Jake Chervinsky, the General Counsel at Compound Finance, recently shared insights and his take on the deal with the recently proposed US infrastructure bill.
1/ 🚨 Here's the deal with the US infrastructure bill:
A new provision has been added that expands the Tax Code's definition of "broker" to capture nearly everyone in crypto, including non-custodial actors like miners, forcing them all to KYC users.
This is not a drill 👇
— Jake Chervinsky (@jchervinsky) July 30, 2021
Jake noted that a new provision has now been added that aims to expand the Tax Code’s definition of “broker” to capture “nearly everyone” in crypto, including “non-custodial actors” such as Bitcoin miners, “forcing them all to KYC users.”
As explained by Jake, the bill expands the definition of a “broker” to include “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets.” Earlier drafts said “even if non-custodial” and explicitly included decentralized exchanges (DEXes) as well as peer-to-peer markets, Jake confirmed.
According to Jake, who is also the strategic advisor at Variant Fund, this definition “is so broad, it could apply to nearly every economic actor in the US crypto industry, if read literally.” He pointed out that this includes PoW miners & PoS validators, since “providing a service to effectuate transfers of digital assets for consideration” appears to fit both.
He further noted that it may include “a huge range of DeFi market participants too, like DEX LPs, liquidators, protocol governors, etc.” Depending what “for consideration” means, it might also extend to “non-economic actors like node operators or wallet developers,” he explained while adding that the scope here “could be massive.”
Jake further noted:
“The Tax Code requires brokers to comply with IRS reporting requirements. Most importantly, they have to give Form 1099s to their customers & file them with the IRS too. To fill out Form 1099s, brokers have to collect customer data including name, address, phone number, etc.”
He added that the infrastructure bill is “estimated to cost > $1 trillion.” Congress scored the new “broker” definition “at $28b in added tax revenue.” He acknowledged that he does not have a clue “how they got this number, or how it’s even possible to calculate.” Regardless, this is “no way to handle major new regulations,” he claims.
According to Jake:
“This is a deeply misguided provision that, if adopted, will do far more harm than good to US interests. … it defies logic to adopt a regulation for which compliance is literally impossible, unless the goal is to kill the industry. … it’ll be a huge foreign policy failure….After China made the geopolitical blunder of forcing miners out of their country, many of us hoped the US would take market share in this crucial sector.”
He further noted that we cannot afford to “make the same mistake China did” and we have “to stay in the game.” He also thinks it just won’t work. He pointed out that “for every new dollar of tax revenue, we’ll lose two (or ten) as the US crypto industry shuts down or goes offshore.”
Jake added that instead of getting more insight into taxable crypto gains, “the IRS will get less, as more users “go dark” on unregulated platforms.” Jake also believes that it “short-circuits the discussion we’ve been having with FinCEN.”
“Since President Biden took office, FinCEN has done a ton of solid work on crypto AML regulation. We should keep that process going, not cut it off by sneaking KYC in through the Tax Code’s back door. … the burden it’ll place on civil rights is unacceptable.”
“Our 4A right to privacy limits how much surveillance government can mandate without a warrant, & in a post-SolarWinds world, the last thing we need to do is expose more sensitive information to a security breach.”
While commenting on what we can do to address this situation, he suggested that to start with, we should not panic. This provision “isn’t final yet and still can be changed,” Jake clarified.
He also noted that even if it passes as-is, it shouldn’t take effect “until 2023 at earliest, so at least we’ll have time to try to undo it, in Congress or the courts,” and this “may be a long fight.”
“If you’re a US citizen, call your Members of Congress, especially Sen. Portman if you’re in Ohio. If anyone says “this won’t help” after we held off FinCEN & the FATF, I’ll lose my mind. Find your House Rep: https://house.gov/representatives/find-your-representative Find your Senator: https://senate.gov/senators/senators-contact.htm”
He also mentioned that if you are a leader of a US crypto company and are not involved in this yet, reach out to him or the team at @BlockchainAssn (after you call your Members of Congress). Your voice is “especially important.”
“For my part, as usual, I’ll be working with @BlockchainAssn, @fund_defi, & others on a lawsuit challenging the provision, if it comes to that. I don’t think the courts will take kindly to a law forcing non-custodial actors to surveil US citizens on behalf of the IRS….Things are moving fast, which can feel scary. But as it was with FinCEN’s proposed rule, it’s been amazing to see the entire industry come together this week to fight against this. We really do have some of the best & brightest on our side.”