5 Reasons Warner’s Crypto Infrastructure Amendment Must Fail

Buried within the Senate’s Infrastructure Bill is a revision to the IRS code that would expand the definition of “broker” to include any actor who “for consideration is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Because there is a reporting requirement on all “brokers” to submit records and information to the IRS about certain “customer” activity, that means under the revised tax code anyone that facilitates the transfer of cryptocurrency would need to collect information about their “customer” or face liability.

The revision is being presented as a “crackdown” on crypto-tax evasion. The problem is while the industry largely agrees that exchanges, which this provision seems primarily aimed at, should be defined as brokers, the term “any service effectuating transfers of digital assets on behalf of another person” can arguably be applied to cryptocurrency miners, software developers, node operators, and other actors within the crypto space that technologically cannot gather such information.

The provision, as currently drafted, is unenforceable to many that it can be applied to and threatens to chill billions of dollars in economic activity by forcing crypto participants to leave the US for fear their activities would be subject to laws in which one can simply not technologically comply.

The WYDEN-LUMMIS-TOOMEY amendment is overwhelmingly supported by the cryptocurrency industry and largely corrects the mistakes in the original draft by stating that one would not be deemed a broker by virtue of only:

At the very last minute, Senators Warner, Portman and Sinema proposed a competing amendment that would only exempt those who did the following from the definition of broker:

While the Warner amendment is an improvement on the original text contained in the infrastructure bill, it is still inferior to the Wyden/Lummus/Toomey amendment in flawed in several fundamental ways.

1. It Picks Winners and Losers And Is Unenforceable— Warner’s original amendment only exempted “Proof-of-Work” mining (like bitcoin) but not other consensus mechanisms. Legislation should not pick technology’s winners and losers and this amendment will result in companies that do the same thing being treated differently because the underlying code they use goes about validating transactions in different ways. After pushback, Warner revised his amendment to also exempt “Proof-of-Stake” (like Ethereum eventually) validators, but this just picks two winners and ignores other forms of consensus for no reason. The Warner Amendment also doesn’t appreciate that for many would-be “brokers” maintaining a decentralized, worldwide network means there is no method by which they could comply with imposed reporting requirements even if they wanted to do so.
2. It Is Unconstitutional — The Warner Amendment does not expressly exempt programmers who work on underlying protocols which (some have argued) may theoretically subject some of our smartest minds to liability for merely creating code. Because the redefinition of “broker” could penalize the writing of code, which has been categorized as constitutional expression, there is a strong argument that the provision is unconstitutional under the First Amendment.
3. It Addresses A Problem That May Not Exist — The rationale behind inserting crypto regulation in the infrastructure bill is that it will “crackdown” on tax evasion and the government can use the taxes collected through this amendment to offset, or “pay for”, the $270B infrastructure bill. The Senate estimates the crypto provision to result in $30B in additional tax revenue, but it is unclear how that number was calculated and, more importantly, what percentage of that number comes from so-called evasive behavior occurring on exchanges versus arguable edge cases. The treasury has suggested that it is concerned that that the Wyden/Lummus/Toomey provision could cause some bad actors to manipulate the tax code, but even if that is true, it appears the vast majority of evasive behavior lawmakers are concerned about are still addressed win the Wyden amendment without risking the ability of the US to innovate in crypto.
4. There Is No Emergency — A lot of people have been asking why is the Senate regulating crypto within a 2700 page Infrastructure bill, and that’s a fair question. Practically speaking, the Senate needs to raise money to offset the $270B infrastructure bill through “Pay For” provisions that raise government revenue. So, if they can claim amending the tax code will result in $30B in funds to help pay for the infrastructure bill you’re going to be hard-pressed to find many (not Ted Cruz) Senators to support excising the provision entirely. But that doesn’t mean vastly consequential tax provisions on complicated new technologies should be pushed through without Senators considering the implications. As explained above, the Government will still be able to raise additional funds under the Wyden/Lummus/Toomey Amendment because it will apply to exchanges which are where the treasury believes most evasive behavior occurring. If the government is really concerned about tax evaders utilizing the language in the Wyden/Lummus/Toomey Amendment, there is plenty of time to explore and make future amendments before the underlying “broker” provision even goes into effect.
5. It Ignores The History — The US has an opportunity to become the world’s leader in financial technologies and reap the considerable rewards that come from becoming a beacon of worldwide innovation. But only if it adopts a policy of supporting innovation similar to how the US supported the development of the internet in the 1990s. Indeed, in the mid-1990s there were several attempts to impose taxes and limitations on internet use that failed because users advocated for free internet, and elected officials recognized it was in the US’s long-term interest to support the growing industry. The worst thing that the US could do right now is follow China’s lead and adopt restrictive cryptocurrency policies that drive the next generation’s greatest economic engine away from our shores.

One thing this fight has taught us is that the cryptocurrency industry has serious muscle and isn’t going anywhere. It is now a fringe view to believe the technology is a fad and most understand crypto will be an economic engine for the US so long as we continue to nurture it by combatting myopic regulations. Adopting Senator Warner’s flawed, technologically illiterate amendment at the last minute does nothing to help the US’s ability to compete in a global economy and only penalizes decentralized technologies trying to compete against centralized channels operated by big finance and tech.

Justin Wales is a Partner at K&L Gates where he practices crypto law.

CALLS TO ACTION: If it's business hours, you can call your Senator and ask them to support the Wyden/Lummus/Toomey Amendment. Information is available: https://www.fightforthefuture.org/actions/stop-the-senate-from-sneaking-through-total-surveillance-of-the-crypto-economy/.

If it’s not during business hours, you should tweet @ your Senator and tell them you support the Wyden/Lummus/Toomey Amendment. This may sound silly but Tweets and social media activity matter more and more.

Lots of people have been involved in this fight, but none more important than the work of CoinCenter, a public-policy advocacy group focused on supporting the Cryptocurrency industry. Please consider learning more about their mission and donating to them: https://www.coincenter.org/donate/