Congress’s Misstep on Crypto Reporting Shows the Dangerous Allure of Surveillance

The U.S. Senate may be nearing a compromise solution to fix a controversial cryptocurrency tax-reporting measure in the omnibus infrastructure bill. The intent of the measure was to impose 1099 tax reporting requirements on crypto exchanges and other companies that handle investments. But because of poorly crafted language, the original measure could have also covered cryptocurrency miners and software developers, who do not and cannot track the real-world identities of users.

On Monday afternoon, original sponsor Rob Portman (R-Ohio) announced a compromise had been reached to exclude “non brokers,” so, fingers crossed, revised language will address the problems. Whatever the outcome, the push for a compromise revision has been made possible by a huge groundswell of activism from U.S. citizens, including floods of emails and phone calls to Senate offices, and loud objections to the measure from figures from Square CEO Jack Dorsey to Gene Simmons of Kiss.

David Z. Morris is CoinDesk's chief insights columnist.

One of the main sources of angst was the possibility the measure might impose tax reporting requirements on software developers who design financial tools and systems, such as decentralized finance (DeFi) protocols and digital wallets for storing crypto keys. According to the Electronic Frontier Foundation, a pro-digital rights group, the measure could “force software creators … to create cumbersome surveillance systems or stop offering services in the United States.”

This is a problem for a number of obvious reasons. The overriding issue is that, according to current U.S. case law, software is a form of speech, and thus protected by the First Amendment of the U.S. Constitution – a protection first established in a case about encryption. It would certainly be a matter for the courts if the initial language were to go into effect. Apple, for instance, was poised to use this argument in 2016 when the FBI tried to force it to create phone-unlocking software, though that case didn’t go to trial.

But that’s just the formal legal issue with the provision. The intensity of the backlash suggests something more visceral than mere constitutional angst. One explanation, I think, is that the measure would do something fundamentally un-American: make a crime not just illegal, but impossible.

This all started, remember, as a measure about tax reporting. Requiring tax reporting from crypto entities was expected to raise about $28 billion in revenue to offset new spending for priorities like highways and trains. Fair enough! As myself and many others have made clear, the fight here isn’t against taxing cryptocurrency capital gains. Entities like Coinbase should absolutely report the tax information the government wants. Individuals should track and report transactions that take place elsewhere ​​– and they should be pursued and punished by the justice system if they don’t.

But making it illegal to build financial software without built-in tax reporting features is a whole different kettle of fish. Such a mandate could be compared to a law requiring that every dollar bill be tagged with a GPS chip and tracked to ensure that it isn’t spent on anything illegal. Or to a law requiring all guns be equipped with a target camera and AI system to ensure they’re not being used to shoot the wrong things.

Translating the original tax measure into real-world terms illuminates why it met so much resistance. These are obviously absurd proposals that would fundamentally conflict with the American ethos by putting immense and direct control of individual decisions in the hands of the government. When it comes to paper money or guns, our deep cultural bias is towards leaving it up to individuals to choose to use them wisely and properly, while making sure they face justice if and when they commit a crime. (The actual way people behave with guns certainly leaves that stance open for scrutiny, but that’s a topic for another day.)

That Portman’s original language looped in so many non-brokers may mostly reflect regulators’ ignorance about the structure of decentralized systems. But it also reflects a deeper failure to think of digital systems through the same ethical framework of personal responsibility that we apply in the physical world. We saw another major sign of this bias recently at Apple, which after years of touting its commitment to privacy and security now plans to start monitoring user communications for child pornography – a measure that would be clearly morally repugnant if it involved monitoring the physical mail of millions of people as a way to catch predators.

To put it directly, the government should concern itself with catching criminals, not with outlawing tools with potential criminal uses. This is an especially important value to defend as financial systems become increasingly digital, in part for the same reason the Second Amendment exists: Limiting government power helps keep it honest. And as inconvenient as this truth may be, defending the right to financial privacy in the 21st  century will be inextricable from defending individuals’ ability to commit crimes using unmonitored financial tools.

There is a further bit of infuriating context here. One reason the crypto-reporting provision was added so hastily to the infrastructure bill is that in late July, Republicans in Congress killed another pay-for in the bill: an additional $100 billion in revenue that would have come from enhancing IRS enforcement of tax laws on corporations and the top 1% of income earners.

On the face of it, this is enraging because it shows Congress knows there’s a boatload of tax avoidance going on among the wealthy and corporations, but finds it more politically expedient to squeeze a nascent industry than putting more cops on an existing but poorly enforced beat. 

But more deeply, it speaks to the profound allure that automated surveillance and censorship hold for the government, and why it demands strong opposition, not just when it comes to crypto, but in all walks of life.