Crypto in the Crosshairs
The U.S. Senate is expected to approve a $1.2 trillion physical infrastructure bill by early next week. If enacted into law, the legislation, which is more than 2,700 pages in length, could have a profound impact on more than just bridges, tunnels, and roads – it could significantly affect cryptocurrency.
Federal and state lawmakers have had digital currencies in their sights for some time. A proposed provision in the infrastructure bill – currently the target of intense lobbying efforts – is just the beginning of what soon could be a flood of new regulatory and tax policies. Before we explore what’s in store, let’s answer a question that a lot of Americans still have: what in the world is cryptocurrency, and why in the world is Washington interested in it?
What Is Cryptocurrency?
Arcade tokens and casino chips.
That’s how NerdWallet has described cryptocurrency. To own a cryptocurrency, first a user will “need to exchange real currency for the cryptocurrency.” Then that user can exchange cryptocurrency online, or, in some cases, in person for goods and services. “Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides,” NerdWallet explained. Cryptocurrency transactions are managed using blockchain, a “decentralized technology spread across many computers.”
Like a regular dollar, the value of a single token or coin can increase or decrease over time. (Or even a day.) The value of Bitcoin has risen 308 percent so far this year, in fact.
Bitcoin, which came into being in 2009, was the first established cryptocurrency. Others followed in 2011. NerdWallet has estimated that today there are more than 10,000 cryptocurrencies in circulation. The total value of all cryptocurrencies on July 23, 2021 was more than $1.3 trillion, down from an April 2021 high of $2.2 trillion. And crypto is gaining adoption: approximately 14 percent of the U.S. population owns at least one cryptocurrency.
Many users are drawn to cryptocurrencies because they exist outside of government or central bank control. Others find it appealing because they believe the system is more secure.
Policymakers are skeptical, however.
Why Is Washington So Worried About Cryptocurrency?
As The Atlantic Council has explained, there are many factors driving policymakers’ concerns about cryptocurrency. For example, “The creation and use of Bitcoin have been associated with a concentration of power among relatively few operators and owners, high energy consumption, market opacity, significant price volatility, and illicit and illegal transactions” have attracted policymakers’ attention.
Additionally, a lot of cryptocurrency activity happens in countries with which the United States is not friendly. The Atlantic Council pointed to Cambridge University’s Bitcoin Mining Map, which has found more than 80 percent of global cryptocurrency mining activity is located in remote areas of China, Russia, Kazakhstan, and Iran.
Regarding climate change concerns, “The annual usage of electricity for Bitcoin mining is comparable to Norway’s total electrical usage and matches the carbon footprint of Morocco.” Regulators and elected officials alike have increased their scrutiny of the contribution crypto mining may be making towards climate change.
Market power also is concentrated in relatively few hands. According to The Atlantic Council, 1,000 individuals own 40 percent of the Bitcoin market. These “whales” as they are known, “are in a position to influence or manipulate the market to the disadvantage of most other participants.” Financial inclusion? This technology could be the opposite.
Fraud and theft are another concern. As a Forbes column explained a few years ago, “In January 2014, the world’s largest Bitcoin exchange Mt.Gox went offline, and the owners of 850,000 Bitcoins never saw them again.” Investigations went on for years, but the bottom line is this: “[S]omeone dishonestly got their hands on a haul which at the time was valued at $450 million dollars. At  prices, those missing coins would be worth $4.4 billion.” This is why, perhaps, Sen. Elizabeth Warren (D-Mass.) today called for regulation of the cryptocurrency markets, arguing that there must be a “cop on the beat” to protect investors from fraud and theft.
Policymakers also think cryptocurrency users are less than honest on their tax returns. Which brings us to the Senate infrastructure bill.
How Would The Infrastructure Bill Impact Cryptocurrency?
Nestled in the bipartisan infrastructure bill that is being debated in the Senate this week is a provision that would require cryptocurrency trading firms and brokers to report additional information about some transactions, including those that are worth are more than $10,000, to the federal government. According to PYMNTS.com, “The provision would require anyone engaged in the transfer of digital assets to report the information to the IRS, which is no different than what securities brokers are required to do” and it would empower the IRS “to go after taxes owed that the government hadn’t known about since the transactions weren’t required to be reported.”
Lawmakers believe this requirement alone will generate an additional $28 billion in tax revenue over 10 years. According to a Morning Consult survey out this week, more than half of Americans support this idea as a way to raise money for infrastructure spending.
Cryptocurrency advocates already have asked lawmakers to reconsider this language, however, because they believe it would put “new reporting requirements on individual players in the industry who have no way to comply.” Other advocates have said the provision would:
Require new surveillance of everyday users of cryptocurrency;
Force software creators and others to implement cumbersome surveillance systems or stop offering services in the United States;
Create more honeypots of private information about cryptocurrency users that could attract malicious actors; and
Create more legal complexity to developing blockchain projects or verifying transactions in the United States, an outcome that will lead to more innovation moving overseas.
Senate Finance Committee Chair Ron Wyden (D-Ore.) has signaled that he is open to some of these arguments, and to changing the provision in the infrastructure bill. The Finance Committee chair has support from a Republican. Sen. Pat Toomey (R-Penn.) has told reporters that he and Sen. Wyden have “a very constructive amendment in mind” to change the cryptocurrency provision.
But even if the cryptocurrency community is successful in rewriting this provision, it might only be a temporary win.
Who Else Is Looking At Cryptocurrency Policy?
States like New York have started to fine companies deemed as bad actors. As Government Technology explained, the Empire State also has launched a lawsuit against a cryptocurrency provider whose initial coin offering state regulators believe should have been registered as securities and subject to broker-dealer registration requirements.
In 2020, the Internal Revenue Service (IRS) changed its forms to ask more questions about taxpayers’ cryptocurrency holdings. This past May, the U.S. Treasury Department announced that it will require any transfer worth $10,000 or more to be reported to the IRS. And in addition to Sen. Warren’s recent comments regarding the need for more oversight over cryptocurrency markets, according to Yahoo! Finance, Rep. Don Beyer (D-Va.) recently dropped a cryptocurrency bill “out of the blue.”
As that news report explained, Rep. Beyer’s bill would:
Expand tax data collecting for reporting purposes;
Allow the U.S. Department of the Treasury to veto the creation of stablecoins;
Direct regulators to define rules for decentralized finance;
Create a charter for crypto exchanges, among other measures; and
Define which cryptocurrencies might be securities and which could be treated as commodities.
And then there is this development: newly-minted Securities and Exchange Commission Chair Greg Gensler gave a major speech on August 3 on cryptocurrency and he made it clear more regulation is to come.
Comparing the current landscape to the “Wild West,” Gensler said, “I wouldn’t have gone to MIT if I weren’t interested in how technology can expand access to finance and contribute to economic growth. But I am anything but public policy-neutral. As new technologies come along, we need to be sure we’re achieving our core public policy goals. In finance, that’s about protecting investors and consumers, guarding against illicit activity, and ensuring financial stability.” The remarks made it clear that Chair Gensler is concerned that cryptocurrency is a threat to each of those objectives.
While Chair Gensler called on Congress to pass legislation to allocate more resources to police the cryptocurrency marketplace and to give the SEC the authority to monitor exchanges, he also made it clear that he believes the SEC already has broad authority to regulate the market.
Now, how quickly will regulation come?
As a Bloomberg report noted, “Gensler didn’t give a timeline for any SEC action” and “he has a to-do list that includes 49 non-crypto policy reviews that could slow progress …” Bloomberg also noted, “The SEC is also working to impose new rules that would require companies to disclose carbon emissions and other environmental risks, a Biden administration priority.”
Make no mistake, however, while the regulatory and tax train might come slowly down the tracks, it is absolutely coming.