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As you read this article, a bill is being debated by politicians in the US that could potentially make or break the crypto industry over there, causing massive ripple effects around the world. A lot has been said about the bill by various different sources, so let’s break it down and have a look at it ourselves.
Before we start with the bill, we need to briefly understand how the legal system in the US works and how a proposal or a bill becomes a law.
In extremely simplified terms, every law in the United States begins as a bill. Any member of Congress, which is the name of the judicial system in the US consisting of The Senate and the House of Representatives, can draft up a bill. The primary congress member to draft the bill is called the ‘Sponsor’ and his supporters the ‘co-sponsors’.
The next step is to introduce the bill. If a Representative is the sponsor, the bill is introduced in the House. If a Senator is the sponsor, the bill is introduced in the Senate. After the bill is introduced, it’s reviewed by the committee, and then voted on by the full chamber, and sent along to the other chamber. If both the chambers are happy with the bill, it is then sent to the President who can sign it into law.
The US is currently debating a $1 trillion infrastructure bill to build and repair the country’s infrastructure. In order to raise that $1 trillion, the lawmakers are looking to raise funds by introducing new kinds of taxes. Tucked away in the bill is a new provision for the treatment of cryptocurrency. The US Congress claimed it could raise $28 billion in new revenue through expanding the reporting requirements for any cryptocurrency firm deemed a “broker,” and changing how the IRS taxes “digital assets.” These provisions have been described as tightening the laws around taxing digital asset sales.
That does not sound too out of the ordinary for a western country, but when you look at the fine print in the bill, things become clearer. Yes, digital asset exchanges and brokers should have reporting requirements, and those that earn capital gains should pay their taxes, but the bill expanded the definition of a broker to “any person who (for consideration) regularly provides any service responsible for effectuating transfers of digital assets, including any decentralized exchange or peer-to-peer marketplace.” That could include virtually every kind of participant in the industry, from miners and validators to software developers and node operators.
According to US law, service providers are responsible for collecting their user data about taxation. Since it includes decentralized exchanges and services as well, DEXs based in the US would need to collect every user’s KYC data, which is impossible to do while keeping the principles of openness and transparency intact.
If passed in its current state, the bill would also mean miners for proof-of-stake blockchains, and validators (stakers) in proof-of-stake blockchains would also be required to collect data on the participants on their blockchain. Anyone who knows even a little bit about how blockchain systems work would know that miners and validators have no means to do so.
This language in the bill caused a lot of confusion and uproar in the US crypto industry, which managed to raise over $6.5 billion in venture capital in the last year alone. If the bill was passed in that state, it would cause nearly all US-based crypto businesses to either shut down or move out of the US. Not a great thing for a country’s economy. Crypto companies and investors already tend to avoid the US because of inconsistent rules and regulations, especially considering regions like Europe and South East Asia have created some very forward-looking crypto regulations that encourage innovation.
Thankfully, because of the democratic process of passing a bill, it’s not too late. After significant pressure from crypto lobbyists and pro-crypto politicians, some changes were made to the wording of the bill, excluding proof-of-work cryptocurrency miners and non-custodial wallet developers like Ledger, Trezor, and Electrum.
While that is a positive step, it’s certainly not a solution. The language about proof-of-stake cryptocurrencies or regular crypto developers was still the same at the time of writing. So in effect, it could still destroy the DeFi industry in the US since DeFi organizations have no ability to collect their users’ information.
Currently, people like Twitter CEO Jack Dorsey are advising the US government about only including crypto service providers that allow people to convert Fiat to cryptocurrencies. He argues that DeFi should be addressed by a different set of laws later on when politicians understand more about the technology.
How could this bill affect the crypto industry?
Many people have made comparisons to the approach towards crypto from US politicians. Some compared it to the government telling companies to pull information from every email decades ago when the technology was young. Others compared it to the government classifying internet modems as “brokers” and taxing them as such. In every case, the crypto community seemed to agree that the bill in its current form poses significant privacy concerns. Crypto users tend to be more privacy-focused than most other groups, so the bill is an existential question for a large part of the industry.
Regardless, it’s important to remember that the bill would not be cleared before the 6-week recess in the US. More politicians are now speaking out against the crypto taxes in the infrastructure bill, with dozens of politicians trying to push through their own amendments in the bill. Only around a dozen have been debated so far and there are hundreds of amendments pending review.
What this means is that the passing of the bill would most likely be postponed to mid-September, which coincides with the top of this bull market according to some estimates. Even if the senate does pass the bill in its current form, The House has vowed not to pass the bill if the senate doesn’t approve another multi-trillion dollar bill aimed at expanding social security benefits. In other words, it’s going to be at least 5-6 weeks until this bill is passed, and till then, the bullish momentum of the crypto markets only seems to be growing. It will be another year or two before the bill can go into effect as a law. A lot can happen in that time in the extremely fast-moving crypto industry.
We’re likely to see greater news coverage of this bill as it gets closer to fruition, and we can only hope that clueless politicians don’t make a decision that would stifle growth in the world’s largest economy, and would listen to the experts instead.