The administration’s public support of a restrictive amendment calls into question the original motives of the crypto provision.
This episode is sponsored by NYDIG.
The infrastructure bill-related surprise in the U.S. Congress came in the form of a competing amendment with a short list of exemptions from the original language. On this episode of “The Breakdown,” NLW addresses the latest updates on the bill, including:
- White House support of the Portman, Warner and Sinema amendment
- Proof-of-work prioritization
- The future of the bill
The White House claimed support of the Portman, Warner and Sinema competing amendment, citing its ability to strengthen tax compliance in the crypto industry. Crypto advocates have been quick to call out the intentional gaps in the amendment’s language as well as the clear lack of technological understanding.
The proposed amendment specifically excludes proof-of-work mining from the reporting requirements, a surprising stance compounded by the fact that the language itself seems to misunderstand the difference between validation and mining. Some Bitcoin maximalists rejoice at their preferential treatment over proof-of-stake networks like Ethereum, but it remains unclear whether this amendment would protect even Bitcoin in the long term.
If the amendment were passed, the bill itself would not go into effect until 2023. Organizations like Fight for the Future are creating resources for crypto allies to contact their senators. If the amendment passes, how will crypto adapt?
See also: The US Senate Goes to War Over Crypto Taxation
The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Razor Red” by Sam Barsh. Image credit: Alex Wong/iStock/Getty Images, modified by CoinDesk.
Transcript
What's going on guys, it is Friday, August 6, and this is not the week-ending podcast I would have hoped to share things around the infrastructure bill had been trending positively. But then, last night at the 11th hour, a new competing amendment was dropped disastrously, and given the full weight of force by no less than the White House itself. We find ourselves in a much tougher spot than we were at this time yesterday. Here's how we got here.
Last week, a last-minute provision was added to the infrastructure bill that would change tax reporting requirements in crypto by effectively reclassifying every actor and entity involved in crypto transactions, even and especially perhaps, noncustodial actors like miners and validators, as brokers, responsible for sending customer information to the IRS. The problem is that miners and validators don't have access to any customer information. So by operating at all, they would be operating illegally. The goal of the provision was to get $28 billion in tax revenue that could go to offset the cost of the bill. That number coming from the opaque black box estimates of the Joint Committee on Taxation, the crypto industry immediately spun into a frenzy given that these reporting requirements would literally be impossible.
Opponents of this space tried to productively say that everyone was just complaining about taxes, even though that was completely, utterly and patently false. The people who wrote the provision, Rob Portman, specifically, a Senator from Ohio, insisted that he didn't mean to target those folks, the miners, the validators, and that we shouldn't be worried that we should, in fact, just let them write this very comprehensive legislation to make it easier for them to do what they intend to do, which is institute reporting requirements for the real brokers, of course, the exchanges, etc. The crypto industry, all of us here said 'That's insane. That's not how the process of lawmaking works. You don't get to say that's not what we mean, but leave the letter of the law open to interpretation.'
The industry flew into a frenzy trying to change the language of the bill itself, and later trying to get an amendment that explicitly excluded the actors that those writers of the original provision kept saying they meant to exclude. Along the way, a number of allies revealed themselves. Senators Pat Toomey and Cynthia Lummis on the Republican side of the aisle both made clear their opposition immediately, calling the proposal unworkable and an affront to innovation. Perhaps more notable was the emergence of Senate Finance Chair and Democrat Ron Wyden, as a similarly vocal opponent of the amendment. In Wyden's estimation, the issue of crypto tax reporting and invasion was an important one. But the way to legislate was not this last-minute provision that had the potential for wild overreach and wide ranging consequences to the industry. We'll come back to Wyden and how much he upset the applecart in just a minute.
Over the first few days of this week, Wyden, Toomey and Lummis rallied to write an amendment that would make official what the original writer of the provisions again, Republican Rob Portman, kept saying was the case: that they weren't interested in going after miners, software developers, validators and the like, yet somehow, when those folks produced an amendment that said exactly that, that just put into the amendment itself, the words that Rob Portman kept saying, that was beyond the pale. The Joint Committee on Taxation said that the amendment would cause a $5 billion shortfall, which makes one wonder, how is it possible that the same people who said they didn't want to include miners and validators, now were saying that by excluding miners and validators, there was going to be a $5 billion gap from what they had originally calculated.
It wasn't just the Joint Committee on Taxation, however, that got huffy. We learned via Politico yesterday that anonymous senior sources at the White House were furious about the amendment, and that in general, they were mad at the crypto industry's unwillingness to just roll over on this. Their take seem to be the same as Rob Portman's publicly, that of course, the provision wasn't meant to cover people who literally couldn't comply, but that by restricting what they can do, it's going to be extremely challenging for them to implement this law. Unlike Portman, and because the source is anonymous, you can tell that the White House was a little more annoyed than Portman would lead on to being. So that's where we were yesterday morning when I recorded.
Interestingly, around midday, Senator Portman came out and said, hey, yeah, we should vote on this amendment. He tweeted, I agree with senators Wyden, Toomey and Lummis that we can do more to clarify the intent of the cryptocurrency provision and the Senate should vote on their amendment. All in all, things were looking pretty positive until around 8pm. That's when we got our second 11th hour surprise, a perfect pairing with the way that provision was announced in the first place last week, we learned that another amendment was being entered: this one by Portman himself plus Democrats, Mark Warner and Kyrsten Sinema. At 7:43, Coin Center's Jerry Brito tweeted: "Wow, Senators Warner and Portman are proposing a last-minute amendment competing with the Wyden, Lummis, Toomey amendment. It is disastrous. It only excludes proof-of-work mining and it does nothing for software developers. Ridiculous. Here's all that excludes: and he included a screenshare of the relevant language. A), validating distributed ledger transactions through proof-of-work mining or B), selling hardware or software the sole function of which is to permit persons to control a private key used for accessing digital assets on a distributed ledger." Brito continues: "If this passes, this is the U.S. Congress picking winners and losers."
At 9:51 last night, we got confirmation of what it had been starting to feel like for a while, that the real power behind this counter push was coming straight from the White House itself. The Washington Post's Jeff Stein tweeted: "Late breaking: White House is coming out formally in support of Warner, Portman, Sinema crypto amendment implicitly against the Toomey, Wyden, Lummis plan."
At 10:04pm, White House Deputy Press Secretary Andrew Bates released this statement. Quote, "The administration is pleased with the progress that has yielded a compromise sponsored by Senators Warner, Portman and Sinema to advance the bipartisan infrastructure package and clarify the measure to reduce tax evasion in the cryptocurrency market. The administration believes this provision will strengthen tax compliance in this emerging area of finance and ensure that high income taxpayers are contributing what they owe under the law. We are grateful to Chairman Wyden for his leadership and pushing the Senate to address this issue. However, we believe that the alternative amendment put forward by Senators Warner, Portman and Sinema strikes the right balance and makes an important step forward in promoting tax compliance."
Coin Center's Brito again summed up the utter confusion, "The White House is endorsing proof-of-work over all other consensus mechanisms to be enshrined in law. WTF is going on?" Jake Chervinsky put it even more succinctly, "Long story short, I'm about to get robbed by my own senator."
The White House's involvement was further confirmed in the morning by the Washington Post, as they reported the pressure had come all the way up from Treasury Secretary Janet Yellen herself. She apparently had spent the last two days lobbying directly including talking directly with Ron Wyden. Clearly, someone is still salty about that Buy Bitcoin photo." Jake Chervinsky tweeted further on this saying: "Word in DC is that this whole thing was Treasury's idea. They don't like what we're building and their solution is to obtain jurisdiction over noncustodial actors. They tried this via FinCen's proposed rule last year and failed. Now they're trying again. Problem is, they might succeed this time. Portman, Warner is DC gamesmanship at its worst, but I have to give it to them. It's a nifty political trick. Although the amendment is garbage, Senator Warner's involvement makes it bipartisan, which means dems can vote for it."
There are lots of parts of this to dissect. Let's talk first about the specifics of the bill. Simply put, what they think it says isn't what it says. The first thing it excludes is validating distributed ledger transactions through proof-of-work (mining), but that's not what mining is, it's conflating two things. Here's Nic Carter explaining in a tweet: "Just realized also that the text of this bill is technologically inaccurate. Proof-of-work does not validate transactions. Nodes validate transactions by checking against rules, miners attach proof-of-work to well formed blocks to ensure continuity and linearity in the ledger. Validation does not equal proof of work. This is the equivalent of conflating a saying a bar of gold when taking delivery of a gold bar and the process of extracting gold from the earth, just different processes entirely."
I point this one out to point out how well and truly the people writing this do not understand what they're writing laws about. This is fundamental, basic stuff that you must understand if you are going to write binding laws about an industry. It also gets to a second point and one of my biggest sources of frustration over the past 18 hours, which is the "sometimes glib, sometimes gleeful" response of some Bitcoiners who are like 'haha screw you Eth kids and shitcoiners,' in their estimation this is somehow a big W for Bitcoin, because the only thing excluded is proof-of-work. They see this and say, 'See, we told you, proof-of-work over proof-of-stake. It's right there in the law, Bitcoin wins.' Let me be clear. This is a staggeringly, unfathomably idiotic, short-sighted take. First of all, the idea that this is some thoughtful, considered position, where Bitcoin supporters in the Biden administration and the Senate had considered all the available consensus mechanisms and decided to throw their weight behind proof-of-work is patently absurd.
This is fundamentally arbitrary compromise theater, picking the most narrowly defined exclusion they could find. And if you have any doubt of that, I again refer you back to the words of the amendment absolutely misunderstanding proof-of-work. Second, in the rush of this opinion group to rag on non-Bitcoin communities, they seem to be entirely missing the fact that this almost assuredly bans the Lightning Network. So I guess the Bitcoiners cheering this just don't think anything being built with Lightning is important. Third, the idea that this isn't just a first step is ludicrous. Crypto was 100%. I mean, 100%, irrelevant to the vast majority of the lawmakers who will vote on this, until the Treasury Department and the Joint Committee on Taxation, a group that hasn't had to show its math, by the way, randomly decided that there was $28 billion of unreported tax revenue that they could go scoop from us, not for nothing. Let's keep in mind the tweet which said, "The best part about all of this is that we've never seen any evidence that there's American crypto tax avoidance amounting to $30 billion."
The point that I'm trying to make here is that if Bitcoiners think that somehow we're immune to further attacks, I have an NFT of a bridge to sell you. Balaji Sreenivasan tweeted, "Make no mistake, this is a backdoor Bitcoin ban. Compliance is impossible. Their intent is to criminalize full nodes, Lightning nodes and most Bitcoin wallets, and they're not really in favor of Balaji Sreenivasan. The very next bill will include some ESG thing to attack that too." Messari's Ryan Selkis, meanwhile, says "Step one: ban proof-of-stake under the guise of tax compliance, step two: ban proof-of-work under the guise of environmental compliance, clever, likely effective back to war time, unfortunately."
Now, one point of clarity, there are some Bitcoiners who are not as stressed because A), they believe that no matter what happens, Bitcoin will continue on. And that B), what matters really is Bitcoin's use in places far outside of the U.S. What matters is that the network continues to offer them refuge from their local monetary regimes. My critique is not with this group. And in fact, I think they're an important reminder who can help balance the intensity of this moment with a longer and more broad perspective.
There are others who find all of this wholly unsurprising, who have made the determination that government is beyond saving, so 'screw you, I'm not going to call my senator.' I don't wholly agree with this perspective, but I respect it. Bitcoin represents an opt out for many, and that necessarily means that they're not going to be lining up for a political battle with terms set by the U.S. government. What I'm reacting to are those who are using their Twitter puppets to cheer this as a victory over non-Bitcoin assets, or who are glibly saying, 'see, of course, Bitcoin is fine, they chose proof-of-work.' Those takes are simply nonsense, ignorant of the reality of what's going on.
But ultimately, of course, my beef isn't with any of my fellow Bitcoiners, even the ones whose behavior I don't love at the moment. My real critique is with a horribly broken political system. Here's the tweet that sums everything up for me from Neeraj of Coin Center: "Making incredibly consequential technology policy through a last-minute tax amendment, on a must-pass bill, is insanity. The process itself is what's so broken."
Can you imagine an entire industry effectively outlawed with no debate? Because some senior staffers wrote an impossible provision in a completely disconnected law and shoved it in at the last moment. That is truly insane. It makes one ask, if this is happening here, what the hell is happening in every other big omnibus bill. I'm also frankly shocked at how many people I have seen say that we should chill out because we can trust the Treasury not to abuse the power its granting itself. Harvard professor and quintessential blue checkmark Jason Furman says, "The belief that this would lead to onerous information reporting requirements having nothing to do with the above like on miners. This isn't how the Treasury operates. They don't try to squeeze blood from stones. They just wouldn't do this." What world does someone live in where 'they just wouldn't do this' is a rational way to look at how laws are made. Laws aren't about who writes them. They're about who interprets them, even if he's correct about this Treasury, which, given how aggressively they're pursuing this, I don't think there's any goddamn reason in the world to think he is, laws aren't about this Treasury, they're about the next Treasury and the Treasury after that, and the Treasury after that, and so on and so forth until the end of time and guess what? The nature of power is that once it has been granted or one, it is extremely rare that it is then relinquished without just as much of a battle, if not more, as it took to win it.
So, where do we go from here? Well, there are a few perspectives. First, the nature of crypto is to iterate faster than regulators. I've seen a number of people say they'll design proof-of-work into their protocols faster than the law can be implemented, and I believe them. Others pointed the validation will simply move offshore. And there is definitely something to the idea that crypto is like the water, filling in all the cracks, making it extraordinarily difficult, ultimately to regulate. Second, let's not forget that this is not done yet. The Senate has adjourned until Saturday, which means call your senators today. If you need help with that look up Fight for the Future on Twitter, they have a service that will help you get to your senator. Third, something that should be calming. This is a law that won't go into effect until the earliest 2023. That means there's still a ton of time to challenge this even if it does pass, both in Congress which has to ratify it and then through other forms of legal challenge as well. Fourth, let's take a moment to recognize the surprising especially to the powers that be amount of pressure this crypto industry has already exerted, from everything we're seeing the Treasury and its allies were completely unprepared for how much pushback there was going to be. Indeed, part of their frustration right now is that they can't believe that it's us, this, in their minds, ragtag sandlot crypto industry that's delaying their marquee legislation.
Were it me and I were a politician. I have to say, I might think twice about making an enemy of an extremely passionate, often ideological group, who has been part of one of the biggest and most rapid wealth creation processes in human history. But that's just me. And look, it is clear that people are already organizing, particularly satisfying to my clearly explosive frustration was this tweet again from Messari's Ryan Selkis who wrote: "I don't have the temperament to testify in front of Congress, but I 100% have the temperament to help lead a decade-long vendetta against career politicians on the wrong side of the crypto agenda." Look, guys, this came out of nowhere, both times the provision itself and then this counter amendment. It was a blistering Sucker Punch. And yet, we still might win and if not, we're going to come damn close. Imagine what happens when we actually organize. For now I appreciate you joining me on this journey. I appreciate you listening until tomorrow. Be safe and take care of each other, peace!