US FUD: Why Compound Lawyer Thinks Latest Crypto Bill Will Kill the Industry and How to Fight Back

By Jack Chervinsky, Legal Director at Compound

Translation | Wu Talks about Blockchain

Introduction: Don Beyer, a member of the U.S. House of Representatives, proposed the "Digital Asset Market Structure and Investor Protection Act", which has caused great controversy in the United States. This 58-page bill is the most comprehensive bill on digital assets so far. We pointed out in previous analysis articles that it will put great pressure on exchanges and stablecoins, and Compound Legal Director Jack Chervinsky conducted a detailed analysis on Twitter, believing that it greatly strengthens KYC and may even kill the cryptocurrency industry and mining industry in North America. He suggested how the U.S. industry should fight back. The specific 21 articles are as follows, slightly edited by Wu Blockchain.

1. The US Infrastructure Act (Digital Asset Market Structure and Investor Protection Act) adds a new provision that expands the tax code's definition of "broker" to cover almost everyone in the crypto industry, including miners, forcing them all to become KYC users. Please note that this is not a drill!

2. The draft regulations expand the definition of “broker” to include “any person who (for consideration) is responsible for and regularly provides any service to enable the transfer of digital assets.” The early draft said “even if it is non-custodial” and explicitly included DEX and P2P markets.

3. This definition is so broad that, if understood word for word, it could apply to almost every economic participant in the U.S. crypto industry. This includes POW miners and POS validators, since “providing services to enable the transfer of digital assets” seems to fit both.

4. It may also include a wide range of DeFi market participants, such as DEX LP, liquidators, protocol managers, etc. Depending on the meaning of "for reference only", it may also extend to non-economic participants such as node operators or wallet developers. The scope here may be large.

5. Tax laws require brokers to comply with IRS (Internal Revenue Service) reporting requirements. Most importantly, they must give 1099 forms to clients and file them with the IRS. In order to fill out 1099s, brokers must collect customer data, including name, address, phone number, etc.

6. This means brokers will have to submit KYC customer reports to comply with IRS reporting requirements. Therefore, this regulation acts as an oversight. Mnuchin also proposed this in the last days of the Trump administration. As before, it is a very bad idea.

7. As those who understand the crypto industry already know, users are pseudonymous & access is permissionless. For non-custodial actors like miners (individuals who control 100% of the private keys), it is almost impossible to get the information they need from the 1099 form. In practice, this may mean a de facto ban on mining in the United States.

8. It sounds crazy, but it could happen. Most past crypto legislation didn't work, so it was easily ignored. But this is different. This provision is bipartisan and part of a popular infrastructure bill that is moving quickly through Congress and has a very high chance of passing.

9. You might ask, what does cryptocurrency have to do with infrastructure? The bill must include a “payment” provision to raise revenue for new spending so that it is tax neutral overall. The definition of “broker” is one of the payment provisions in the Senate draft bill.

10. There are three main ways to raise revenue in a bill like this: increase existing taxes, add new taxes, or improve tax compliance. This falls into the third category, which is to make people pay the taxes they already owe. Congress believes that the cryptocurrency industry is full of tax evaders (it is not).

11. Infrastructure costs are estimated at over $1 trillion. Congress defined the new "broker" as $28 billion in additional tax revenue. I have no idea how they got that number or how it was calculated. Regardless, this is no way to handle major new legislation.

12. This is a seriously misguided provision that, if adopted, would do far more harm to American interests than good. I'll tell you my top five reasons. First, it is illogical to adopt a regulation that is simply impossible to comply with unless its purpose is to stifle the industry.

13. Second, it would be a huge policy failure. After China forced miners to leave the country, many of us hoped that the United States would take market share in this critical sector. We cannot do the same as China, we must stay in the industry.

14. Third, it doesn’t work. For every dollar of additional taxation, we lose two (or ten) dollars as the U.S. crypto industry shuts down or goes overseas. The IRS won’t learn more about taxable crypto gains, but will get less as more users trade on unregulated platforms.

15. Fourth, it reduces our discussions with FinCEN. The Financial Intelligence Center has done a lot of solid work on crypto AML regulation since President Biden took office. We should let that process continue rather than cut it off by sneaking KYC in through the back door of the tax code.

16. Fifth, the burden it places on civil rights is unacceptable. Our right to privacy limits the surveillance that the government can enforce without a warrant. And in a post-SolarWinds world, the last thing we need is to expose more sensitive information to security breaches.

17. So, what can we do? First, don't panic. The rule isn't final yet and can still be changed. Even if it passes as is, it wouldn't take effect until 2023 at the earliest, so at least we have time to try to undo it in Congress or in court. It could be a long battle.

18. If you are a U.S. citizen, call your member of Congress.

19. If you are the leader of a US crypto company and are not already involved, please contact me or the team at @BlockchainAssn (after you call your Congressman). Your voice matters. Finally, everyone, add your donation to @coincenter. They may need it.

20. For my part, as always, I will be handling a lawsuit challenging this provision along with @BlockchainAssn, @fund_defi, and others, if it comes to that. I don't think the courts will accept a law that forces non-custodial actors to be monitored by the IRS.

21. Things are moving fast, and it's scary. But as with FinCEN's proposed rules, it was amazing to see the entire industry come together this week to oppose it. We do have some of the best and brightest on our side. Stay tuned for the latest news. (Image from cryptonomist)