GiD Report#173 — Maybe the U.S. won’t ruin crypto after all

Published in

GlobaliD

5 min readAug 17, 2021

Welcome to The GiD Report, a weekly newsletter that covers GlobaliD team and partner news, market perspectives, and industry analysis. You can check out last week’s report here.

ICYMI:

EPISODE 11 — The XRP Card and the future of communities
Check out Vadim’s guest post: What determines your digital trust halo?
Via /junhiraga + /gregkidd — Figment Announces $50 Million in Series B Funding | Figment (a Hard Yaka investment)

This week:

Where we are with the infrastructure/crypto bill
Felix Salmon on crypto regulations
Chart of the week
Stuff happens

1. Where we are with the infrastructure/crypto bill

The reality is that the U.S. government is going to want more control and oversight over the $2 trillion and rising crypto economy. That includes DeFi and NFTs and everything else blockchain. That’s inevitable.

It should be a good thing, though. It’s validation that crypto is important. Like the legalization of marijuana, it’s also an opportunity for new tax revenues. For investors and developers and entrepreneurs, having regulatory clarity protects their efforts and money.

Of course, things might get a little messy along the way. Such is the case with really new things that break the rules we thought we understood.

So where are we with the infrastructure bill and its crypto tax provision, reporting requirements, and overly broad definition of the term “broker?”

As we discussed last week, a compromise amendment was rejected by a lone senator at the final hour.

Now the bill will go to the House, where the battle resumes.

In the meantime, Bloomberg reports that the U.S. Treasury will release guidance on the new provision:

The U.S. Treasury Department is set to clarify that only cryptocurrency companies it considers brokers will need to comply with proposed IRS reporting requirements, aiming to quell concerns over a provision in the bipartisan infrastructure bill passed by the Senate.
Other firms key to the nearly $2 trillion crypto market — from developers and miners to hardware and software providers — won’t have any new requirements, so long as they don’t also act as brokers, according to a Treasury official. The Treasury’s guidance won’t grant blanket exemptions based on how firms identify themselves and instead will focus on whether a firm’s activities qualify it as a broker under the tax code, the official said on condition of anonymity to discuss internal deliberations.
The guidance, which could be made public as soon as next week, is an attempt to address concerns in the cryptocurrency industry that the $550 billion infrastructure bill would require a host of companies with ties to digital assets to report data to the Internal Revenue Service that they don’t have. The tax provision, estimated to raise $28 billion over a decade, was included in the legislation as a way to help pay for new investments in roads and bridges.

Which seems like a positive development. But if you remember, it was also Janet Yellen and the Treasury fighting back against changes to the original wording of the bill. From Yellen’s perspective, that makes sense. Let’s start overly broad, and then release guidance that’s more specific. It allows the Treasury to cover all their bases and the necessary wiggle room if they want to maneuver in the future.

The guidance is also probably a move to help push the bill through the House without as much of a fight. But we’ll see how much this really appeases the crypto community.

Here’s Coindesk:

According to Cornell Law, the U.S. tax code defines a broker as:
“A) a dealer, (B) a barter exchange, and © any other person who (for a consideration) regularly acts as a middleman with respect to property or services.”
Treasury is reportedly planning to exempt non-broker parties on a case-by-case basis, a far cry from the more sweeping exemptions the industry had sought.

Relevant:

2. Felix Salmon on crypto regulations

Axios:

Driving the news: SEC chair Gary Gensler — who has taught a course on cryptocurrencies at MIT — gave an important speech last week laying out a maximalist vision for the degree to which his agency can and should regulate the asset class.

FTX, the fastest-growing crypto exchange, last valued at $18 billion, wants to become a regulated stock exchange where stocks can be traded on the blockchain.
Ethereum, the upstart rival to bitcoin, is in the process of moving to a more centralized system that transfers power to the largest holders of the currency, including its founder, Vitalik Buterin.
Stablecoins, which by their nature are inextricably linked to TradFi, or traditional finance, have already started to dominate crypto trading and quell its more anarchic fringes.

How it works: A more regulated system would help solve problems like the difficulty of buying a home using the proceeds of crypto sales, or customers of NBA TopShot being unable to transfer their money to banks, including JPMorgan and Wells Fargo.
The bottom line: We’re now clearly at the beginning of the end of cryptocurrency as an anarcho-libertarian Utopia.

Most crypto activity continues to take place outside the U.S., often in unregulated (and very risky) venues. But when the U.S. wants to regulate global financial activity, it generally finds it very easy to do so.

Go deeper: Yahoo’s Roger Parloff has a big profile of FTX’s Sam Bankman-Fried that examines in much more detail the regulatory tightrope he’s walking.