Members of the crypto community recently became concerned about the $ 1 trillion infrastructure bill that the United States House of Representatives was due to vote on this week. The legislation includes a crypto tax reporting provision, in addition to establishing a precise definition of the term “broker.”
Lawmakers in the House of Representatives have said that the vote on the infrastructure bill will take place on September 30. However, on September 29, Congresswoman Nancy Pelosi announced that the vote would be postponed until later. Media sources said the infrastructure bill could be passed on October 1.
While the looming implications of the proposed infrastructure plan may seem obvious, some members of the crypto community raised specific concerns about the legislation at a press conference hosted by the Enterprise Ethereum Alliance on September 29.
Ryan Selkis, CEO and co-founder of Messari, a crypto asset research and data firm, believes the bill aims to designate anyone who participates in DeFi platforms as a broker:
“This includes stakers, validators, software developers and more …”
Jeremy Sklaroff, General Counsel for Edge & Node, the team that works in the Graph ecosystem on decentralization and governance initiatives, added that while the bill’s wording is likely to pass, it unfairly demonstrates a broad way of defining the participants within a blockchain ecosystem. :
“Network miners and validators provide a service and often get transaction fees for their work. If this bill passes, the validators and miners would essentially act as intermediaries. Software developers have even more to worry about. If a team manages ‘Smart Contracts’ for a DeFi platform and earns fees or benefits from an incentive with a governance token, that team will likely become a broker. “
According to Sklaroff, network validators, miners, software developers, and other members of a decentralized ecosystem should not be considered traditional brokers because they are anonymous participants. Therefore, Sklaroff believes that it would be almost impossible to comply with this section of the infrastructure plan.
In addition to defining who qualifies as a broker, Sklaroff noted that the infrastructure plan’s reference to anti-money laundering (AML) and know your customer (KYC) could also be detrimental to DeFi protocols. Specifically, the bill requires a broker to be required to report KYC for any transaction in digital assets over $ 10,000.
Although the new legislation is intended to emphasize the KYC principle and a broker’s tax information systems, Sklaroff explained that those who fail to comply could face penalties or even jail time. In turn, Selkis said the bill would likely stop DeFi’s innovation in the United States.
“This bill would modify IRC Section 6050I, giving KYC and AML a wide range of peer-to-peer transactions. Recipients of digital assets over $ 10,000 must report this information to the IRS or they could face felony charges. “
Selkis echoed Sklaroff, adding that regulators seem to be more concerned about DeFi protocols than Bitcoin and non-fungible tokens (NFTs):
“Bitcoin and NFT have a relatively safe position. The bill really focuses on financial instruments built using ‘smart contract’ platforms that attempt to reorganize traditional banking and lending. “
Infrastructure plan targets all levels of the crypto industry
While DeFi protocols may be the hardest hit by the infrastructure plan, Sklaroff noted that the proposed legislation targets every industry in the crypto ecosystem.
For example, the proposed wording in the bill could define minors as runners. In this case, the bill would require mining companies to provide the IRS with information such as taxable net profit, identity of buyers and sellers, transaction amounts, transaction locations, etc. Still, miners would have no way of collecting this data as they only validate the blocks and not the information they contain. As a result, the minors would not be able to comply with the law and therefore would have to cease their activities in the United States.
This is of particular concern to Sklaroff, as he noted that the United States generally tries to set the regulatory tone for the rest of the world:
“If we don’t clarify the wording of this bill, I wouldn’t be surprised if other countries adopt something similar.”
On a lighter note, John Whelan, president of the Enterprise Ethereum Alliance, said that institutions that adopt DeFi measures ensure that KYC and AML are considered, which could help advance the DeFi ecosystem even when the bill is adopted:
“All the pain goes away with AML and KYC from an institutional point of view. Once you know who you are interacting with and understand that there is no way funds are going where they are not supposed to go, that is what banks do anyway. “
Selkis further stated that even more institutions interested in DeFi can contribute to the positive development of the ecosystem, but only if these systems are interoperable:
“We are starting to see more institutional interest in DeFi, and I think it can be a net benefit for the development of a broader ecosystem, but it only works if these systems are interoperable and the policy framework is not working. peer-to-peer experimentation. […] A common sense regulatory framework would ensure that centralized intermediaries remain regulated as they already are ”.
While that may be the case, Sklaroff said a key question is whether or not a DeFi project is truly decentralized:
“If the IRS is looking to enforce certain requirements, it should be able to point to an identifiable person, business, or group of people so they can say, ‘Okay, as an identifiable group, you’ve violated that part of the tax code, so here are your fines. . “”
Still, Sklaroff noted that while a DeFi project is truly decentralized, there is no entity to turn to to enforce or expect compliance:
“This is really where all these regulatory issues are at right now.”
Long-term impacts of the bill
While the consequences of the infrastructure plan have yet to be determined, Sklaroff noted that if the United States continues to push for laws that cannot be enforced, the country will ultimately miss out on a next major wave of innovation:
“Other countries will be there to take over and they may not share the same values as the United States when it comes to democracy, human rights, etc.”
While the negative implications of the bill are apparent, Selkis added that a good long-term effect is that the crypto community is now focusing on developing policymaking committees and discussions to help educate regulators on how the cryptocurrency works. the industry:
“The only long-term positive effect is that the US crypto community develops antibodies and actually organizes for policymaking discussions.”
While this is a step in the right direction, Sklaroff said the bill demonstrates that the crypto industry must continue to step up efforts to educate lawmakers:
“They need to know the difference between proof of stake and proof of work. It is a fundamental part of the industry and the way people do things. This technical training will help legislators see how absurd these poorly written bills are, while also allowing them to learn how these technologies can help improve their work. “