My biggest problem with personally investing in cryptocurrencies has not been the arcane blockchain technology on which it is based nor the volatility of prices nor even some of the sketchy players that have popped up in the field.
It's that it creates autonomy for individuals to conduct financial transactions absent the direct supervision by governmental authorities and the large financial institutions they regulate, thus redistributing power and authority from the state to individuals.
And the government really hates that.
Imagine a crypto trader who does hundreds or thousands of transactions a day. What if he was legally required to collect personal data about every single person he does business with? Think of how burdensome that would be.
Or rather: Think of how burdensome that will be. Under a provision slipped into the new infrastructure bill, that's the law.
If you're thinking, "That's strange, because I don't recall the kinds of hearings you would naturally expect to have been conducted on such a sweeping change that could completely change the character of an entire industry" there's a perfectly good explanation for that.
None of that happened.
"There's a whole process through which the issues get aired and unintended consequences become understood, and then members can vote with a full knowledge of the vote," says Brito. But that didn't happen. Many lawmakers may not have even realized that the change had been included in the bill.
How could something like that have happened?
Easy. First start with a 1,039-page, $1.2 trillion bill that was rushed through the legislative process with senators never having even read the stupid thing.
That, incidentally, is on purpose. These things are monstrosities by intention, the better to win the war against a watchful citizenry through attrition.
Second, make seemingly innocuous changes the ramifications of which are not obvious at first, in this case, simply making "digital assets" subject to an old rule intended to combat money laundering by monitoring large cash transactions.
Section 6050I is a "long-forgotten statute" within the tax code, says Abe Sutherland, an adjunct at the University of Virginia School of Law and a fellow at the Coin Center. It requires people who transact large amounts of cash—above $10,000—to file reports to the IRS detailing the senders' names and Social Security numbers. The new law amends the rule to make it apply to cryptocurrency transactions.
What kind of report?
This one. (PDF)
That's just the first page. There are five more, including three pages of instructions.
Here's the short version of how that would work In practice:
This is "way more severe" than just adding friction, [Sutherland] says.
"All other tax code reporting violations are misdemeanors, but violation of 6050I can be a felony (up to five years in prison)," Sutherland notes on Twitter. "The law's relative clarity and limited applicability in the case of old-fashioned cash does not translate to digital assets. Compliance can be impossible."
Not to worry, it's not like using crypto to make transactions is being banned or anything.
"Because this is technically a reporting provision, that allows people to say 'Oh, well, it doesn't ban it,'" but that misses a lot of the point, says Sutherland. The original provision was "designed to stop people from using cash," so they'd use banks instead. This provision could similarly compel crypto users to turn to the very financial institutions they're trying to free themselves from. After all, crypto's allure is partly due to the freedom users get from intermediaries.
The provision does not take effect until January 1, 2024, so there is time to address the issue. One course of action is to question the constitutionality of the provision.
Perhaps most importantly, there are significant concerns about whether the reporting provision is even constitutional at all. When applied to crypto, Section 6050I arguably constitutes unreasonable search and seizure. It's warrantless surveillance of an individual, who is now required to collect another individual's Social Security number. Multiple sources within the crypto world tell Reason they're prepared to challenge it in court.
I've always thought the provision as originally applied to cash transactions was unconstitutional so I hold out little hope for this.
Of course, the provision can also be addressed through legislative means.
America's emerging crypto interests need to get their heads in the political game and invest in allaying the state's fear of financial disintermediation.
Believing that all you have to do is allay "the state's fear of financial disintermediation" may be wishful thinking.
Policymaker education is key. Given the nature of blockchain technology, the broker and 5060I reporting requirements don't make sense and can't really work. This suggests that legislators don't understand what it is they're trying to regulate. When folks think of lobbying, they tend to think of hardball influence peddling, backroom deals, and shady quid pro quo. Reality is a bit more mundane. A surprisingly large part of policy advocacy it is simply explaining the basic, relevant facts to policymakers and then what follows from that. Crypto people have a lot of explaining to do if they don't want this to happen again.
Sometimes reality is indeed a bit more mundane. However, I have some personal experience in this and far too often, it really is "hardball influence peddling, backroom deals, and shady quid pro quo."
More to the point here, I think, is that the people who placed that provision in the bill knew exactly what they were doing. Here's another one:
The first of the bill's crypto provisions redefines "broker" to include "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." This definition is so vague and broad that miners/validators, node operators, or even Axie breeders—none of whom are brokers in any recognizable sense—could conceivably fall within its scope, which would subject them to nonsensical and potentially ruinous broker tax reporting requirements.
Banking interests hate disintermediation, precisely because they are the ones being disintermediated. The inclusion of this provision was not an accident. Yes, most legislators are completely ignorant of all this, and maybe they can be swayed, but there are powerful interests behind this with big wallets.
One more thing, a dirty little secret that does not get discussed nearly often enough: Congress no longer passes laws, it gives out homework assignments.
Given the extent of regulation these days, laws have become so vast that they are purposefully written using vague language, leaving it to the executive branch's departments to interpret it, and those interpretations are everything.
Take it from this law firm offering to help out with that.
Depending on how this new reporting obligation is interpreted and implemented... An expansive application could have sweeping and unintended consequences for the cryptocurrency industry...
To avoid these consequences, it will be critical for stakeholders in the cryptocurrency ecosystem to advocate for regulators to adhere to the traditionally narrow scope of the cash-reporting requirement when it comes to digital assets...
This is the quiet way the legislative branch accedes ever more authority to the executive branch.
In the meantime...
P.S. Now treat yourself to our viral video "How to speak Bidenese" 😁👇