Congress always has a lot on its plate--particularly before it heads into its annual August recess. And this year is no exception. There were the heartbreaking hearings about the events that unfolded on January 6. There was also a lot of scrambling to figure out a short-term solution to the expiration of the eviction moratorium. There was the Senate resolution establishing Hip Hop Celebration Day (August 11) and Hip Hop History Month (November 2021) (I love hip hop but who asked for these things...?).
And then there was the unveiling of the Senate's massive $1.2T infrastructure bill. The bill has a lot in it. The proposed legislation has some things that one would expect to see in an infrastructure bill, such as improvement projects for roads, rails, pipes, broadband, etc. There are some other more surprising or interesting initiatives, such as the pilot program testing out national motor vehicle per-mile user fees. And then there's what some are calling the "cryptocurrency surveillance" provision. *record scratch*
Infrastructure Bill: Where the Rubber Meets the Crypto Road
In a provision titled "Enhancement of Information Reporting for Brokers and Digital Assets," the original version of the bill seeks to expand the definition of "broker" in the Internal Revenue Code. The new definition would include anyone who is “responsible for and regularly providing any service effectuating transfers of digital assets” on behalf of someone else. Anyone that falls under this umbrella would need to collect user data, including names, social security numbers, and addresses, because she would be subject to the IRS reporting requirements for brokers.
One issue with this proposed all-inclusive definition is that it could (inadvertently?) sweep in network participants that do not/should not have access to sensitive customer information, such as miners, nodes, and developers. Second, if adopted into law, the provision could place an unnecessary regulatory burden on companies that do not play any custodial role when it comes to users and their digital assets.
The proposed provision received swift backlash from the crypto community because it is overly broad and likely would discourage continued innovation in the space. Furthermore, many in the crypto community highlighted privacy concerns over non-custodial participants collecting sensitive data and transaction information on users.
In response to this backlash, a handful of senators proposed an amendment to the provision that would carve out explicit exclusions for non-financial mediators, such as validators, hardware and software makers, and protocol developers. At the time of writing this blog, a compromise on the original language has not yet been agreed to. And, if I'm not mistaken, another amendment from one of my senators has been put forth.
One might wonder how this type of provision relates to infrastructure. The short answer is that it really doesn't. However, Congress sees an opportunity to increase government revenue (to pay for the infrastructure bill) by decreasing suspected widespread crypto tax evasion. Only time will tell whether these suspicions are confirmed but the more you know...
While we're on the topic of Congress, my Congressman recently introduced a bill in the House that aims to incorporate digital assets into the existing financial regulatory frameworks. Regulatory uncertainty and ambiguity are ongoing concerns for crypto innovators and investors. The Digital Asset Market Structure and Investor Protection Act seeks to resolve some of that uncertainty by:
- Creating statutory definitions for digital assets and digital asset securities and providing the Securities and Exchange Commission (SEC) with authority over digital asset securities and the Commodity Futures Trading Commission (CFTC) with authority over digital assets.
- Providing legal certainty as to the regulatory status for the top 90% of the digital asset market (by market capitalization and trading volume) through a joint SEC/CFTC rulemaking.
- Requiring digital asset transactions that are not recorded on the publicly distributed ledger to be reported to a registered Digital Asset Trade Repository within 24 hours to minimize the potential for fraud and promote transparency.
- Explicitly adding digital assets and digital asset securities to the statutory definition of “monetary instruments” under the Bank Secrecy Act and formalizing the regulatory requirements for digital assets and digital asset securities to comply with anti-money laundering, recordkeeping, and reporting requirements.
- Providing the Federal Reserve with explicit authority to issue a digital version of the U.S. Dollar, clarifying that digital assets, digital asset securities and fiat based stablecoins are not U.S. legal tender, and providing the U.S. Treasury Secretary with authority to permit or prohibit US Dollar and other fiat-based stablecoins.
- Directing the Federal Deposit Insurance Corporation, National Credit Union Administration, and Securities Investor Protection Corporation to issue consumer advisories on “non coverage” of digital assets or digital asset securities to ensure that consumers are aware that they are not insured or protected in the same way as bank deposits or securities.
- Requiring legislative recommendations from FinCEN, SEC and CFTC to provide clarity on dividing lines between who must register as a money services business versus who must register as a securities or commodities exchange.