Friday, June 10, 2022

Digital Assets: Lathrop GPM Takes on Consensus

Author: Julian Sansano 

I recently attended the largest cryptocurrency, non-fungible token (“NFT”), and digital asset conference in the world. Consensus by Coindesk attracts tens of thousands of people from around the world, in a variety of fields and sectors, who either participate in the world of digital assets or are looking to build their knowledge and network in the digital asset world. Incredible buzz and excitement—think trade show meets rock concert, but the rockstars were the largest players and influencers in the digital asset game. For example, the founder of Cardano, a cryptocurrency, presented in jeans and a tee-shirt about his optimistic views on the future of cryptocurrency and their utility in the modern world, while the Chairman of the U.S. Commodity Futures Trading Commission presented in a suit about incoming crypto regulation.

One thing that I heard quite often (and which, as an attorney who practices in this digital asset space, worried me) was that this industry is like the “wild west,” meaning that there is no regulation, and there’s a ton of money to made. This may be an unpopular opinion, but cryptocurrency is in fact regulated in the U.S., and more regulations are coming down the pipeline this summer or early fall.

In November of 2021, President Biden signed into law HR 3684, the “Infrastructure Investment and Jobs Act,” commonly referred to as the “infrastructure bill.” The Act allocates funding and other resources toward roads and bridges, water infrastructure, resilience, internet, and cybersecurity, among other areas. The 1039-page Act also contains three pages adding new reporting requirements for certain cryptocurrency transactions. These requirements have little to do with infrastructure, but potentially they could have dramatic implications for millions of United States businesses and consumers who have embraced cryptocurrency for its efficiency, transparency, and accessibility.

One aspect of the Act that is of particular concern is the inclusion of an overly broad definition of a “broker” in the digital assets marketplace. The Act expands existing IRS Form 1099 reporting obligations by amending the definition of “broker” under 26 U.S.C. § 6045 to include anyone “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

I believe that the intent of this inclusion was relatively harmless, but the broadness of the language “any services effectuating transfers of digital assets” is worrisome, especially when “digital asset” is not defined. As cryptocurrencies become more accepted and used in everyday life, this concept is alarming to the smaller business owners and consumers wanting to accept payment or make payments in cryptocurrency. Would regularly transferring or paying in cryptocurrency consider a small business owner or consumer a broker who regularly is effectuating the transfer of digital assets? This would require them to issue a 1099 for every new customer with whom they transact business. If this is to be the case, I could see very little utility to the use of cryptocurrency by the everyday consumer or small business owner.

Luckily, leaders in the industry have implored Congress and the several government agencies attempting to regulate this industry to further clarify the Act. Senators Gillibrand and Lummis are spearheading a bipartisan committee working to introduce what many are considering the most significant cryptocurrency bill in the world later this year. And yes, you read that right – a bipartisan committee in 2022. Funny enough, cryptocurrency regulation is truly being handled in a bipartisan manner. Also, the IRS is expected to release their new treasury regulations later this year to clarify some of the language and reporting requirements in the Act.

Although regulation is coming, I wonder if the government will ever be able to keep up with the fast-paced digital asset market and community. Although I am not sure what the additional regulation will look like, I am sure that the cryptocurrency, NFT, and digital asset market will quickly test every possible aspect of such regulation. I look forward to keeping you updated on the continual change and growth of this industry.

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