By Jim Harper

“CONGRESS IS SO BROKEN,” shouted Caitlin Long, founder and CEO at the Avanti
Financial Group. Having spent two decades on Wall Street in stints at Solomon
Brothers, Credit Suisse, and Morgan Stanley, she now
inhabits the world of cryptocurrency. She spearheaded efforts to make her
home state of Wyoming a legal and regulatory “oasis” for blockchain companies.
Long’s all-caps exclamation on Twitter was inspired by a fast-moving proposal
in Congress that would potentially doom big chunks of the domestic US
cryptocurrency industry by imposing impossible financial surveillance
requirements.

At this writing, Congress is doing what passes for
deliberation these days. Key senators are
saying they will fix
the error by floor amendment. True deliberation would probably unearth the
inconsistency of such surveillance with our national values and its incapacity
to serve national goals.

Congress is indeed broken. When I served on the Hill, the
brinksmanship and mass-scale logrolling of government shutdowns and omnibus
bills still felt surprising and unusual. But the trend was well underway: More
and more legislating is done through a small number of huge bills sprung on
Congress’ rank and file and the public mere days before passage. So it is with
the infrastructure bill. Heading for the Senate floor this week, the 2,700-page
text of the bill was revealed Sunday.

Such bills include anything insiders want, so the
“infrastructure bill” has cryptocurrency regulations making pretty much anyone
facilitating the processing of cryptocurrency transactions a “broker.” The tax
code requires brokers to file “information returns” with the IRS — those
ubiquitous 1099 forms which document financial transactions of interest to our
national tax collector. The language originally in the bill said that “any
person who (for consideration) is responsible for and regularly provides any
service effectuating transfers of digital assets” would have these obligations.

Jake Chervinsky, General Counsel at Compound Labs, tweeted
out a good write-up of the demerits, but an important one is
this: Cryptocurrency networks have many actors that routinely effectuate
transfers for “consideration” — legalese for something of value handed over by
contract. “Miners” receive payments for including transactions in the
blocks that they cryptographically secure and append to the blockchain. They
generally have no idea with whom they’re transacting.

To file 1099s, miners would have to create a personal data
collection infrastructure that is completely alien to them, cryptocurrency
wallets would have to be redesigned to broadcast personal information, and
people would have to publish their identity details with every single
transaction. It will never happen. The 1099 requirement would end (legal)
mining in the United States.

Proposals like this steer the US toward following China’s
lead in banning cryptocurrency mining. It echoes New York’s
ill-fated “BitLicense,” which made a world financial center into a crypto
backwater. The US should be taking Wyoming’s lead, not China’s.

The appeal to Congress of “1099ing” cryptocurrency use is an
assessment from the Joint Committee on Taxation saying the provision would produce
$28 billion in revenue over 10 years that would help pay for infrastructure
spending. But it is theoretical, even speculative. The 3.5 billion returns
annually sent to the IRS already have its systems “operating at capacity,”
according to the Government Accountability Office. It said in December
2020 that the “IRS’s ability to process and use information returns is
limited.”

While the actual fiscal benefit of monitoring cryptocurrency use would be small, consider a cost highlighted by ProPublica’s reporting on the tax practices of wealthy Americans. It shows that the IRS lacks the capacity to control access to its files. Additional information reporting would create privacy and security risks. It is common in the cryptocurrency community to store your own assets. (“Not your keys, not your coins.”) Lodging personally identifiable cryptocurrency information with the IRS, from which it can be exfiltrated, would expose cryptocurrency users to the risk of kidnapping, home invasion robbery, or worse.

Information returns filed with the IRS now come in at a rate
of more than 10 per man, woman, and child each year. In fiscal year 2019, US
financial institutions lodged more than 20 million reports
on people’s financial transactions with the Treasury Department’s Financial
Crimes Enforcement Network. Should financial surveillance increase further?
Should it do so in a knee-jerk fashion?

St. Mary’s University School of Law professor Angela Walch,
a critic of the crypto sector — mining in particular — says Congress should
slow down. “Making changes to crypto systems through regulation needs to be
done with humility and care,” she writes, “not by wildly swinging a hammer, as I fear we
would do by rushing crypto regulation into an unrelated infrastructure
package.”

I have disagreed with her on some things, but on this she is
right. If only Congress were not broken.

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