Infrastructure Bill - Understanding its impact on the Crypto Economy

The US administration's decision to include the crypto sector in its $1 trillion infrastructure bill has experts concerned about its fallout.

Joe Biden's administration announced that the crypto sector will be included in the $1 trillion infrastructure bill. Crypto experts fear this will kill the burgeoning blockchain-based crypto industry. 

The bill has included a provision that has mandated tax reporting requirements for digital assets like cryptocurrencies and non-fungible tokens (NFTs). It was first taken into consideration by the treasury bench in September 2021, where the content of the bill was made public. 

The bill which has a provision entitled "Information Reporting for Brokers and Digital Assets" in the Infrastructure Investment and Jobs Act is designed to bolster tax-enforcement efforts and help pay for the estimated $1.2 trillion in spending authorized by the bill.

On 5 November 2021, the US House of Representatives passed the bill with no amendments keeping the original broker language intact. Though various attempts were made to amend the broker definition by various senators, all went in vain.

It is now with the president's office, once the president signs it, it will become a law.

Once the bill gets the president's assent, it will allow the US Internal Revenue Service and Treasury Department to set tax reporting rules for cryptocurrency transactions starting in 2023.

Broker definition

The main concern is the law laid down for a 'broker' in the bill. The bill mandates that a broker will have to report any digital-asset transfer moved to the account of an unknown person or address. The new rules stand to put tremendous emphasis on a broker's Know Your Customer (KYC) and tax information reporting systems. To lower reporting obligations, a firm will need to have a robust means of identifying customers and accounts that receive transfers.

A particularly contentious part of the provision relates to the definition of a digital asset broker. The provision states that a digital-asset broker will constitute, any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.

Many prominent proponents of cryptocurrency and digital assets fear this definition is too broad and may potentially capture cryptocurrency miners and software developers, which will harm innovation in the sector and possibly cause software developers to move overseas.

Definition of broker was not the only setback. The bill also included the application of 6050i, an obscure section of the federal tax code, to crypto-assets also.

Under the new rules, the transfer of digital assets above $10,000 in value will be treated like cash. And failure to report the identity of the person or business sending payment for the digital assets would be considered a felony offense. The penalty for non-compliance is up to five years in prison.

What is 6050i?

In 1984, Internal Revenue Code Section 6050i was passed to crack down on money laundering. The law states that any person receiving cash in excess of $10,000 as part of a trade or business must report the personal information of the sender. 

Speaking on this, a fintech and tax lawyer Christopher Murrer said, “The US government is interested in obtaining information about a sender of $10,000-plus.” 

Many experts believe that since blockchains transactions often purposely avoid banks and other financial institutions, the new law is both a way for the government to track the transfer of large sums of money and encourage crypto users to involve banks.

The government wants to regulate crypto space

Governments across the world are concerned by the anonymous nature of cryptocurrency transactions that are very opaque and decentralized, which can be used for money laundering activities. This creates tremendous burdens on firms and law enforcement agencies seeking to enforce Anti-Money Laundering (AML) and Counter-Terrorism Finance (CFT) laws.

In order to overcome this, governments want to bring crypto under their regulations. The IRS feels that cryptocurrency, given its use, to facilitate illegal activity and tax evasion, currently has a critical detection challenge. 

Despite constituting a small portion of today's business income, cryptocurrency transactions are likely to rise in importance in the next decade. Exchanges and other financial firms offering digital assets are broadly subjected to the US Bank Secrecy Act and AML rules. So, they will not only need to ensure they are properly identifying account owners and beneficial owners but also able to handle the potential influx of volumes and remediation stemming from new measures. Broader changes in AML/CFT regulations are likely to come in H2 2021, with cryptocurrency transactions valued over $10,000 subject to heightened reporting.

Another aspect that firms must consider is how they interact with Stablecoins and other digital assets that derive value from real-world assets, such as fiat currencies. 

On this, Securities and Exchange Commission Chairman Gary Gensler has said that Stablecoins are Security-Based Swaps (SBS). If that view were to prevail in SEC rulemaking and enforcement, firms offering these assets to customers would be required to comply with the SEC regulatory regime for SBS.

This will require enhanced client outreach and enhanced onboarding due diligence to ensure firms gather the required regulatory information to trade. It will also require the tax and KYC infrastructure to comply with the reporting regime envisioned by the federal infrastructure bill.

Those in the sector who believe the bill will pass will move to crypto-friendly nations. Europe is one region, which has been working hard to project itself as a hub for crypto firms. 

Jagdish Kumar
Klever Writer
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