By Jim Harper
“CONGRESS IS SO BROKEN,” shouted Caitlin Long, founder and CEO at the Avanti Financial Group. Having spent two decades on Wall Street in stints at Solomon Brothers, Credit Suisse, and Morgan Stanley, she now inhabits the world of cryptocurrency. She spearheaded efforts to make her home state of Wyoming a legal and regulatory “oasis” for blockchain companies. Long’s all-caps exclamation on Twitter was inspired by a fast-moving proposal in Congress that would potentially doom big chunks of the domestic US cryptocurrency industry by imposing impossible financial surveillance requirements.
At this writing, Congress is doing what passes for deliberation these days. Key senators are saying they will fix the error by floor amendment. True deliberation would probably unearth the inconsistency of such surveillance with our national values and its incapacity to serve national goals.
Congress is indeed broken. When I served on the Hill, the brinksmanship and mass-scale logrolling of government shutdowns and omnibus bills still felt surprising and unusual. But the trend was well underway: More and more legislating is done through a small number of huge bills sprung on Congress’ rank and file and the public mere days before passage. So it is with the infrastructure bill. Heading for the Senate floor this week, the 2,700-page text of the bill was revealed Sunday.
Such bills include anything insiders want, so the “infrastructure bill” has cryptocurrency regulations making pretty much anyone facilitating the processing of cryptocurrency transactions a “broker.” The tax code requires brokers to file “information returns” with the IRS — those ubiquitous 1099 forms which document financial transactions of interest to our national tax collector. The language originally in the bill said that “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets” would have these obligations.
Jake Chervinsky, General Counsel at Compound Labs, tweeted out a good write-up of the demerits, but an important one is this: Cryptocurrency networks have many actors that routinely effectuate transfers for “consideration” — legalese for something of value handed over by contract. “Miners” receive payments for including transactions in the blocks that they cryptographically secure and append to the blockchain. They generally have no idea with whom they’re transacting.
To file 1099s, miners would have to create a personal data collection infrastructure that is completely alien to them, cryptocurrency wallets would have to be redesigned to broadcast personal information, and people would have to publish their identity details with every single transaction. It will never happen. The 1099 requirement would end (legal) mining in the United States.
Proposals like this steer the US toward following China’s lead in banning cryptocurrency mining. It echoes New York’s ill-fated “BitLicense,” which made a world financial center into a crypto backwater. The US should be taking Wyoming’s lead, not China’s.
The appeal to Congress of “1099ing” cryptocurrency use is an assessment from the Joint Committee on Taxation saying the provision would produce $28 billion in revenue over 10 years that would help pay for infrastructure spending. But it is theoretical, even speculative. The 3.5 billion returns annually sent to the IRS already have its systems “operating at capacity,” according to the Government Accountability Office. It said in December 2020 that the “IRS’s ability to process and use information returns is limited.”
While the actual fiscal benefit of monitoring cryptocurrency use would be small, consider a cost highlighted by ProPublica’s reporting on the tax practices of wealthy Americans. It shows that the IRS lacks the capacity to control access to its files. Additional information reporting would create privacy and security risks. It is common in the cryptocurrency community to store your own assets. (“Not your keys, not your coins.”) Lodging personally identifiable cryptocurrency information with the IRS, from which it can be exfiltrated, would expose cryptocurrency users to the risk of kidnapping, home invasion robbery, or worse.
Information returns filed with the IRS now come in at a rate of more than 10 per man, woman, and child each year. In fiscal year 2019, US financial institutions lodged more than 20 million reports on people’s financial transactions with the Treasury Department’s Financial Crimes Enforcement Network. Should financial surveillance increase further? Should it do so in a knee-jerk fashion?
St. Mary’s University School of Law professor Angela Walch, a critic of the crypto sector — mining in particular — says Congress should slow down. “Making changes to crypto systems through regulation needs to be done with humility and care,” she writes, “not by wildly swinging a hammer, as I fear we would do by rushing crypto regulation into an unrelated infrastructure package.”
I have disagreed with her on some things, but on this she is right. If only Congress were not broken.