The U.S. Infrastructure Bill And Cryptocurrency Regulation – Technology

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The U.S. Infrastructure Act and Cryptocurrency Regulation

September 16, 2021

Withers LLP

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M. Ridgway Barker co-authored this article with Joseph Bambara, CIPP / US.

Regulation of cryptocurrency has been of interest to U.S. lawmakers lately. The US $ 1 trillion Infrastructure Act HR 3684, which contains crypto-regulatory provisions, has been passed by the Senate. The evolving US cryptocurrency regulation will address the following topics: Stopping Cryptocurrency Crime and Tax Evasion, Stablecoin Regulation, and Investment Vehicles, e.g. B. Cryptocurrency ETFs. One such newly proposed cryptocurrency ordinance is included as a provision of the $ 1 trillion bipartisan infrastructure bill that goes through Congress. The determination: SEC. 80603. BROKER AND DIGITAL ASSET INFORMATION REPORTING would expand the definition of a brokerage to include companies that facilitate trading in digital assets such as cryptocurrency exchanges. The change would mean increased responsibility for tax reporting to facilitate the IRS’s ability to prosecute crypto tax evasion. The SEC. 80603 is a “Payer” provision in TITLE VI referred to as the Miscellaneous Provisions. Other provisions attempt to describe how the bill pays for itself. Congress believes it will generate $ 28 billion in new revenue through expanded reporting requirements for all cryptocurrency companies that qualify as “brokers” and through the change in the taxation of “digital assets” by the IRS. These provisions have been described as tightening the laws governing the taxation of sales of digital assets. Unfortunately, it’s not a well-thought-out way to pay the bigger bill. While we do agree that digital asset exchanges and brokers should have reporting requirements and those who make money should pay their capital gains taxes. The bill falsely extends the definition of a broker to “any person who regularly provides a service (for a fee) responsible for the transfer of digital assets, including a decentralized exchange or a peer-to-peer marketplace”. This includes practically all players in the industry, from miners and validators to software developers and node operators. This provision reveals a fundamental misunderstanding about how Distributed Ledger Technology (“DLT”) works and how best to regulate it. Let’s look at three types of DLT players: miners, validators, and decentralized exchanges.

Miners verify transactions using a consensus method known as proof-of-work (“POW”). It, as most know, requires a large amount of computing power provided by the miners to verify a transaction. In return, the miners are compensated with cryptocurrency. In 2021, the reward per block was 6.25 bitcoins for bitcoin miners, and one bitcoin is worth around $ 45,000 when released. But miners have nothing to do with the actual onboarding of buyers and sellers or the transactions made between them. They do not store the identities of the participating buyers and sellers.

Validators use a different consensus method to confirm transactions. It is known as the Proof of Stake (“POS”). Here, parties anonymously use platform tokens, i.e. assets, to aid in transaction validation and maintain the network platform by operating it more cheaply than a POW platform. The number of tokens the party deploys determines the number of transactions they can validate. You will be compensated for every transaction they validate. Again, they do not know or store the identities of the participating buyers and sellers. Please read our article on staking HERE.

As for exchanges, traditional centralized cryptocurrency brokers and exchanges like Coinbase should comply with the new Congress-approved reporting laws. But these exchanges, for example Uniswap, have increasingly become decentralized exchanges. A decentralized exchange (DEX) is an exchange based on a distributed general ledger. It does not store user funds and personal information on its servers and only acts as a platform for the reconciliation of bids to buy or sell user assets. Trading on such platforms takes place directly between the participants (peer-to-peer) without financial intermediaries. Therefore there is no central authority to identify and report individual transactions in the network. On the contrary, a combination of algorithms, mathematics, cryptography and software fulfills all the functions of a financial intermediary, but in a transparent, decentralized and verifiable manner.

So how do we go about it? There are several ways we can begin to properly address digital assets, DLT, and the new Internet of Value. Legislators in the house must find a way to change SEC law. 80603 before the passing of the Omnibus Infrastructure Act HR 3684. Senator Pat Toomey (R-Pa.) Explained which actors are brokers and why a change makes sense: “We are not proposing anything blanket or radical.[A] Brokers only mean those people who transact on exchanges where consumers buy, sell, and trade digital assets. ”The House needs to develop more precise language that allows more reasonable regulation and taxation for lawmakers to address this new DLT / blockchain and its many In particular, to properly develop a policy around digital assets and DLT / blockchain we need a lively discussion that engages all stakeholders and covers the many interconnected elements in regulating the second era of the digital age. This is a pivotal moment in the development of DLT / Blockchain technologies, which have so much potential for positive change in supply chains, healthcare, education, and virtually every aspect of banking and financial services, and regulations that have a deterrent effect on the entire industry ultimately bring the development of America’s innovation economy to a standstill y.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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