Since the language first became public, the idea of using crypto as a pay-for in the trillion dollar infrastructure bill has sparked a vigorous response from the crypto industry. Think tanks, trade associations, and many of the largest players in the cryptoasset sector have rallied to try and have changes made to the original language.
At the crux of the matter is how the proposed language defines who is a broker, and what the tax reporting obligations of these organizations and individuals are. As of this writing there are two competing amendments that have been put forward to revise this definition, with supporters for both of them making their views well known.
At the end of the day, however, the true impact of this legislation and language will not be felt for a significant amount of time, and will be heavily influenced by how the language that ultimately makes it into the final bill is interpreted by regulators. Even after the bill is voted on and becomes law, in whatever form that takes, the interpretation of the statutory language by regulatory agencies will play a large part in how this law drives market actions. In other words, the debate and conversation around the language is absolutely an essential part of the process, but is only part one of the process; the efforts to educate and inform policymakers on these issues must continue for the foreseeable future.
On top of all of this there are also bigger picture perspectives and issues that need to be taken into consideration to answer the following – why is it so important for U.S. crypto regulation to be done correctly? Let’s take a look at some of the reasons why this, and any other future crypto regulation, is so critically important for the sector.
Setting precedent. The question might fairly be asked as to why this specific regulatory language has received so much attention, since crypto has been in the crosshairs before. Such an attitude is true, but also misses the following point; prior to the inclusion of this language in this infrastructure bill, crypto and blockchain more broadly had not been the focus of major legislative action.
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Outside of the Internal Revenue Service (IRS) cracking down on tax evasion the blockchain and cryptoasset sector has remained – for the most part – on the back burner from a regulatory and policymaking perspective. With this inclusion, and debate that it has generated, that is certainly no longer the case.
This highlights the need and critical importance of balancing the need for clear and enforceable rules with the need for any crypto legislation or regulation not to stifle innovation or creativity.
Global implications. While it is true that any legislation that is passed into law in the United States is for the United States, it would be naïve to think that laws implemented in American will not influence global decision making. Blockchain and cryptoassets have long suffered from a patchwork and inconsistent legal framework that makes conducting business and transactions on a global basis a difficult proposition. Transparent and common sense regulation form part of the foundation of any global economic sector; cryptoassets are no exception to this principle.
What could potentially happen, especially if current language regarding reporting and compliance obligations remains unchanged or clarified further, is that other jurisdictions would have an opening to pass similar measures the world over. In addition to the tax reporting and payment obligations that already exist in many jurisdictions, the sheer amount of compliance that could become necessary would discourage capital and individuals from entering the sector in the first place.
Front burner news. A silver lining to this intense debate and push back from the cryptoasset sector has two components. Firstly, the fact that the cryptocurrency and blockchain sector has been able to exercise the level of influence that is has should be seen as an encouraging sign. Far from being perceived as a tool for criminals or “fake money,” cryptoassets are a rapidly maturing piece of the financial marketplace.
Secondly, the awareness and education that has been taking place over the last several years has clearly borne fruit during this current debate. Policymakers have, admittedly, been moving rather aggressively in terms of crypto enforcement with several public statements to that effect made by several regulatory agencies recently, while also working with industry leaders in a consultative manner.
This is good news, as any robust and flexible regulatory framework for such a fast moving area will require coordination and cooperation between the private sector and policymakers.
Blockchain and cryptoassets have existed in a regulatory landscape that could generously be described as murky at best. Although the regulatory language that has been included in the infrastructure bill is an erroneous attempt to help increase tax and reporting compliance, and it would be tempting to simply approve it and apply “fixes” later, that is an incomplete perspective. Regulation around cryptoassets, and how crypto intersects with the wider financial markets is critically important. What is more important, however, is getting it right in a manner that encourage continued investment and innovation.
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Author: Sean Stein Smith, Contributor