United States Senators have cast their votes and approved the controversial Infrastructure Act HR 3684 in the Upper Chamber of Congress. Now, the gigantic document, over 2,700 pages and worth nearly $ 1 trillion in volume, goes to the House of Representatives, including provisions expanding the definition of a cryptocurrency broker to improve crypto and decentralized finance (DeFi) tax compliance. That $ 1 trillion can’t come out of nowhere, can it?
While the bill in effect simply follows Financial Action Task Force (FATF) guidelines, doomed singers are already declaring the end is near, haunted by visions of the dreaded Internal Revenue Service (IRS) picking up their coins. As always, they’re wrong.
Related: Cryptocurrency Mining Under Proposed US Policy Changes
No, not everyone is a “broker”
For critics, one of the main points of contention is that section 80603 of the bill defines “broker” as anyone who “regularly provides services that effect transfers of digital assets on behalf of another person”. Even this incredibly obscure language comes from an amended version of the bill, with an earlier one giving an even broader definition. And yes, it could be even clearer. The bill requires brokers to report customer information to the IRS, but critics fear that such a broad definition would cover everyone from miners to node operators to liquidity pool providers.
A compromise amendment should explicitly exclude blockchain validators from the definition, but did not survive a vote sunk by a defiant senator. Even if House lawmakers don’t change that, it remains difficult to see how the original language could apply to the broader crypto ecosystem, since “making transfers” on someone else’s behalf is just not what miners or proprietors do to do. In the cryptoversum, the units that transfer values between users are centralized exchanges (CEX) and decentralized exchanges (DEX). You are the market maker. Both types of brokers are able to introduce compliance tools through software updates for their platforms.
Related: Broker licensing for US blockchain developers puts jobs and diversity at risk
In the August 2007 legal debates over content piracy, BitTorrent was not blamed for the enormous amount of copyrighted songs and videos freely shared through its peer-to-peer (P2P) protocol. Those who used the P2P protocol weren’t so lucky – the Lime Group, with its LimeWire web service, was found liable for “contributory infringement” in 2010. The difference was in how they approached the searches. With BitTorrent, you create a tracker for a specific file and share it on a third-party website to move it gradually across a network of users. LimeWire’s network supported intrinsic searches for audio and video files, making file transfer easier. LimeWire also had a recommendation system: if it saw you downloading the movie, say Spider-Man, it would suggest you download Superman too. Similar to BitTorrent, miners allow a generic transaction, not necessarily a transfer of value. The transfer of value is facilitated by the party who coordinated the transaction, which includes matching a buyer and seller with related pricing information for a proposed transaction.
And one more point: CEXs already submit tax information to the IRS, while DEXs mostly don’t. Why aren’t DEXs held to the same standard as CEXs and other services that facilitate value transfers, such as: B. PayPal? Bringing them under this roof is not only morally fair and just, but also a solid and consistent implementation of the law. And for those who say such entities don’t have centralized management to enforce anything, keep in mind that most of the time DEXs still have an owner whose wallet picks up the profits, and that most updates to open source projects are usually from originate from the same entity. Where there is a will, there’s a way.
Related: More IRS crypto coverage, more risk
No, innovation doesn’t pack up
Critics also warn that if the bill is passed, it could drive the crypto community out of the US, which would hurt the country’s innovation potential. But don’t worry: there’s nowhere to run anyway. As mentioned earlier, the crypto provisions of the Infrastructure Act are based on the latest standards from the FATF, a global anti-money laundering organization. These standards are usually implemented worldwide, albeit in different timeframes.
The FATF targeted cryptocurrencies for the first time in 2019 and urged nations to tighten regulations for crypto exchanges. Since then, dozens of exchanges around the world have closed for failing to comply with their respective local regulations inspired by FATF standards. The latest guidelines target DeFi and non-fungible tokens or NFTs, so it’s not surprising that decentralized funding is one of the goals of US regulators. The process extends beyond the United States: Europe is also tightening crypto regulations in line with other laws that control the transfer of value.
Sooner or later, the playbook will be the same everywhere. Most in the community understand this and would be hard to get started if their businesses weren’t banned outright.
No, there will be no private data honeypots
Another very loud concern is that the brokers who are required to submit customer data to the IRS must create databases of customers’ private information, creating a honeypot – a lucrative target for hackers. This idea does not take into account the effectiveness of the crypto and DeFi communities with secure cryptographic algorithms.
Consider Zero Knowledge Proof: A Cryptographic Concept That Explains How You Can Prove To A Third Party That You Know The Value Of A Specific Variable Without Saying Anything Other Than You Know. With zero-knowledge authentication, users who keep their authentication data to themselves log on without disclosing sensitive data to the platform. Implemented for DeFi, this algorithm can generate all the required forms and automatically send them to the IRS without the DeFi service having to store the data on its own servers. Reports of suspicious transactions can also be generated automatically and sent directly to the supervisory authority without having to inform other bodies.
Related: The FATF draft guide aims to achieve DeFi compliance
Finally, the point of surveillance and privacy also requires a further parallel to the articles of association and written rules for other transfers of value, in particular for the disclosure of financial services. You can be as anonymous as you want while spending $ 100 in cash at your local store. In order to send $ 3,000 to a friend, you will need to provide the bank with additional information about yourself. And if you want to send $ 100,000 overseas, the bank or customs office will ask you more questions and the money will leave more financial mark. Why should it be any different at DeFi?
Win through adaptation
As we can see, much of the outcry over these possible regulations is not rooted in any real legal or logical justification. Yes, more compliance poses a challenge to the crypto ecosystem as it would cost time and money to develop the algorithms and protocols to make it work. And yes, some people will have to part with some of their income from the illegal business of others – not a significant part of the crypto ecosystem anyway.
The truth, as offensive as it may seem to crypto purists, is that more compliance means greater mainstream adoption, and greater mainstream adoption means more growth. Blockchain-based financial services and applications promise a revolution in finance that will bring real value to billions of users. The basic legal conformity is hardly too expensive for this.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.
Bob Reid is CEO and co-founder of Everest, a fintech company that uses blockchain technologies for a more secure and inclusive multi-currency account, digital / biometric identity, payment platform and e-money platform. As a licensed and registered financial institution, Everest offers end-to-end financial solutions that facilitate eKYC / AML, digital identity and regulatory compliance related to money movements. He was a consultant to Kai Labs, the General Manager of Licensing at Bittorrent and VP of Strategy and Business Development at Neulion and DivX.