In search of money to pay for its trillion-dollar infrastructure bill, Congress turned to cryptocurrency. The bill imposes new reporting requirements on cryptocurrency brokers, intended reduce tax evasion. However, the proposed reporting requirements are too broad, and would hobble the development of cryptocurrency services. These reporting requirements could also hurt efforts to provide alternatives to mainstream social media platforms. Many of the most promising alternatives rely on cryptocurrency to coordinate hosting speech across decentralized networks. Imposing reporting requirements on user-operated nodes within these networks would make their deployment difficult.
The provision would dramatically expand the definition of a cryptocurrency broker, imposing reporting requirements on a wide range of cryptocurrency intermediaries. Any person “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” would be deemed a broker by the proposed bill. Covered brokers would be required to file tax information reports detailing cryptocurrency transfers, even those not involving USD.
While far from the services of a broker, cryptocurrency developers, miners, and wallet operators all regularly “effectuate transfers of digital assets.” Imposing expansive reporting requirements on these actors would raise comparatively little revenue. The Wall Street Journal reports that the broader definition of broker would be responsible for only $5 billion of the $28 billion in revenue that the Joint Committee on Taxation expects the broker reporting requirements to raise. The proposal would also make developing services utilizing cryptocurrencies more difficult and expensive.
Decentralized hosting networks such as the Interplanetary File System (IPFS) use cryptocurrencies to pay users who provide storage space to the network. IPFS hosts files in exchange for filecoins, which are distributed to users who offer the network storage space on their computers. The protocol hosts speech across a distributed array of servers, it isn’t controlled by any central authority. However, if each transfer of filecoins in this process makes the facilitator a broker, taking part in the IPFS network will become administratively burdensome. While intended as a revenue generation provision, expanding the definition of a cryptocurrency broker will make it more difficult to compete with “big tech.”
Thankfully, Senators Ron Wyden (D‑OR), Cynthia Lummis (R‑WY), and Pat Toomey (R‑PA) have proposed an amendment that would limit the definition of brokers to actual brokers, such as Robinhood or Coinbase. Their amendment specifically excludes “developing digital assets,” providing cryptocurrency wallets, and “validating distributed ledger transactions,” (mining) from the broker definition. This remedy received an initial endorsement from Sen. Rob Portman (R‑OH), author of the initial cryptocurrency reporting provision.
The Wyden/Lummis/Toomey amendment was set to receive a vote on Thursday, but its consideration was interrupted by the introduction of a comparatively more limited amendment by Senators Mark Warner (D‑VA,) Kyrsten Sinema (D‑AZ), and a quickly shifting Rob Portman. This alternative amendment would only protect some wallet providers and miners using proof-of-work validation schemes, which are more energy intensive than proof-of-stake systems. Proof-of-work systems requires computers to solve complicated math problems to verify transactions, proof-of-stake merely needs users willing to provide collateral. The Ethereum blockchain’s environmentally friendly move to a proof-of-stake system would be punished by the Warner amendment. The Amendment would, without any justification, privilege proof-of-work-over proof-of-stake in American law.
Both amendments are now likely to receive a vote on Saturday. The outcome could have a dramatic effect on the viability blockchain-based alternatives to established social media platforms. Comparing the two amendments, Sen. Lummis writes “Our amendment protects miners as well as hardware and software developers. The other does not. The choice is clear.”
