The Breakdown - Crypto Allies Rally and Race to Fix the Infrastructure Bill

Episode Date: July 31, 2021

On this episode of “The Breakdown’s Weekly Recap,” NLW covers the past week’s biggest financial, regulatory and markets news, including: The three simultaneous crypto hearings across Congress Binance’s moves to position itself favorably for oncoming regulation Proposed legislation with sweeping implications to crypto Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Philip Rozenski/iStock/Getty Images, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDest. What's going on, guys? It is Saturday, July 31st, and that means it's time for the weekly recap. And what a week. Price action was interesting. We were going on 10 daily green closes as I recorded this, although options expiry seem to have dragged the price of Bitcoin down slightly, there is still definitely a lot of optimism from a price perspective.

This is perhaps unexpected given how much regulatory news has hit the wires this week and how much markets have seemed to respond to this sort of thing over the past few months. First of all, at the beginning of the week, we had three hearings that touched crypto. One each about ransomware and CBDCs, but the main one from the Senate Banking Committee on the value of cryptocurrencies generally. That meeting showed simultaneously some clear work. had been put in among certain senators to learn more about the space. But it also showed the entrenchment of a number of political opponents, most notably Elizabeth Warren, who lamented the shadowy super coders, her term, who were the new exploitative superpower in this new financial

sector that in fact would do nothing to break the power of the banks. Still, that was, for the moment, just bluster, and there was a heck of a lot of real action at the same time. Let's talk Binance first. Last weekend, Binance dropped max leverage from 100x to 20x, stopped crypto margin trading involving the sterling, the euro, and the Australian dollar, and finally, they reduced withdrawals for non-KIC'd customers. This sucks in a broad sense of showing you the breadth of acceptance of overarching global KYC regimes, but also, to be quite honest, I was shocked that they still allowed as much non-KYC withdrawal as they did.

On Tuesday, CZ held a press conference where he said that while there was no urgency, Binance was looking for the right replacement for him. This was based on their need to find someone who had regulatory experience and who could lead the transition of the organization as they moved from tech startup to financial institution. Now, that is a big shift given how iconic CZ is and how closely connected to the brand he is. On Friday, there were two more pieces of news.

First, that Malaysia's Securities Commission had issued a public reprimand against finance and were ordering it to shut down its websites and mobile apps in the country. Bigger than that, though, was that Binance announced that users in Germany, Italy, and the Netherlands would be unable to open new derivatives positions, effective immediately. There was a lot of chatter on whether this might mean the beginning of the end of derivatives in general, but for now, the relevant thing is that this is yet another move on Binance's part to try to outrun regulatory issues.

Speaking of, Brian Brooks, former head of the office of the comptroller of the Kerr, currency, former Coinbase lawyer, and now CEO of Binance US, sat down and did an interview with Forbes. There were two main takeaways. The first is that Binance.us is raising a big round, and while Brooks wouldn't give details, he said that term sheets are signed. Second, he is definitely trying to minimize the relationship between Binance and Binance U.S., effectively reducing it to just a licensing agreement for the name. So a ton going on there, but still we've barely scratched the surface. Breakdown is sponsored by NIDIG, the institutional-grade platform for Bitcoin.

As long-time listeners know, NIDIG is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at NIDIG.com slash NLW. That's nydig.com forward slash NLW. Let's talk Doug Byers. I mentioned that he had introduced comprehensive legislation yesterday to regulate crypto, and if page length is a measure of comprehensiveness, then, man, is this comprehensive? In fact, it's so long that people's reactions are still rolling in,

but here are a couple takes from crypto lawyer Gabe Shapiro. He organizes it into good, bad, and ugly, and in the good column, he said that the definitions used are reasonably technically accurate. Low bar, right? He also said that there's a reasonably good approach to security, law, a fairly narrow definition of virtual asset service providers for Bank Secrecy Act purposes, and that the Act basically lays off defy because it more or less admits to not understanding it yet. In the bad column, he says that it gives the SEC and CFTC exclusive power

to classify the top 25 currently trading tokens as either securities or commodities with no clarity on the process and at their sole discretion. In the ugly column, boy, there's a lot and a lot of it's around stable coins. He tweets that the act, quote, has blanket, probably totally unenforceable and possibly unconstitutional rule that no person may issue, use, or permit to be used a digital asset fiat-based stable coin that is not approved by the Secretary of the Treasury. This is treating stable coins like Schedule I drugs, end quote. Effectively, this makes every stable coin not approved by the Department of the Treasury illegal. It requires FinCent to try and ban anonymizing services and anonymity enhanced tokens. Gabe's summary is, quote, all in all, although this bill would take a big bite out of

the value and confidence in our industry, in spirit it is unsurprising and fairly measured. But in a few key places, its overbreath or ambiguities raise civil rights and other issues that need to be addressed. End quote. I've had a few of you ask on Twitter about my thoughts on this, and while I still haven't had a chance to really dig in, on spec I agree with a lot of what Gabriel says. My biggest thought, though, is that this is one congressman introducing a bill. We now get to review and comment on and advocate for changes around and get our legislative allies involved in, and you see where I'm going here. There is room for a democratic process. That means there's room to rework it. So I almost don't have to care too much right now how bad it is to start. Instead, my questions are,

how much support does this version have? How much room to change it is there? This stands in sharp contrast to the steaming heap of poo emoji that we got earlier this week when the Senate voted to to debate a new infrastructure bill that, at the last minute, stuck extremely expansive language about crypto into it as a way to make back $28 billion of the overall $550 billion price tag. The intention clearly is to get crypto tax revenue, but the issue is that it would impose nigh impossible reporting requirements on entities that don't actually custody crypto assets, and instead simply contribute resources to the network. think software wallet providers, miners, etc. It intentionally expands the definition of brokers to

include these companies. And because this was inserted into absolutely essential to pass legislation that has extreme momentum, it's been a whole different type of fire drill. Jake Chravinsky wrote one of his patented threads and it's worth reading in full so you really understand. Quote, here's the deal with the U.S. 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. 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 decks in P-to-P markets. This definition is so broad it could apply to nearly every economic actor in the U.S. crypto industry, if read literally. That includes proof-of-work miners and proof-of-stake validators, since providing a service to effectuate transfers of digital assets for consideration seems to fit both. It might include a huge range of defy-market participants too, like decentralized exchange liquidity providers, liquidators, protocol governors, etc. Depending what for consideration means, it might also extend to non-economic actors like node operators or wallet developers.

The scope here could be massive. The tax code requires brokers to comply with IRS reporting requirements. Most importantly, they have to give Form 1099s to their customers and file them with the IRS, too. To fill out Form 1099's, brokers have to collect customer data including name, address, phone number, etc. This means brokers have to K-YC customers to comply with IRS reporting requirements. As a result, the provision functions as a surveillance mandate, just like the one Secretary Mnuchin proposed in the final days of the Trump administration. As before, this is a very bad idea.

As those who understand crypto already know, users are pseudo-anonymous and access is permissionless. It's literally impossible for non-custodial actors that, like miners to get the information they need to do form 1099s. In practice, this could mean a de facto ban on mining in the USA. This sounds insane, but it really might happen. Most crypto legislation goes nowhere. It's easy to ignore. Not this time. This provision is part of the bipartisan and otherwise popular infrastructure bill, which is moving quickly through Congress and is highly likely to pass. What does crypto have to do with infrastructure, you ask? The bill has to include

pay-for provisions to raise revenue for new spending, so that a its revenue neutral as a whole. The broker definition is one of the pay-for provisions in the Senate draft of the bill. There are three main ways to raise revenue in a bill like this. Increase current taxes, add new taxes, or improve tax compliance. This allegedly falls in the third category, making people pay taxes they already owe. Congress thinks crypto is full of tax evaders. It isn't. The infrastructure bill is estimated to cost greater than $1 trillion. Congress scored the new broker definition at $28 billion in added tax revenue. I have no clue how they got this number or how it's even possible to calculate. Regardless, this is no way to handle major new regulations. This is a deeply

misguided provision that, if adopted, will do far more harm than good to U.S. interests. I'll give you my top five reasons why. First, it defies logic to adopt a regulation for which compliance is literally impossible unless the goal is to kill the industry. Second, 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 U.S. would take market share in this crucial sector. We can't make the same mistake China did. We have to stay in the game. Third, it won't work. For every new dollar of tax revenue will lose two or ten as the U.S. crypto industry shuts down or goes offshore. And instead of getting more insight into taxable crypto gains, the IRS will get less as more users go dark on

unregulated platforms. Fourth, it short circuits the discussion we've been having with FinC. Since President Biden took office, FinC 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. Fifth, the burden it will place on civil rights is unacceptable. Our Fourth Amendment right to privacy limits how much surveillance governments can mandate without a warrant. And in a post-Solar winds world, the last thing we need to do is expose more sensitive information to a security breach. So, what can we do? The start, don't panic.

This provision isn't final yet and it can still be changed. 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. This may be a long fight. If you're a U.S. citizen, call your members of Congress, especially Senator Portman if you're in Ohio. If anyone says this won't help after we held off FinCEN and the Fadif, I'll lose my mind. If you're a leader of a U.S. crypto company and aren't involved in this yet, reach out to me or

team at the Blockchain Association, your voice is especially important. Things are moving fast, which can feel scary. But as it was with FinCEN's proposed rule, it's been amazing to see this entire industry come together this week to fight against this. We really do have some of the best and brightest on our side. So that was extremely long. You got a little long read Sunday on Saturday, but I shared it because it does such a good job of laying out all the pieces of this. Picking up on that last thread of people coming together to fight this, MarketWatch published a piece called Crypto Allies rally against ignorant new tax rules in bipartisan infrastructure deal. Warren Davidson of Ohio said, quote,

crypto has been around since 2008. For over 10 years, the spaces had zero regulatory clarity, but it took the Senate all of a few days to use crypto taxes as pay-for's for a bloated infrastructure deal. Davidson also asked whether the move was, quote, skillfully crafted or maliciously ignorant. Kristen Smith of the Blockchain Association pointed out, as Jake did, that many of these actors targeted simply could not comply because they don't have visibility into their customer transactions. She said, quote, instead of rushing through an

untested provision with vast unintended consequences, we encourage Congress to work with industry to find language that works for all stakeholders, keeping America at the forefront of crypto innovation. There's also been a lot of weird talk going around about how much crypto is contributing to unpaid taxes. The IRS commissioner in April told the Senate Finance Committee that the absence of crypto transaction reporting contributed to $1 trillion of unpaid taxes. As Suzhu tweeted, however, Sun, the entire market cap is $1.5 trillion. If you want to collect $1 trillion of tax, you have to help send this asset class to $30 trillion first. In either case, work behind the scenes continues, and there still is a ton of confusion. Nick from CoinDesk tweeted yesterday, heard from various folks

that things were still somewhat fluid regarding crypto tax reporting requirements, although I didn't expect this level of fluidity, referring to a tweet from Senator Rob Portman saying that the bipartisan group hasn't finished drafting its bill. Then someone else tweeted that the Senate is currently debating this. I prep the weekly recap on Friday afternoon, so it's possible, if not likely, that something new will have happened by the time you're hearing this. I'll do my best to keep you up to date. In the meantime, though, I'll end on this positive note. Don't forget that the reason that there is such an increase in regulatory scrutiny is that there is a corresponding rise in us bitcoiners and crypto users.

Crypto.com this week released its latest study on global crypto users and found that between January and June, the number more than doubled, from 106 million in January to 221 million in June. It had taken nine months to go from 65 million when crypto.com started tracking to hit the 100 million user level, so the rate of growth is also accelerating. Put differently, the constituency of crypto users is bigger than ever. That means more people to advocate and fight. So let's make those voices heard. For now, guys, I hope you're headed into a great weekend. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.