The Future of Cryptocurrency Is Being Decided in Biden's Infrastructure Bill

A small part of the bill concerning cryptocurrency tax reporting requirements has turned into a massive fight, with the industry's future on the line.
August 6, 2021, 7:56pm
The Future of Cryptocurrency Is Being Decided in Biden's Infrastructure Bill
Image: Bloomberg / Contributor via Getty Images

Two competing amendments to the Senate’s infrastructure bill may shape the future of cryptocurrency in the United States as senators fight over who must be subject to new tax reporting requirements.

One proposal wants to exempt miners, hardware manufacturers, and developers, putting the focus on centralized cryptocurrency exchanges and trading apps. But the Biden administration has thrown its weight behind another amendment that would grant exemption only to those behind so-called proof-of-work cryptocurrencies such as Bitcoin, but not other networks said to be more environmentally friendly because they don’t consume as much electricity to validate transactions.

Advertisement

The infrastructure bill, which promises public spending on major projects like new roads and bridge repairs, wouldn’t appear to have anything to do with cryptocurrency. But the Congress figured that “crypto brokers” could be squeezed for $28 billion in taxes over a decade to foot part of the bill. The proposal immediately caused a furor, with crypto influencers prompting their followers to call their senators and industry stakeholders applying pressure

The definition of brokers in the original bill—“any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person”—was so broad that it meant pretty much anyone that makes a cryptocurrency tick—node operators, miners, validators, or services that stake digital assets—would have to report to the I.R.S. the information on their “customers.”  

Advertisement

Cryptocurrencies such as Bitcoin are designed to be non-custodial and pseudonymous, so that requirement could be nearly impossible to satisfy for much of the industry.

"The industry is watching how this will play out, but generally, if the bill is passed with the language as drafted originally, it would likely result in a lot of node operators leaving the US because of their inability to comply with the new regulations and facing withholding tax liabilities and penalties," Olya Veramchuk, director of tax solutions at blockchain firm Lukka, told Motherboard.

On Wednesday, three senators—Ron Wyden (D., Ore.), Pat Toomey (R., Pa.), and Cynthia Lummis (R., Wyo.)—put forward an amendment to narrow the definition of a crypto broker down to those who are custodial and actually hold information on their customers, such as cryptocurrency exchanges like Coinbase or trading apps like Robinhood, granting exemption to everyone else.

But an amendment proposed by Senators Rob Portman (R. Oh) and Mark Warner (D., Va) on Thursday, favored by the Biden administration, grants an exemption from the tax reporting obligation to only a segment of the crypto industry, resting on a major technical difference in blockchain design between proof-of-network and proof-of-stake.

Some networks like Bitcoin and Dogecoin require miners—which use racks of high-power computers—to take care of the task of validating transactions using huge amounts of electricity for a reward in the form of newly-minted coins. This is called proof-of-work. Others, like Polkadot and Cardano, require “staking” (hence, proof-of-stake)—which is a process of pledging funds to the network and getting semi-randomly called to validate transactions. Validators are rewarded with newly-minted coins. Proof-of-stake doesn’t consume energy as there are no super powerful computers involved, and is often touted as a solution to the cryptocurrency industry’s massive carbon footprint. 

Advertisement

Ethereum, the world’s second largest cryptocurrency after Bitcoin, is currently in the midst of transitioning from proof-of-work to proof-of-stake—soon to be known as Ethereum 2.0—by booting gas-guzzling miners and already welcoming stakers, with $19.1 billion locked in

“My amendment is tech neutral and gives crypto developers room to experiment and move to greener technology,” Sen. Wyden told Motherboard. “The alternative locks in current cryptocurrency tech, which experts agree consumes exponentially more energy. Anyone who cares about the climate or innovation should oppose the Portman amendment.”

Tim Ogilvie, CEO of Staked, which runs a major Ethereum 2.0 validator, told Motherboard that the core responsibility of a proof-of-stake validator is to assemble new blocks, so that means “including transactions from every address on the chain, whether we have a customer relationship or not.”

“This is exactly the same reason the Warner-Portman amendment excluded proof-of-work validators [such as Bitcoin miners], yet they inexplicably excluded proof-of-stake validators,” he said. “I assume this is a simple oversight—but one that may be very damaging to the US, if not corrected.”

The Warner-Portman amendment also hits the $73.1 billion-worth decentralized finance industry, which consists of protocols that allow people who own crypto to use bank-like services, such as loans or interest accounts, without any intermediary. The most popular of these services are built on the Ethereum network—like SushiSwap, the creator of which is a mysterious coder who goes by “Chef Nomi”. So, in many cases, the law may also have trouble finding people to punish for non-compliance.

The vote on rival amendments is expected to take place on Saturday.

Jerry Brito, executive director of crypto industry think tank Coin Center, said in a statement shared with Motherboard that the “tech policy of this magnitude is being done as a last minute tax provision buried in a massive must-pass infrastructure bill.”

“This is no way to make policy,” he said.

Correction: An earlier version of this article misattributed a statement to Olya Veramchuk. Motherboard regrets the error.