The fight against Senate infrastructure cryptocurrency was just the beginning

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The bipartisan infrastructure bill that the Senate passed on Tuesday will, among other things, help improve water systems and highways in the Americas. Oddly, however, in the days leading up to its passage, the only provision in the bill people argued over was not about roads or bridges. Instead, it was, among other things, cryptocurrency.

The provision in question is said to help foot the bill by raising $ 28 billion over 10 years through crypto transaction taxes. But its most important function will be to expand the ability of governments to trace and track crypto transactions and further integrate crypto under the umbrella of financial regulation. In this sense, it is a testament to the growing importance of cryptocurrencies. But the battle over the bill also shows something else: just how difficult it will be for the government to regulate fintech designed, in many ways, to avoid regulation.

The crypto clash in the Senate was over the meaning of one word: brokers. The bill as passed defines a broker as any person who provides a service performing digital asset transfers on behalf of another person and requires brokers to complete 1099 tax forms for their clients (this which means, of course, that they need the names, addresses and social security of these people (or tax identification numbers).

The crypto brokers the billers had in mind were platforms like Coinbase, which people use to buy and sell crypto assets. But the definition is broad enough to also include software developers and even crypto miners who confirm and verify blockchain transactions, as they all provide services that help transfer crypto assets. Minors, however, do not have access to their users’ information, which would make it impossible for them to complete a 1099.

The crypto clash in the Senate was over the meaning of one word: brokers.

Crypto advocates acknowledged this was a problem and pressured the Senate to change the provision. Initially, two competing bipartite amendments emerged. The one backed by the White House would have exempted traditional cryptocurrency miners, those who work in so-called proof-of-work systems like Bitcoin and Ethereum 1.0, from the reporting requirement. The other sponsored, interestingly, by Liberal Sen. Ron Wyden, D-Ore., And two Republicans reportedly exempted all minors, including those who work in so-called proof-of-stake systems used by many newer cryptocurrencies, as well as software. and protocol designers and developers.

Wydens’ proposal was the best, as only exempting miners from proof of work would have meant the government picked the winners, giving one form of crypto (and very power-hungry) technology tax advantages over others. And ultimately, the two sides reconciled and proposed an amendment that would have exempted anyone involved in validating blockchain transactions, whether through proof of work or proof of stake, from having to deposit 1099s.

It was a reasonable compromise. But all of this was for naught. Senators left it so late that the only way to include the provision in the bill was by unanimous consent, meaning each senator had to agree to include it. Senator Richard Shelby, R-Ala., Twice tried to tackle defense funding on the amendment, and after being pushed back twice, he opposed the provision. And so, the bill was passed with its original and expansive definition of broker intact.

Now, if you’re not a crypto enthusiast, that was a pretty esoteric argument. (And the argument isn’t even over: the Treasury Department, which will be responsible for implementing the provision, will have the power to write rules clarifying who counts and doesn’t count as a broker.) But there is some important points that the struggle helped to clarify.

First, it shows how difficult and controversial, even simple things, like recording the names and addresses of people we take for granted in all other parts of the financial system, are in the crypto world. What the senators were discussing, after all, was not whether minors should be required to pay taxes, but whether they should be required to collect information from users (who, to be fair, will have to pay taxes. taxes), or as the bill’s critical crypto advocates have indicated whether they should be required to monitor users. The entire U.S. financial, fiscal and regulatory system relies on user oversight, and most of us don’t think about it. But for many crypto enthusiasts, this is an intolerable invasion of privacy.

Now, in the short term, that won’t be a big deal, as most crypto transactions in the United States consist of cryptocurrency exchanges, and many cryptocurrency users prefer to use traditional brokers like Coinbase, which makes transactions easier. for the government. hunt down. But a lot of people believe that much of the future of crypto is as the foundation of decentralized finance, or DeFi. Already people are building financial systems, running on the Ethereum network, which include a host of tools that mirror the traditional financial system without going through centralized exchanges. And that presents a much bigger set of challenges for the federal government.

The whole promise of DeFi is that it is not inside the system and is not centralized. It is designed to operate without brokers or banks and without the government setting the rules of the road. In other words, it is designed to be difficult to monitor and regulate. So the fight we’ve seen over the past week feels like little more than trying a much bigger argument about what DeFi regulation should look like. It’s still not clear whether DeFi offers enough benefits for ordinary users to really take off. But if it does, the struggle to track, tax, and regulate it will make the battle against Bitcoin miners who deposit 1099s seem trivial.

James Surowiecki is the author of “The Wisdom of the Crowds”. His work has appeared in The New Yorker, The New York Times, Wired, and Fortune, among others.

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