Last month, the US Senate passed a sweeping bipartisan package that would inject $1 trillion into the economy. It included a new provision broadening the definition of a broker that will require anyone participating in crypto to report their activities to the IRS.
The provision caused much contention. Here to explain why is Nick Saponaro. He is the co-founder and CEO of the Divi Project, a decentralised payment ecosystem that’s on a mission to improve people’s lives by making crypto easy.
A dedicated proponent of the founding principles of the crypto movement as set out by its originator Satoshi Nakamoto, Nick is working towards the delivery of a new paradigm for financial services. One that is truly decentralised, accessible to all, and works for everyone.
The crypto industry offers massive potential for driving world-leading innovation, wealth creation, and supporting the unbanked to access critical services that up until now they’ve been denied. What’s more, it can do this with or without support from the world’s governments and legislators.
The decentralised nature of blockchain platforms that support cryptocurrencies is enabling them to find ways around most obstacles. More use-cases are being uncovered every day and because of this, the industry is expanding in virtually every economy.
But, going it alone is not optimal. Having a healthy working relationship with the State would help accelerate innovation, bring validation through regulation, and generate tax revenues for the economy. It was therefore disappointing to see such a shortsighted move from the US Government when it crowbarred a new crypto provision into the Infrastructure Bill.
I’m certainly not against proportionate and intelligently crafted taxation laws. However, by broadening the definition of a broker as the amendment has done, it now includes anyone participating in crypto.
If you’re a software developer, you’re now considered a broker. If, like Divi, you’re a crypto wallet and payment provider, you’re now considered a broker. If you run a staking node – the process of delegating your coins to the blockchain to validate payments and secure the network – you’re now considered a broker.
Not only is this ludicrous – it doesn’t take a genius to see that software developers and network participants are not brokers – it’s also unworkable.
Let’s say, for example, you were running a staking node on your favourite cryptocurrency. To meet the requirements of the new law, you’d have to find information on everyone who has transacted on the blockchain and make it available to the Government. This is impossible because all transactions are anonymised.
The opposite is also true, in that it would be close to impossible for the IRS to audit you. Again because of the anonymised nature of decentralised systems, there’s nothing online to trace you to the staking node. Certainly, any government with the will to do so could find a way to track you down but it would be costly and ultimately futile because of the challenges outlined above.
To be clear, there are already laws in place to ensure that people who enjoy capital gains from trading cryptocurrencies have to pay tax on the profits they accrue. Exchanges like Coinbase are taxed on their earnings as they should be. Their CEO, Brian Armstrong, has acknowledged their broker status, confirmed they pay tax and that they send forms to users so they can file their activities.
This is correct because they are holding people’s funds, facilitating the trading of crypto, and taking a fee for doing so. The fiduciary responsibility for what they do and what a payment ecosystem like Divi does is completely different.
But we’re also seeing overreach and wildly sporadic regulatory moves from non-governing bodies, (e.g. the SEC’s random targeting of Coinbase’s P2P lending product), who are scrambling to make sense of this technology while concurrently falling behind even some of the smallest nation-states on earth (see El Salvador).
Even more, interestingly, the provision was challenged by a coalition from both the left and right of the House. Crypto is not a political movement as Jackson Palmer, one of the creators of Dogecoin, had recently accused it of being. It is a societal movement.
It comes as no surprise that Cynthia Lummis, Wyoming’s Senator, was the driving force behind killing the bill. Wyoming has been incredibly supportive of crypto for years now. It was the first state to have a crypto bank and the first to legally recognise a Decentralised Autonomous Organisation, a business that uses blockchain to govern itself without the intervention of a central authority.
So too was Ted Cruz, the Republican Senator for Texas. He admitted that those voting don’t really know what they are voting on and that it is vital that people who do understand it are consulted before Congress passes a law that could have a negative impact for years to come.
He had a point. Taxation is something of an anathema to most but we all understand the need to pay it. However, overzealous taxation typically drives industry out of a country. We’ve seen this happen in other sectors when you impose additional taxes, tariffs, and reporting. It doesn’t just stop innovation or growth. It drives it offshore.
All of a sudden Governments lose not only the tax revenues but also IP and the talent. With crypto, this would result in the mass exodus of a $2 trillion industry from the US at a time when the economy is in serious trouble.
Ironically, the Infrastructure Bill was in itself a good argument for crypto. In addition to printing a trillion dollars as a result of this bill, literally the day after it was passed, the US government set forth a bill committed to printing $3.5 trillion more.
This lunacy is set against a backdrop of rising inflation, the devaluing of the dollar by 95% since its decoupling from the gold standard in 1971, and wages flatlining. If anything, the injection of such huge sums of money is the perfect case for allowing a provably scarce store of value like Bitcoin to thrive.
A knotty problem
Yes, it’s a knotty problem. But rather than trying to assert control over something they don’t understand, governments and regulators would do better to collaborate with the crypto industry so that everything from the public purse to the public can benefit.
Certainly, there is taxable income to be achieved but rather than a blanket law that’s essentially impossible to both adhere to or enforce, a more intelligent and collaborative approach is necessary to ensure both the industry and those involved in it can realise its potential.