On November 15th, 2021, President Biden signed the Bipartisan Infrastructure Bill into law. Unfortunately, this bill contains poorly thought-through provisions that overregulate cryptocurrency and will ultimately stunt the growth of a burgeoning alternative currency. Between vague descriptions and confusing frameworks, the bill will only punish Americans for mining cryptocurrency and discourage American firms from innovating and adopting blockchain technology.
Congress must urgently rethink its approach to taxing and regulating crypto.
The American crypto market has snowballed with limited regulation and a wealth of talent. International crypto companies and home-grown startups have cropped up in Miami, Austin, and San Francisco. A Pew Research Study found that 16% of Americans have already bought or sold cryptocurrency. With the crypto sector now valued at over $2 trillion, Congress should be careful not to stunt this industry through punitive regulation.
Crypto offers a myriad of benefits for consumers compared to traditional currencies such as the US dollar. For example, the recent development of lightning networks allows users to move crypto between countries without the high fees and long waiting times of legacy financial institutions.
Cryptocurrencies are also more reliable than traditional currencies due to ‘blockchain’ technology—the public ledger that each cryptocurrency creates. The blockchain documents and verifies all transactions, meaning that banks and governments do not have to manage every transaction made.
This decentralization circumvents the need for consumers to use banks and prevents governments from controlling money flows. Many cryptocurrencies also have lower transaction fees than traditional currencies, making them more accessible to lower-income consumers.
The principal issue with the infrastructure bill is its loose definition of broker and what they must report to federal regulators. Under the bill, brokers must report to the IRS the name and address of each customer. In addition, the bill’s broker provision defines a broker to be “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
This wording means that any ‘miner’ of cryptocurrency, meaning the operator of a system that is used to verify crypto transactions— will be required to report this information. This definition impacts Americans running a mining operation from their personal computer and not just major trading platforms. Since the USA accounts for 35.4% of all of the world’s Bitcoin mining, many Americans would be impacted by these new rules.
Due to the secure nature of the blockchain, Bitcoin miners, for example, do not have access to the name and address of those who make transactions with cryptocurrency. Without this information, they cannot report to federal authorities. This vague wording de facto bans crypto mining in America since complying with reporting requirements would be impossible.
A more sensible approach to tracking crypto transactions is for federal agencies such as the IRS to look at the public ledger created by the blockchains. This method would allow the IRS to see how much money is moved between crypto wallets. While this does not provide identifying information, examining public ledger activity has already been successfully used by the FBI to recover the Bitcoin that was paid in ransom to the cyber attackers of the Colonial Pipeline. Considering this tool is already available, the individual broker reporting framework represents an unnecessary overreach.
Proponents of the broker provisions have claimed that it would lead to $28 billion in new taxes being collected every year. While the figure comes from the Joint Committee on Taxation (JCT), they have not publicly announced how it was calculated, making it almost impossible to independently verify.
The new provisions would do little to combat illicit activities. Studies have shown that less than 1% of current cryptocurrency use is for any illicit activity, including tax avoidance. This small percentage is dwarfed by the 2 to 4% of the gross domestic product resulting from illegal US dollar uses. Therefore, if the aim is to stop illicit activity, de facto banning bitcoin mining and increasing surveillance of miners is not an effective approach. By disincentivizing mining in the US, Congress is giving foreign nations the opportunity to become leaders in this sector. Hopefully, members of Congress will see the errors of their ways and stop the overregulation of crypto mining before it does long-lasting damage to America’s crypto sector.