The recent US Infrastructure Bill (the “Bill”) proposes to extend the definition of 'broker' to encompass any person or company that facilitates digital asset trading. Cryptocurrency exchanges, as a consequence, would see their reporting obligations towards the Internal Revenue Service (“IRS”) increased.
The increased expectation for disclosure has become a key point of debate within the newest proposed legislature, sparking polarised discussion regarding the current state and future direction of the digital asset market. It is worth considering both the potential benefits and downsides of the Bill.
Exchanges would be compelled to report to the IRS transactions over $10,000 and their general activities would be subject to greater regulatory scrutiny.
UK and US Consumers already must report gains and losses made through digital asset investments. The imposition of reporting obligations on exchanges would create a new layer of security rather than a threat. In particular, this would aid in identifying suspicious / potentially fraudulent transactions and, alongside the implementation of stricter "Know Your Customer" procedures, could be key to tackling crimes on the rise in the crypto market, such as fraud, tax evasion and money laundering. This also aligns with the already existing power of courts in the UK to order exchanges to disclose information pertaining to people accused of crimes committed in the use of their platforms.
The proposed changes have faced stiff opposition from a part of the digital assets sphere. In fact, the broad definition of broker offered by the Bill is aimed at exchanges but does not appear to exclude individuals such as miners and developers. The latter thus complain that this legislation would impose “unworkable conditions” on them and fear this would threaten the decentralised structure of the software.
However, the nature of miners today could not be further from that originally envisioned by Satoshi Nakamoto. Several studies demonstrate that mining operations today are largely run by for-profit companies. These companies operate mining farms installed in developing countries where the costs of electricity is lower.
In light of this, the imposition of obligations on miners, who have a key role in the validation of all bitcoin transactions, would greatly contribute to breaking the chain of financial crime and to halting the use of cryptocurrency for illicit purposes. Individual developers instead are responsible for the ongoing development of the software and have the power to change the code in particular situations (e.g., to restore legitimate proprietary rights over digital assets if an individual gets defrauded/hacked). It is therefore reasonable to believe that the Bill, by imposing duties and bringing the role of developers under the lens of the regulators, would work in the interest of all digital asset holders and investors.
The Bill would bring certainty to the sector, making clear that the activities of exchanges and developers fall within the scope of legal systems. For the UK, we advocate the enactment of similar legislation for the benefit of the growing domestic digital asset market.
This blog was written by Joe Woodward and Nicola Scarparo.
For all questions regarding the topics raised in this blog, please contact a member of our team of digital asset legal experts.