we can guess who might be the first company to become a digital asset depository institution in the Cornhusker State? (See LB 649)
Crypto Tax Bills
Finally, another hurdle for mainstream adoption of crypto is that it is not considered “legal tender” for paying taxes. That could be changing at the state level in Wyoming and Arizona. Much has already been reported on the legislative happenings related to DAOs and crypto in Wyoming, so we’ll just touch briefly on that state here. As Politico reported, Wyoming’s bill is limited to allowing state sales and use taxes to be paid with crypto. Arizona’s goes further to declare Bitcoin as legal tender in the state. The U.S. Constitution doesn’t allow for states to create their own currency so Arizona may have difficulty in the courts if the bill passes. But even a small step forward in legitimizing crypto, as the Wyoming bill would do, could encourage other states to consider similar measures.
The Direction Blue States Are Steering: New Restrictions and New Possibilities
There’s hope yet for Democratic support of bringing crypto into the mainstream.
New Jersey
New Jersey’s Digital Asset and Blockchain Technology Act appears to have support from both sides of the aisle and was introduced by a Democrat. However, unlike two other bills introduced by GOP members, the bill is primarily restriction-focused and doesn’t contain any incentives for new DeFi entrepreneurs. On the plus side, it sets up a structure for licensing crypto-related businesses in the state.
New York
There was also a flurry of bills in New York last year, many with at least some support from the left, if not led by the left. One of them would allow state agencies to accept crypto as payment and another calls for a task force to evaluate the creation of a state-issued cryptocurrency.
Perhaps the most exciting bill coming out of New York would establish an Office of Financial Resiliency at the state level, tasked with coming up with creative ways to use crypto to build communities and local economies. Refreshingly, this piece of legislation clearly articulates the value of crypto to level the playing field in financial markets. It could allow marginalized communities to build wealth in a way that doesn’t require overcoming the biases and restricted access that keeps them out of the traditional finance space.
What would happen if someone considered a financial risk by the banks could borrow money to start a business at the same low rate as those who are already wealthy? Or someone trying to build a career who has trouble getting their first “normal” job could earn crypto and gain experience working for a DAO instead? Hopefully, New York takes us in a direction that allows us to explore those possibilities.
And, The Directionless: Honorable Mentions of Crypto
Louisiana
While largely ceremonial, Louisiana adopted legislation in 2021 that commends Bitcoin for being the first trillion-dollar decentralized asset. It also encourages the state and its localities to consider ways to benefit from increased use of this “new technology” (See HR 33). This bill doesn’t change anything in the state, but it does set an intention to be more open to crypto as part of the economy.
It could also mean that the Louisiana legislature was testing the political waters with a non-binding, low-risk bill that supports crypto before real legislation like that of Kentucky. The last sentence of the bill referencing “new technology” opens the conversation to other types of crypto, DAOs, and blockchain-related concepts, instead of just being specific to Bitcoin.
Michigan
Probably the least consequential crypto-related bill passed last year came from Michigan, which declared October 2021 as “Cryptocurrency Education Month”. No, not every October, just October 2021.
Ultimately, it does appear there is a slight lean to the right politically, but it hasn’t fully swung that way just yet. In the meantime, federal regulatory agencies do have some inherent authority to regulate crypto without new laws, and they are.
Possible Federal Stablecoin Regulation Soon?
The Biden administration put out a report looking specifically at stablecoins and how they might be regulated. The good news is that the report points out the value of stablecoins to provide a faster exchange of funds and their growing utility in the market. The not-so-good news for DeFi is that they recommend only insured financial institutions be allowed to issue them. This is to ensure that they have the proper backing to withstand a run on a stablecoin, but it also would put them squarely within the jurisdiction of the SEC. While this so far hasn’t led to new rules by the SEC or other banking oversight agencies directly related to crypto (but perhaps indirectly as noted here), the report could be an indicator of where stablecoin regulation is headed.
The Fed Making Moves
Related to stablecoins, the Federal Reserve System is considering setting up a new central bank digital currency (CBDC). It would fall under the purview of the Fed and work with private banks, theoretically providing increased access to financial tools that crypto allows while ensuring greater stability and protection against fraud. Of course, this would clearly put traditional banks in the driver’s seat with a digital currency and contradict the ethos of DeFi. On the other hand, it could also serve to further legitimize crypto in the public eye, while Tether and USDC continue to be the go-to stablecoins.
Even if it isn’t part of current proposals, the logical next step after establishing a CBDC would be to allow exchanges for other cryptos. The public would probably demand it (at least eventually) and restricting transactions to only between USD and the CBDC would be as silly as not providing an exchange between fiats.
The IRS Wants to Know About Your Crypto
Many of you already plugging away on your tax returns are aware of the new regulations from the IRS related to crypto. Taxpayers this year will be required to report crypto income as well as capital gains and losses from the sale of crypto. Some of the major custodial wallet providers like Coinbase will be reporting this year to the IRS on the 1099-MISC and 1099-K. It appears that they don’t yet have to report capital gains and losses to the IRS, however.
Coinbase says that you will receive a 1099-MISC from them, also sent to the IRS, if you earned $600 or more in crypto from airdrops, contest winnings, mining, staking, or from a hard fork. However, they won’t be sending any 1099-Bs (proceeds from broker or exchange). Assuming that this means the IRS isn’t requiring it yet, we can expect they probably will in the future. It appears you need to be logged in to find this info under the “Taxes” menu. Some of this is covered on this public-facing page.
What You Can Do: Advocate and Vote
The smarter politicians and regulators in the U.S. know that banning cryptocurrency outright is not viable. However, if cryptocurrency becomes either a conservative or liberal cause, its growth will still be hampered. Neither side appears to have claimed ownership of this space yet. We have to make sure that it stays as bipartisan as possible, given our political climate that requires one side to fight the ideas of the other.
There’s something for both sides to like — the conservatives have clearly already picked up on crypto’s potential for enhancing commerce, supporting individual liberties, and reducing the need for government oversight of finance. The progressives should like its potential for creating a more transparent and equitable economy that provides access for the unbanked, helps consumers keep more of their money out of the hands of bankers, and facilitates DAOs — which are the future of people-oriented organizations.
We all know crypto is here to stay — and as with any fundamental part of society, politics and policy will be part of shaping it. There’s no escaping that, so let’s help guide this process instead of hoping that it doesn’t happen in the wrong way.
Which type of person are you? If you are the type that is aware of the large role politics and policy play in your life, then you should be paying attention to what is happening with crypto in the political arena. At a minimum, all of us can educate ourselves on the issues and vote for the political leaders that represent our views, Republicans or Democrats. Otherwise, we’ll end up with political leaders, and then laws, that represent someone else. After all they did to give us a voice, and our own currency, Ben Franklin and Alexander Hamilton would be disappointed if we didn’t take matters into our own hands.
Author Bio
Zero Mass is a writer exploring the unique space of DAOs and crypto. His pseudonym is purposefully designed to test the “trustless” concept.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
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