As a year of massive blockchain industry growth and cryptocurrency adoption breakthroughs approaches its final month, many in this space remain reluctant to join in on the celebration — and for good reason.
Many of cryptocurrency’s leading developers, investors, and pundits have spent the past three years lamenting that the plight of decentralized systems have been hampered by a lack of regulatory clarity. In 2021, their complaints and wishes alike have been granted with interest. Monetary authorities from the Federal Reserve to the International Monetary Fund (IMF) have outlined their visions for the future of digital assets, while an assortment of polarizing U.S. Congressional figures and federal agencies including the Securities and Exchange Commission, Commodity Futures Trading Commission, and even the House Agriculture Committee have weighed in with their regulatory intentions. This month, a sprawling list of intentions was haphazardly aggregated and stamped into law in the Biden administration’s US$1 trillion Infrastructure Investment and Jobs Act.
And who could have guessed — the 2,700-page bipartisan bill is littered with surveillance tactics, tax mandates, draconian reporting decrees and enough vague language as well as one-off, tucked-away caveats to bring virtually any blockchain ecosystem or decentralized application back under the thumb of the feds.
In case you missed it, here’s what slipped in between the lines:
→ The arbitrary application of Internal Revenue Code 6050i, which requires any recipient of more than US$10,000 to report the sender’s identity in addition to the transaction value — allegedly to prevent money laundering. Code 6050i, which was less-than-ironically passed into law in 1984, is designated for cash transactions, which means that in the context of transaction reporting crypto is to be treated as cash. Needless to say, what has gone entirely unmentioned is how Code 6050i could possibly coexist with Trump’s 2017 year-end Tax Reform Plan, which classified cryptocurrency as property and therefore typecasted crypto-to-crypto trades as like-kind exchanges subject to capital gains tax.
So is crypto property or cash?
The answer: It depends on how much money the government stands to make. (Fun Fact: Failure to file disclosures covered under IRS Code 6050i is a felony.)
→The inclusion of a tax reporting requirement for brokers dealing in cryptocurrency to disclose extensive information pertaining to their user base and clients. Somehow, 2,700 pages were not enough for regulators to provide any further clarity into what exactly qualifies an organization as a broker. As is, the term is vague enough to potentially encompass all virtual asset service providers (VASPs), including mining operators, developers of decentralized protocols and wallet providers.
The implications of such a sweeping classification threaten to expose the data of virtually every user in the digital asset space, or at least to expand know-your-client (KYC) procedures to every platform and service. Wyoming Senator Cynthia Lummis, a rare advocate of privacy and decentralization in the halls of Congress, is purportedly working with legislators to narrow the scope of the term brokers.
→A provision to require U.S. banks to report data pertaining to any active account with aggregate deposits and withdrawals in excess of US$600 — not even enough to purchase an iPhone 13. Fortunately, this provision was uncovered and excised from the bill before it could make its way through Congress. But make no mistake, regulators have made their intentions clear: they want to see everything, from everyone, all the time. Zero privacy, ever-diminishing cash, permissioned finance, closed systems, and hefty penalties for those who dare not comply.
But before pulling out your torches and pitchforks, take a moment to step back and consider the bigger picture. Regulators regulate; they are merely doing their jobs. Yearning and begging for regulators to examine a nascent industry — especially one that has been riddled with scams — and declare that they will be stepping aside and proceeding hands-off is like taking your chronic back pain to an osteopathic specialist and expressing distress and disappointment when he prescribes invasive exams and surgeries. Like any doctor, a regulator’s job is to identify dysfunction and intervene. Expect them to operate accordingly.
The real issue at hand is that as the crypto community has expanded, its core principles — the individual liberties of empirical self-ownership and privacy — have been diluted to the point where they stand on the periphery of almost every conversation. For those that have forgotten, here’s a handy reminder:
Decentralized systems that operate under the purview of the centralized authorities they aspire to replace are not decentralized, individual privacy that is protected by an oversight committee is not private, and a permissionless application whose users submit KYC information and other inquiries for permissioned access is not permissionless.
The crypto community has reached a fork in the road. Developer teams and users alike can no longer masquerade on Twitter as in-name-only proponents of the Web 3.0 paradigm that upholds individual freedoms, privacy and financial inclusion while it is painted over by Web 2.0’s top-down, exploitative governance model of old.
It is the responsibility of each team, each user, and each investor to examine protocols and ecosystems and to select those that provide true protection for user privacy, and that are truly void of single points of failure. As more draconian regulation is drafted, groomed, and ratified into law, any system which is vulnerable to a centralized hostile takeover will be hastily absorbed and assimilated into the archaic landscape of Web 2.0. In like manner, only the platforms that emulate the principles upon which cryptocurrency was founded will be able to withstand the 21st century’s technocratic rendition of authoritarianism.
It’s time we all get serious about the platforms we build, use and promote. Otherwise, it’s time to get out the reading glasses and pick apart 2,700 pages of dense legislation so we don’t end up on the wrong side of the law.