Against the US Senate’s Heavy-Handed Crypto Provision

9 August 2021

CoinDesk almost never adopts a formal editorial position on issues. We feature a wide variety of outside and internal opinion pieces, including those the two of us pen in our personal capacities. We usually leave the task of presenting the organization’s common perspective to the breadth and balance of the newsroom’s reporting, rather than explicitly taking an official point of view on any given topic. 

We now feel compelled to make what will be an extremely rare break with that tradition, in response to the U.S. Congress’s deliberations over competing amendments to a controversial cryptocurrency provision in the infrastructure bill.

Michael J. Casey is CoinDesk’s chief content officer. Marc Hochstein is CoinDesk’s executive editor. The views expressed are not necessarily shared by all members of the editorial staff.

We write to state that CoinDesk endorses the changes floated in an amendment to the bill proposed by Senators Ron Wyden (D-Ore.), Cynthia Lummis (R-Wyo.) and Pat Toomey (R-Pa.). Unfortunately, that amendment did not make it to a vote. Under the circumstances, we urge lawmakers to vote against the entire bill unless the crypto provision is removed or sufficiently modified before the final vote. (As we were finishing this editorial, a compromise among Republicans, Democrats and the Treasury Department was announced but its passage is far from certain.) We favor debating the very complicated crypto issues regulated in this package in a separate, properly considered bill.

There are arguments for and against Congress procuring an estimated $1 trillion to improve the nation’s outdated, creaking infrastructure. Our point is not to support either side in that debate, merely to argue that ramming through this bill should not be done at the cost of curtailing innovation in one of the most promising technologies of the digital age and, more alarmingly, impeding on the civil liberties Americans hold dear. The bill has the potential to thrust every single transaction by U.S. crypto users into an invasive dragnet. By passing it unamended, Congress would be cutting off its nose to save its face. 

The U.S. government should treat cryptocurrency as it treated the internet at the same point of its development: protect it from premature, overzealous and onerous regulations that, lacking such protections, would likely push innovation and ultimately tax revenue for the country to distant shores. If Congress wants to change or clarify how cryptocurrency is handled, it should do so in a purpose-built bill that simply does that rather than trying to backdoor major regulatory changes in a 2,500-page omnibus vehicle.

As a matter of principle, cryptocurrency and blockchain technologies are built on open-source software run by permissionless, transparent networks. In plain English: Anyone can use these networks and anyone can see what is happening on them. They are open platforms, and as such constitute a public good – with the added importance of providing what is arguably the most essential form of social infrastructure: a monetary system. 

Protecting that public good is how we define our responsibility as a news organization covering the transformation of money in the 21st century. Think of it as an update to the Fourth Estate concept, applying a similar role of public accountability in the governance systems of open-source code and borderless information networks to that which the mainstream media traditionally applies to governments and big business. We cover this industry with a view that crypto technology should remain free from capture by narrow private interests, open to innovation and developed in such a way that users can freely access it without compromising their rights.

The cryptocurrency provision in this bill, with the obligation it imposes on cryptocurrency “brokers” to report users’ transactions to the Internal Revenue Service, undermines all three of those principles. Its blanket wording gives the state the potential to exert excessive influence over the technology’s use, which would limit the prospects for innovation. And, as the Electronic Frontier Foundation warns, it would be “a disaster for digital privacy.”

The problem lies in the original provision’s catch-all definition of “broker,” which as written could include miners, hardware wallet makers, protocol developers and others that take no custody of customer assets and therefore should remain exempt from anti-money laundering and other reporting requirements. Large parts of the provision are unenforceable because developers of free, open-source software have no way of knowing who is using their products. Where operators do have a known customer base, the definition could enlarge a limited surveillance system into something far more comprehensive and insidious. In the end, it would be counterproductive because it would encourage developers and users to flee the U.S. for friendlier jurisdictions.

Of course, crypto investors who owe capital gains tax should be subject to the same reporting requirements that others face in the financial system. The sector could benefit from the legitimization that taxation brings. But this bill, as written, goes way too far. 

Its shortfalls would have been sufficiently addressed by the bipartisan Wyden-Lummis-Toomey amendment, which was pulled together last week amid a mass crypto industry lobbying effort led by D.C.-based crypto interest groups Coin Center, the Chamber of Digital Commerce, the Blockchain Alliance and the Association for Digital Assets Management. The revised language sufficiently crafts the right exemptions for developers, miners and others and appropriately leaves developers free to exercise their right to code, arguably protected by the First Amendment. 

The Wyden-Lummis-Toomey amendment received significant bipartisan support. Unfortunately, the White House and the Treasury Department weren’t on board. Worried that the operation won’t amass the targeted $28 billion in new tax revenue, they backed the competing Warner-Portman-Sinema amendment that would offer certain exemptions for mining and hardware wallet providers but not much more. 

In many respects, this adjustment makes things worse by distinguishing between protocols. It breaks a cardinal rule of regulation: It seeks to regulate technology itself instead of its uses, inserting bureaucrats into the business of deciding which tech should or shouldn’t succeed. 

Ethan Buchman, co-founder of blockchain project Cosmos, acutely demonstrated the counterproductive nature of this kind of parsed wording. When the initial wording of the Warner amendment exempted proof-of-work mining but not proof-of-stake, he pointed out in a tweet that cryptographers can trivially add proof-of-work functionality to their proof-of-stake consensus mechanisms to meet the amendment’s requirements.

If it’s important that CoinDesk doesn’t pick winners and losers between competing technologies, it’s doubly important the government avoids doing so as well. 

This is not to say the government doesn’t have a responsibility to ensure that people using this or any other technology operate within the law. And the industry would benefit from the legitimacy that sensible regulation can bring. 

But if lawmakers want the United States to be a fertile environment for innovation, they must ensure that any new regulation doesn’t quash the capacity to innovate here. The future payoff in tax revenue will be so much higher in that vibrant new economy than under this short-sighted, traffic cop approach.

Lawmakers may be understandably eager to get this bill passed given the derelict state of the country’s infrastructure, and unwilling to hold it up over some clumsily worded language about what, to them, seems an esoteric niche. This is penny-wise and pound foolish. Not only could the bill as written hamstring the development of modern financial infrastructure, and the economic benefits that come with that, it would undermine American values of free speech and individual privacy.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.