State of Crypto: Crypto's wild week

How policy and regulation impact the crypto world – and the other way around

By Nikhilesh De

Managing Editor, Global Policy & Regulation

Aug. 3, 2021

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Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De. You’re probably here because you signed up, but in case you're not a fan, you can unsubscribe here.

Congress has been talking about crypto for years, and we’re finally getting a sense of what sort of regulations lawmakers might enforce. The biggest issue is a controversial tax provision within the Senate’s infrastructure bill.

—Nik

Infrastructure Week

Congress had a busy week. (Kevin Dietsch/Getty Images)

The narrative

What a week. Seven days ago the biggest thing on my radar was a trio of Congressional hearings on crypto. By Thursday, we had two massive bills seeking to regulate the industry in different ways. The first bill, the U.S. Senate’s trillion dollar bipartisan infrastructure effort, would broaden the definition of a “broker” to capture all sorts of entities for the purposes of crypto tax collection. The second, by Rep. Don Beyer (D-Va.), is much more of a longshot but provides the most comprehensive effort to regulate crypto yet.

Why it matters

The infrastructure bill has sparked controversy in the crypto world due to just how broad its definition of a “broker” originally was. A revised version, and the one that’s in the actual bill introduced late Sunday, tones the definition down a tiny bit in that it no longer explicitly includes decentralized exchanges as brokers. But it doesn’t explicitly exclude miners or node operators either.

The main takeaway is that crypto has gotten on lawmakers’ radar as an industry that is permanent enough to help fund the government.

Breaking it down

Okay so the plus side for the crypto industry is this is a continuing recognition that crypto is not just a casino that’s going to disappear when traders get bored. Congress clearly expects this industry to stick around long enough to generate at least $28 billion in tax revenue for this infrastructure bill. It’s arguably the most concrete recognition of this from Congress, and yes, I’m including all of the hearings Congress has hosted in recent months.

The downside is the continuing confusion over just who exactly must file information reporting documents. Exchanges and OTC desks should have no difficulty complying, and the fact they’ll even be directed to a specific form to fill out may even make it easier for these trading platforms in lieu of clear IRS guidance on the matter.

The problems arise when we look at decentralized exchanges, node operators, miners, etc. It’s less clear how they would comply.

The Joint Committee on Taxation (JCT), which “scores” provisions, meaning they evaluate how much would be raised through them, published a document stating the just-under $28 billion figure, but didn’t actually say where the figure came from. In other words, there’s no information right now on how the JCT expects these entities to report.

“It was inevitable” that brokers and dealers, registered exchanges and OTC desks would have to comply with these types of reporting standards, former lobbyist Reid Yager told me.

“Whether this year, in five years, they were going to get captured,” Yager said. “The fact that ‘broker’ could be interpreted to expand to software developers and providers, that’s an issue.”

We know that there’s bipartisan opposition to the specific wording of the provision – Sens. Ron Wyden (D-Ore.), who chairs the Senate Finance Committee (which oversees the IRS), Patrick Toomey (R-Penn.) and Cynthia Lummis (R-Wyo.) who are both on the Senate Banking Committee, have all publicly stated that they don’t see the current definition as being feasible to implement.

The almost odd part is Sen. Rob Portman (R-Ohio), who I’m told is behind the specific amendment, doesn’t intend to capture non-custodial entities like miners, according to a spokesperson.

“This legislative language does not redefine digital assets or cryptocurrency as a ‘security’ for tax purposes, impugn on the privacy of individual crypto holders, or force non-brokers, such as software developers and crypto miners, to comply with IRS reporting obligations. It simply clarifies that any person or entity acting as a broker by facilitating trades for clients and receiving cash, must comply with a standard information reporting obligation,” said Drew Nirenberg, the spokesperson.

However, at this point it doesn’t seem like Portman is willing to put this kind of language in the bill itself or in supplementary material that the IRS can point to in implementing the proposal.

So we now get about a week to see what amendments are offered and whether or not they’re accepted.

And then there’s the House of Representatives, which most likely won’t take the bill up till the fall, and whose members may have their own issues with the bill (both crypto-related and not).

If the general public is interested in providing feedback, they should reach out to their elected officials, says Kristin Smith of the Blockchain Association, Perianne Boring of the Chamber of Digital Commerce and Michelle Bond of the Association for Digital Asset Markets.

The Biden Bunch

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

Dave Uejio, acting Consumer Finance Protection Bureau (CFPB) director, will face his confirmation hearing for Assistant Secretary of Housing and Urban Development on Thursday. His potential CFPB successor, Rohit Chopra, appears to still be awaiting a final confirmation vote.

Elsewhere

Who in Crypto Met With Brian Brooks When He Ran OCC? Here’s His Calendar: This is an excellent deep dive by my colleague Nathan DiCamillo, who filed a Freedom of Information Act request with the Office of the Comptroller of the Currency for former Acting Comptroller Brian Brooks’ calendar. Brooks, now the CEO of Binance US, met with crypto industry participants some 40 times.

Kentucky Orders BlockFi to Stop Signing Up New Interest Accounts: A fifth state, Kentucky, is now looking into BlockFi’s Interest Accounts product on allegations it may be an unregistered security. It joins New Jersey, Alabama, Texas and Vermont.

CoinDesk DFX Launch

The CoinDesk DeFi Index (DFX), benchmarking the investable DeFi sector, is now available for investors watching decentralized finance, the first true "sector" in cryptocurrencies.

It is the latest index by CoinDesk Indexes, the market standard for crypto assets since 2014. The DFX provides a market-cap-weighted benchmark for a representative basket of DeFi-sector cryptocurrencies, composed of assets suitable for long-term holding.

Find out more at coindesk.com/indexes/dfx, or email [email protected].

Outside CoinDesk

(Wall Street Journal) Inca Digital, a data firm sometimes contracted by the CFTC, found that 372 crypto derivatives traders it found on Twitter (out of roughly 2,000 total) are based in the U.S., and likely using virtual private networks (VPNs) to trade products currently barred from the American market through exchanges like FTX, Binance and Huobi, among others, according to the Wall Street Journal’s Alexander Osipovich.

(Bloomberg) Tether was one issue discussed among a group of financial regulators when the President’s Working Group for Financial Markets met last month to discuss stablecoins, reports Robert Schmidt and Jesse Hamilton at Bloomberg.

(The Verge) Russell Brandom at The Verge wrote a detailed play-by-play on an FBI raid into a New Hampshire bitcoin community and the broader story around it.

Today's Tweet

If you’ve got thoughts or questions on what I should discuss next week, or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

See ya’ll next week!

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