The Breakdown - US Treasury Department Won’t Go After Miners, and BlockFi Settles With the SEC

Starting point is 00:00:00 Part of Treasury's argument was that, of course, they weren't going to do something stupid. They weren't going to try to make a group who didn't have access to a certain type of information, share that information, or else render their activities illegal. That wasn't their goal. Never was their goal. My argument at the time was that that's not how we make laws. Even if we believe that this group will be good to its word to not interpret their definition of broker in such a way, we have to consider the next group of leaders who makes policy around it and the next group after that.

Starting point is 00:00:27 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 nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, February 14th. And today, we are talking about the latest from the Treasury Department on new crypto tax policy, plus a ton of other late week slash weekend stories. But before we dive in, if you are enjoying The Breakdown, please go subscribe to it wherever you listen to podcasts,

Starting point is 00:01:06 give it a five-star rating, give it a review, or if you want to dive deeper into the conversation, come join the Breakers Discord. It's where we chat about everything that's going on in the world of crypto and in the world of macro and often even beyond that. If you want to check it out, you can go to the link in the show notes

Starting point is 00:01:22 or you can go to bit.li-slash breakdown pod. Finally, a disclosure, as always, in addition to them being a sponsor, I also work with FTX. Now, speaking of FTX, I'm actually recording this show on Sunday, February 13th, one, because there's already so much news that needs covering that I had plenty to fill a show, but two, also because today is a pretty crazy day. We have an ad in the Super Bowl. By the time you're hearing this, you've likely had a chance to see the spot that we've in keeping under wraps for so many months. I won't talk about it too much here, although if you

Starting point is 00:02:00 want any behind-the-scenes details, come join the Discord. I'll give you the inside scoop. But in any case, I do hope you enjoyed watching it as much as we enjoyed making it. All right, so there was a fairly large amount of news on Friday and over the weekend. And we're going to start with a headliner from the Treasury Department. In a letter dated February 11th, which was Friday, the Treasury reassured six senators who had sounded the alarm that the Treasury does not intend to treat crypto miners, stakers, and wallet providers as brokers for tax purposes. The letter went to six senators, Cynthia Lummis, Mark Warner, Rob Portman, Kristen Sinema, Pat Toomey, and Mike Crapo, who had shared concerns about the Treasury's changing definition of broker in a communication to the Treasury Department.

Starting point is 00:02:44 So the backstory of this, of course, starts last summer with the infrastructure bill. At the last minute of that bill process, there was the addition of a pay-for provision, That's something that's inserted to help show how politicians are going to make a bill revenue neutral without just having to raise taxes to cover the cost. One of these pay-for provisions proposed to change tax codes, specifically around the definition of a broker, in a way that the bill's author said would get them back $30 billion a year in taxes that weren't being paid around cryptocurrency transactions.

Starting point is 00:03:17 Now, this redefinition of a broker was extremely wide, and it didn't make any sense in a non-custodial system. It would have imposed reporting requirements that would have been impossible for people in the crypto ecosystem to actually abide by. In effect, it would have made it a priori illegal to do things like validate the network or provide security through mining

Starting point is 00:03:38 because you would be defined legally as a broker but not able to actually live up to a broker's commitment simply based on the design of the system. Now, at first, this was so egregious that many thought it was a simple error. If you go listen to Jake Trevinsky, who's the head of policy at the Blockchain Association on my show from a couple months ago, he was really convinced that it was just a mistake. However, it turned out not to be.

Starting point is 00:04:01 It was the Treasury working through the Senate process and trying to give themselves a pretty wide latitude to figure out whatever they thought they needed to figure out in terms of tax policy around crypto. What no one who wasn't in this industry expected was the intensity of the fight that crypto would put up. Lobbying went into full swing, and before long there was a bipartisan group of senators who were trying to narrow the redefinition of broker to explicitly exclude and protect some of these categories that could be so detrimental if they were actually to have that

Starting point is 00:04:31 broker definition. Some of these allies were people you'd expect, like Cynthia Lummis, but some you wouldn't, like Senator Ron Wyden. It was a bipartisan group with a group of Democrats and Republicans on one side and a group of Democrats and Republicans on the other side. Now, the crazy thing over about two and a half weeks is we actually got to a compromise that would have been a lot better than what was in the bill originally. However, by the time they got to that point, they weren't allowed to actually have a normal vote because of procedural reasons. Instead, the one path to actually changing this language was to have a unanimous vote, and even that crazy reach scenario was on track until one senator said no unless the rest of the Senate added a $50 billion defense spending package, which happened to benefit his state most of all. all. The whole thing was enough to make your headspin, and ultimately in many ways it was a good legacy for crypto. It was a seismic moment, an inflection point for crypto lobbying and for just the

Starting point is 00:05:26 crypto political apparatus in general, but it still left us with the question of what the heck was going to happen with this provision specifically. Now, part of Treasury's argument was always that of course they weren't going to do something stupid. They weren't going to try to make a group who didn't have access to a certain type of information, share that information, or else render their activities illegal. That wasn't their goal. Never was their goal, according to them. My argument at the time was that that's not how we make laws. Even if we believe that this group will be good to its word and true to its promises to not interpret their definition of broker in such a way, we have to consider the next group of leaders who makes policy around it and the next group after that. But we lost,

Starting point is 00:06:08 at least in those specific terms, so really all that was left was to see what Treasury actually did in the rulemaking process. So to this letter, it reads, existing regulations impose broker reporting obligations only on market participants engaged in business activities that provide them with access to information about sales of securities by taxpayers. Indeed, the letter goes on to basically say that it's broadly aligned with the senator's view, saying they're consistent with the Treasury Department's view that ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers. For example, persons who are just validating transactions through a consensus mechanism are not likely to know whether a transaction is part of a

Starting point is 00:06:48 sale. And persons who are only selling storage devices used to hold private keys or persons who merely write software code are not carrying out broker activities. So what to make of this? Well, obviously, this is an encouraging sign. It reiterates a key statement from Treasury at that time. It's explicit about the types of groups they're trying to exclude, so at least they are not so far, going back on what their promises at the time were. However, this is, of course, a long way from formal guidance. That process will include proposals, public comment, revisions, and repeats. So for now, we're just going to have to keep watching, but certainly it's starting better than it could. Nexto is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a

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Starting point is 00:09:26 and specifically it was around the practices around their high yield interest-bearing accounts. So why might this have attracted attention? Well, on the one hand, it wasn't some big, hypey ICO, but on the other hand, you could see how a regulator would think that this product was more likely to attract regular old buyers, right? There were concerns about the opacity of what the investment activities were that were producing these promised yields, and of course, in the crypto space, there were more cynical takes on the fact that this type of interest-bearing activity competes very favorably with

Starting point is 00:09:54 the traditional banking activity of savings accounts, which currently offer almost nothing at all. In either case, on Friday, Bloomberg reported that BlockFi will agree to a $100 million settlement with the SEC. As part of that, they will pay the SEC $50 million and another $50 million to various state regulators. They will also stop opening new accounts of high-yield lending to most Americans as part of the settlement. When asked about this report, a BlockFi spokesperson said, and productive ongoing dialogue with regulators at the federal and state level. We do not comment on market rumors. We can confirm that clients' assets are safeguarded on the BlockFi

Starting point is 00:10:28 interest platform and BlockFi interest accounts clients will continue to earn crypto interest as they always have. So we're not getting the full information yet, but already most people are focused on what it means for the future and in terms of precedent. Grayscale's Barry Silbert wrote, It would be naive to think that the SEC and state regulators are going to find BlockFi 100 million, but not go after defy lending platforms as well. How? I don't know. Jeff Dorman from ARCA said,

Starting point is 00:10:53 BlockFi has been running an unregistered hedge fund for years with zero disclosures to depositors in terms of what they do to generate yield. DeFi lenders are 100% transparent with regard to how it works and where yield comes from. You may be right, but not apples to apples. Now let's shift to some other bullish adoption-type stories. On Thursday, YouTube released a blog post called A Look at 2022, Community Collaboration and Commerce, it was making circles for its comments on Web3. YouTube's chief product officer Neil Mohan wrote, Web3 opens up new opportunities for creators. We believe new technologies like blockchain and NFTs can allow creators to build deeper relationships with their fans. Together, they'll be able

Starting point is 00:11:34 to collaborate on new projects and make money in ways not previously possible. There's a lot to consider in making sure we approach these new technologies responsibly, but we think there's incredible potential as well. There was also only fans, which come on, I don't need to explain to you. they're also letting users post-verified NFTs now as profile pictures, following Twitter's lead. So far, it's only Ethereum, and it shows it a little eth icon to display that they are legit. Finally, one more Web 2 thing. The CEO of Uber said in an interview with Bloomberg that the company will, quote, absolutely accept crypto at some point in the future.

Starting point is 00:12:09 When asked about this, he said it definitely could. We're having conversations all the time. I think right now what we see with Bitcoin and some of the other cryptos, they are quite valuable as a store of value. The exchange mechanism is expensive. It's not great for the environment. As the exchange mechanism becomes less expensive, becomes more environmentally friendly, I think you will see us lean into crypto a little bit more. So we're absolutely watching it. And if you say, is Uber going to accept crypto in the future? Absolutely. At some point. This isn't the right point, but we will. Now, I just want to go back to the KPMG example that we

Starting point is 00:12:39 were talking about a few days ago, where when they announced that they had put Bitcoin and Ethereum on their balance sheet, they also announced that they had bought an offsetting amount of carbon credits. My point at the time was that I wondered if that would start to form a pattern for companies to adopt crypto in a way that keeps them on the right side of ESG mandates. To say, hey, we think this adoption is worth it, we think this asset is worth it, we also recognize an environmental externality, and here's our way of approaching that. I have no idea if Uber thinks in similar terms to that, but I do think it's worth putting this discussion of how it becomes, quote, more environmentally friendly, at least at a corporate level together with that

Starting point is 00:13:15 KPMG example. Finally, a couple more geopolitical things. Chris Sununu, the governor of New Hampshire, has announced a state commission on crypto. According to a February 9th executive order, this commission is going to do things like make findings and determinations regarding the role and effectiveness of current state laws and regulations governing cryptocurrencies and other digital assets and the reason why modifications and improvements to such laws and regulations are necessary. The commission includes the Attorney General, the bank department, both chambers of the state legislature, and frankly, it makes a ton of sense. New Hampshire is already a popular destination for crypto folks given that it has no state income tax, and plus, the damn state's motto is live-free or die.

Starting point is 00:13:55 Popping on down now to El Salvador. El Salvador has been in the news lately based on both its upcoming volcano bonds, but also because of the clapback of international institutions who seem determined to punish it for its insolence, thinking that they can get out of the normal dollar system. The latest shoot-a-drop is that New York-based Fitch ratings has moved El Salvador. Lodore's long-term foreign currency issuer default rating, or IDR, from its most recent rating of B-minus to CCC, a much worse rating. Quote, the government has been an extended discussion with the IMF for nearly a year for a possible 1.3 billion three-year program. However, there are important differences between the two sides and many key areas in Fitch's view. A deal would help cover the government's financing gap and likely unlock other multilateral loans.

Starting point is 00:14:38 It would also help provide more clarity on the government's medium-term fiscal strategy. Now, Fitch is also not buying bonds as a real alternative just yet, saying there is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubt surrounding an IMF program, as well as the capacity to issue Bitcoin-backed bonds through new distribution channels. Somehow, I don't think that Fitch's skepticism is going to stop Buckele and El Salvador's plans anytime soon. Over in Europe, Politico reported that a senior official from the European Commission announced that the EU is set to formerly consider legislation around a digital euro in 2023. They said, quote,

Starting point is 00:15:17 our goal is to table legislation in early 2023, a targeted legislative consultation in the coming weeks. Research is currently being pursued by the ECB who formed a 30-person advisory group around a digital euro last October. And lastly, one more from the just-how decentralized is defy-files. Pancake swap, which is the largest decentralized exchange or decks on the Binance smart chain, is set to begin geoblocking users from Iran, Belarus, Cuba, the Democratic Republic of Congo, Iraq, North Korea, Sudan, Syria, Zimbabwe, and Crimea. Pancake swap represents a third of the total value locked on BSC, and while they're certainly not the first decks to do something similar, for example, one inch, a decks aggregator

Starting point is 00:15:57 blocks users from the U.S., it's still notable that a theoretically permissionless decentralized exchange is in the geoblocking game in the same way that a centralized exchange would be. This is not to make a judgment about their decision. I just think it's worth pointing out that a lot is going to be figured out about the D in DFI this year, and this is yet one more preview. Anyways, guys, like I said, this is just Sunday, and these are all pieces of news from when I finished recording on Friday afternoon. So tons going on, a lot to dig into as the week begins. I hope wherever you are, you had a great weekend and are off to a rollicking start.

Starting point is 00:16:30 I want to say thanks again to my sponsors, nexo.io, Arculus and FDX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - US Treasury Department Won’t Go After Miners, and BlockFi Settles With the SEC

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