Crypto Kill Bill and Regulatory Madness! 💀😵
TradFi to DeFi Weekly Wrap Up 7/30/2021
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The Empire Strikes Back
As the Biden administration’s new infrastructure bill slowly winds its way through the halls of the Capital, many crypto enthusiasts find themselves displeased with the bill’s contents. A provision within the legislation will require crypto brokers and investors to disclose a significant amount of information to the IRS, representing the dawn of a new era in crypto tax reporting. Over the next decade, the administration projects an additional $28 billion in tax revenue derived from these new reporting standards. While a drop in the bucket compared to the $550 billion in new spending required to support the bill, lawmakers see this as a step in the right direction.
The United States currently boasts a “tough but laisse-fair” approach to crypto tax reporting, allowing individuals to self-report their annual trading activity. Whether this current approach initially arose from a fundamental inability to enforce, a lack of understanding of the crypto industry, or a simple shrug due to the industry’s comparatively small size remains unknown. However, with a multi-trillion-dollar price tag on this new bill, Washington stands ready to crack open whatever piggy banks they deem sufficient for securing funding.
This development begs questions regarding relevant comparisons. After all, this isn’t the first time that the halls of power echoed loudly with calls to destroy, regulate, or heavily tax emerging technology. Fun Fact: Congress used the term “Crypto Laws” way back in 2001. At the time, this term had nothing to do with cryptocurrency — Bitcoin wouldn’t take the stage for another seven or eight years. Rather, the term referred to encryption as a whole and how the US government might best regulate encrypted data in the name of national security. Regardless of one’s perspective on the issue, this historical context helps to remind us that the halls of power tendentially pack emerging innovations into neat boxes, for better or worse, to maximize revenue derived from their activities.
Knights of the (TradFi to DeFi) Round Table
The bright minds which comprise the TradFi to DeFi community have much to say regarding this new potential regulatory development. By collaborating and leveraging our diverse expertise, we achieved some interesting insights into the nuances and potential implications of the bill.
The first line of thought immediately ebbs towards material enforcement of any new legislation. While the government might require centralized and decentralized exchanges to report customer activity, the subsequent difficulties of compliance remain far more challenging for the latter. Decentralized exchanged are… well, decentralized. Even if an allegedly decentralized entity maintained the ability to track customer behavior, the growing ubiquity of VPNs leaves the accuracy of this data dubious at best. As was eloquently stated during the call: “The government remains far behind in terms of technology… even more so than much of the private sector!”
Here’s another excellent consideration using a recent example. The United States corporate tax approach considered profits actualized in the United States as taxable funds. If these profits actualize in a different jurisdiction, their tax status remains questionable or deferred until the funds reenter the United States. For this reason, companies like Apple, which holds just under $1 billion in cash offshore, remain reluctant to repatriate their funds. If the world’s largest company can finesse the system to maximize their financial benefit, then VPNs and decentralized exchanges open an entirely new can of worms for regulators.
How cryptographic units of account intersect with governmental financial reporting standards remains an interesting topic. However, a tongue-in-cheek cynicism towards the intent of such regulations often results in humorous comparisons. For example, the apparent need for greater regulation and control over airlines led the EU to pass strict new laws regarding commercial flights. Interestingly, private jet fuel remains exempt from these new regulations. Prepare for more costly commercial airline tickets… unless you have a private jet lying around.
Stick and Carrots
With such regulatory hypocrisy front and center, the group opined regarding realistic enforcement mechanisms. While a select few may remain as ideological holdouts, refusing to comply and report, the limited real-world use case for crypto as a medium of exchange makes compliance a necessity for the average person. Conscious of this reality, Central Bank Digital Currencies (CBDCs) retain growing significance since their first conceptualization in the early 2010s. While such a nexus of financial control may shake some to their core, Matt reminded us that the concept of privacy and anonymity evolved markedly over the past two decades. Actively documenting one’s life on social media stands as the norm, while real-time tracking software exists in every cellular device. Going “off-grid,” for better or worse, now boasts a new meaning.
With the evolution of blockchain, perhaps CBDCs stand as a natural evolution in centralized finance. Nevertheless, they shift the scope of surveillance from that of cursory tracking to complete encapsulation of every movement, payment, and interaction. While the future remains uncertain and nobody holds a crystal ball, the discussion illuminated two likely scenarios arising from these trends. Some nations may move towards a Chinese-style social credit system, with the most compliant citizens receiving elevated scores and social benefits. This financial and social carrot may emerge in the form of access to universal basic income or some other MMT-style scheme.
Alternatively, some group members echoed the sentiment of the government and private sector standing firmly behind the curve of innovation. This reality offers an encouraging future promise. As the pace of innovation continues to accelerate, authoritarian overreach grows increasingly difficult. We may well be moving into a golden age of information and technology — one in which the confluences of mutual value grow so great as to upend the traditional paradigms of financial industry configurations completely.
Putting it Together
We covered so much amazing information in such a short time — to gain the full value from the Weekly Wrap-Up calls, you really have to be there! We’re actively working on producing audio recordings of the weekly calls and establishing additional time slots for community interaction. We’re humbled and excited by the outpouring of community support — we’ve already secured DeFi jobs for several group members, helped to facilitate and close deals, and fostered countless industry connections. The growth doesn’t stop here!
If you work in or are interested in traditional finance (TradFi) and how Decentralized Finance (DeFi) is changing the world for the better, we want to hear your story! The future remains uncertain, but you’re also a part of this amazing puzzle. Let’s connect and find out how we can help you in your DeFi journey!
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Special thanks to this week’s contributors! Dustin, Ray, John, Matt, Nathan, Olivier, Chuck, and everyone else who joined us on the call!
