Crypto Weekly: Dodging a hard hit to the industry

Seconds before the industry was hit hard in the US

It seems that one week cannot pass without significant news on crypto regulation around the world – and this week the focus is on the US. To fund President Joe Biden’s $1.2trn infrastructure package, it is expected that the enforcement of taxes on cryptocurrencies can bring in $28bn over the next decade. Not only is the infrastructure bill setting an ambitious goal for taxes gained on profit from cryptocurrencies, but it also lays the groundwork on how the US government aims to achieve this through enforcement.

The first publicly available copy of the bill from last week was a fairly tough hit on the industry, as it specified that every broker responsible for carrying out transfers of digital assets would be responsible for complying with IRS (Internal Revenue Service) reporting requirements. This involves the implementation of know your customer (KYC) procedures and collecting personal customer data like name, address, and telephone number. The majority of US-based brokers and exchanges already comply with these rules. What shocked the industry, though, was the extremely broad definition of brokers mentioned in the bill. Specifically, it mentioned that the definition counted decentralized protocols, including decentralized exchanges. Between the lines, the definition of brokers would even count miners and validators verifying transactions on cryptocurrency networks, as well as software developers making e.g., wallets. Due to the nature of cryptocurrencies, decentralized protocols, miners, and validators are simply not able to comply with KYC due to technical limitations in the crypto software protocol.

If the bill in this format would have been approved, the decentralized aspect of the industry in the US would have been hit hard, as essentially every miner, validator, and decentralized protocol would have to move abroad. That would be a tremendous hit to the industry overall, as the US counts for a significant part of miners, validators, and decentralized protocols. Additionally, the bill would perhaps inspire other countries to heavily regulate the industry.

However, after tremendous pressure from cryptocurrency exchanges, and think tanks the last couple of days, the specific mention of decentralized protocols has been removed. Additionally, the definition of brokers is now mentioned less broadly. Though, it still falls short of specifically excluding bitcoin miners, validators, and software developers. The executive director of the cryptocurrency think tank Coin Center, Jerry Brito, wrote yesterday on Twitter that their goal is to clearly get miners, validators and software developers excluded from the bill. Only the future will tell whether they will succeed with that, but for now, the industry still thrives in the US.

As often pointed out, every investor in this space should expect supplemental regulation on the industry, which can impact the market somewhat considerably. This event should serve as a lesson for everyone involved in the industry on how sudden status quo can be challenged from a legislation point of view. This time it came out of nothing – and surprisingly, even packed into an infrastructure bill.

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