In the United States, a battle to defend the cryptocurrency industry is underway

This article is an original piece by Chain Catcher, authored by Richard Lee and Gu Yu.

In recent weeks, a red alert has suddenly sounded in the U.S. cryptocurrency industry.

From strengthening regulations on the DeFi market to introducing tax policies targeting the entire cryptocurrency sector, the U.S. cryptocurrency industry has come under strong attack from regulatory authorities, marking the beginning of a battle to defend the cryptocurrency industry.

1. Why does the U.S. cryptocurrency industry oppose the tax provisions?

On July 28, a draft infrastructure bill aimed at improving transportation, electricity, and water resources in the U.S. included provisions for taxing the U.S. cryptocurrency industry at the last moment of Senate debate. According to estimates by the U.S. Congressional Joint Committee on Taxation, the federal government could raise $28 billion over ten years by taxing the cryptocurrency industry.

However, the strict information reporting requirements and the broad definition of taxpayers in the legislative language of the bill have triggered a significant sense of crisis among industry insiders in the U.S.

According to the formal legislative text of the bill, "any person responsible for regularly providing any service that facilitates the transfer of digital assets on behalf of others" is defined as a "broker." Brokers are required to report information on cryptocurrency transactions exceeding $10,000 using the IRS Form 1099-B and pay taxes accordingly. The IRS's 1099-B form indicates that the information reporting requirements include personal information such as the taxpayer's name, detailed address, phone number, and the client's name, as well as descriptions of transaction details regarding receipts, sales, and profits and losses.

The bill's broad wording regarding the definition of "broker" has raised concerns among industry professionals that miners, node operators, wallet developers, and other entities may also be implicated. Previously, centralized exchanges like Coinbase had already filed tax reports as required by the IRS.

"One thing that left a deep impression on me while working in Washington is the importance of the right to petition. Democracy is not just about voting," tweeted Jerry Brito, executive director of the nonprofit organization CoinCenter advocating for crypto policy, on July 30. He was one of the first to issue a call to action on Twitter.

Subsequently, major KOLs including Coinbase CEO Brian Armstrong, Twitter CEO Jack Dorsey, and Elon Musk expressed their views and initiatives on Twitter. In addition to industry associations issuing statements, insiders united with senators who shared the same stance as the crypto community to submit amendments and called senators to apply pressure, with over 100 industry organizations co-signing an open letter to Senate leaders. The previously slow and fragmented lobbying power of the U.S. cryptocurrency industry seems to be experiencing an explosion.

Specifically, the opposition from insiders in the U.S. cryptocurrency industry mainly focuses on the following points:

First, parties such as miners, node operators, and developers do not have the capability to collect "customer" information and should be explicitly excluded from the definition of brokers;

Second, the bill may force almost all companies related to cryptocurrency to enhance monitoring of personal information of everyday users, implementing cumbersome monitoring systems that could lead these companies to cease operations in the U.S.;

Longer-term concerns include that strict information reporting requirements will increase the legal complexity for cryptocurrency companies to develop projects or validate transactions in the U.S., potentially leading to the relocation of innovative institutions in the industry overseas.

2. Lobbying to "leverage" Washington

As a result, U.S. cryptocurrency industry leaders have engaged in intensive lobbying with U.S. lawmakers regarding the specific wording of this bill to protect the competitiveness of the U.S. cryptocurrency industry.

Before the formal legislative text of the bill was released, the wording of the tax provisions in the draft could have been worse. The draft's definition of brokers included descriptions such as "providing digital asset transfer services" and was expanded to explicitly state "including any decentralized exchanges or peer-to-peer markets." Lobbying groups like the Digital Chamber issued warnings in media interviews.

After receiving opposition from some industry insiders, on August 2, the formal legislative text removed the wording "including decentralized exchanges or peer-to-peer markets," marking the first round of progress in the lobbying efforts of the crypto community.

However, the broad and vague definition of taxpayers in the formal legislative text still left a strong sense of crisis in the U.S. cryptocurrency industry.

On August 2, the Electronic Frontier Foundation, an organization advocating for the protection of digital innovation, was the first to release a statement titled "The Cryptocurrency Surveillance Provisions Buried in the Infrastructure Bill Are a Disaster for Digital Privacy."

According to Jerry Brito's Twitter timeline, policy advocacy organizations like CoinCenter began contacting and lobbying senators who might support the crypto community's stance starting July 29.

On August 4, crypto advocates successfully connected with senators Ron Wyden, Cynthia Lummis, and Pat Toomey, who submitted an amendment aligned with the industry's position. The Wyden-Lummis-Toomey amendment explicitly exempts three groups: validators of distributed ledger networks (i.e., miners, stakers, and node operators), hardware and software wallet vendors, and protocol developers.

On the same day, lobbying organizations and leading industry firms such as the Blockchain Association, Coinbase, Coin Center, Ribbit Capital, and Square issued statements in support of the Wyden-Lummis-Toomey amendment, while calling on the public to participate and urging lawmakers to clarify the provisions.

In fact, the drafters of the bill had previously stated that the provisions were not aimed at non-intermediaries. Ohio Republican Senator Rob Portman is one of the main drafters of the bill. On July 30, his spokesperson Drew Nirenberg stated in a press release: "This legislative language will not redefine digital assets or cryptocurrencies as 'securities' for tax purposes, will not infringe on the privacy of individual cryptocurrency holders, and will not force non-brokers such as software developers and cryptocurrency miners to comply with IRS reporting obligations." However, perhaps out of concern that broad exemption language could become a tax loophole for the industry, the above statement was not included in the legislative text.

Insiders did not accept this, believing that the legislative intent lacks legal effect and demanding explicit exemptions in the legal text.

The Twitter crypto community was soon "flooded" with KOLs calling on crypto enthusiasts to contact lawmakers and apply pressure. The digital rights advocacy group Fight for the Future included a channel and script for automatically calling lawmakers in a post titled "Red Alert," which spread for several days. Coinbase also created a page for sending emails to lawmakers with one click. Additionally, industry insiders called for donations to policy advocacy organizations like CoinCenter, with some crypto firms responding.

The time left for the U.S. cryptocurrency industry before the Senate vote was limited, and intensive lobbying was conducted within a week, thanks to the emphasis and layout of leading U.S. crypto firms on lobbying in recent years.

According to The Washington Post, there are nearly 60 registered lobbyists for U.S. cryptocurrency companies, compared to just one five years ago. The nonpartisan organization Center for Responsive Politics, which tracks lobbying expenditures, indicates that U.S. cryptocurrency companies' spending on lobbying this year is expected to double compared to last year.

In terms of establishing lobbying groups, in April 2021, Coinbase, along with asset management firm Fidelity, payment company Square, and investment firm Paradigm, jointly established a new crypto policy lobbying organization called the "Crypto Innovation Council." According to The New York Times, Coinbase has spent over $700,000 on government lobbying since 2015.

The lobbying power of the U.S. cryptocurrency industry has previously been relatively fragmented, with conflicts of interest existing between Coinbase and Binance. According to The New York Times, before 2020, Coinbase was a member of the U.S. domestic industry association Blockchain Association, but after competitor exchange Binance joined the Blockchain Association in the summer of 2020, Coinbase withdrew from the organization. The bipartisan infrastructure bill has ignited a rare unified lobbying force within the U.S. cryptocurrency industry.

However, amid the intense lobbying wave, a stalemate is brewing. Daily records from the U.S. Congress show that on August 1, Senator Rob Portman and others submitted an alternative amendment No. 2137 to the infrastructure bill, which modified the tax provisions for the cryptocurrency industry. However, this news did not attract attention in the Twitter crypto community until around August 6.

Amendment No. 2137 was proposed by Senators Warner, Portman, and Sinema. This amendment exempts validators of distributed ledger networks under proof-of-work (PoW) consensus mechanisms, as well as vendors of hardware and software wallets, from the original bill. On August 6, the White House also issued a statement supporting the Sinema-Warner-Portman amendment, stating that compared to the Wyden-Lummis-Toomey amendment, the Sinema-Warner-Portman amendment strikes an appropriate balance in protecting industry innovation and preventing tax evasion.

Portman's round of modifications triggered a larger uproar in the crypto community. Insiders criticized that the amendment does not exempt protocol developers from the possibility of taxation, while only exempting PoW miners and ignoring validators of other consensus mechanism networks, essentially allowing the U.S. Congress to decide the winners and losers of different types of technology.

Upon hearing this news, Elon Musk, who had remained silent on the matter for days, also weighed in: "Now is not the time to pick technology winners or losers in cryptocurrency technology; there is no crisis forcing hasty legislation."

August 7-8 was the Senate's voting day. As an alternative version of the bipartisan infrastructure bill, the amendment No. 2137 proposed by Portman and others passed in the Senate with a vote of 69-28. Nevertheless, Portman and others faced fierce attacks from the opposing faction led by Wyden and Lummis.

According to the special decision-making process of the U.S. Senate, other amendments, including the Wyden-Lummis-Toomey amendment supported by the crypto community, require the agreement of all 100 senators to pass.

The lobbying efforts of the crypto community have not been without progress. On August 8, Senator Rob Portman issued a statement on his personal website, clearly stating that miners, stakers, validators, node operators, hardware and software wallet vendors, and other non-brokers should be explicitly exempted, while expressing his intention to communicate with Wyden, Lummis, and others to find a compromise.

After 30 hours of limited debate, the two sides finally reached a compromise. However, due to the opposition of Senator Richard Shelby, the compromise version ultimately failed to pass. The Sinema-Warner-Portman amendment No. 2137 was submitted to the House of Representatives for consideration.

However, some individuals in the U.S. cryptocurrency community remain undeterred, stating that a brand new amendment can be drafted from scratch in the House to address all concerns.

3. Strengthening DeFi regulation

In addition to the tax policies targeting the entire cryptocurrency industry, U.S. regulatory authorities have also noticeably increased their focus on the DeFi sector, publicly discussing DeFi regulation multiple times.

Earlier in June this year, Dan Berkovitz, a commissioner of the U.S. Commodity Futures Trading Commission, suddenly criticized DeFi derivatives during a forum speech, stating that unlicensed DeFi derivatives markets are a bad idea and do not comply with the relevant requirements of the Commodity Exchange Act. He also pointed out that DeFi derivatives projects lack market safeguards and customer protections, imposing regulatory obligations, restrictions, and costs on other market participants, which would create unfair competition.

"We should not allow DeFi to become an unregulated shadow financial market that directly competes with regulated markets." Dan Berkovitz stated that the CFTC and other regulatory agencies need to pay more attention to this growing area and appropriately address violations.

According to the Financial Times, the SEC and CFTC held an online meeting at the end of June with representatives from leading DeFi projects like Uniswap and dYdX to explore the possibility of reviewing the DeFi market.

On August 3, SEC Chairman Gary Gensler attended the Aspen Security Forum and stated that any tokenized stock or cryptocurrency that provides exposure to underlying securities is subject to securities laws, and any DeFi project offering securities-like tokens is within the SEC's regulatory scope. Although specific regulatory policies have not yet been introduced, the SEC's statement has made it clear that it will strengthen regulation of the DeFi industry going forward.

Recently, regulatory authorities in multiple U.S. states issued bans against the cryptocurrency lending platform BlockFi, as the regulators view interest-bearing cryptocurrency savings products as investment contracts and therefore subject to the Securities Act. Although BlockFi is a centralized lending platform, similar fixed-rate savings products also exist in the DeFi market. CoinDesk columnist Preston Byrne believes that these bans may be a precursor to similar actions against DeFi.

If U.S. regulatory authorities further advance legislative procedures along these lines, many DEX projects and derivatives projects could face certain risks and would need to register in accordance with the U.S. Commodity Exchange Act, which could lead to many developers facing lawsuits and hinder further innovation in DeFi.

Under the frequent pressure of regulation, several DeFi projects have already taken countermeasures. For example, in July this year, the decentralized aggregation trading platform ShapeShift announced the closure of its corporate entity and transitioned to a decentralized autonomous organization to avoid friction with regulatory authorities.

Similarly, in mid-July, Uniswap Labs removed 129 synthetic stocks and derivative tokens from the front end of the Uniswap trading page, citing the "changing regulatory environment" to avoid potential regulatory risks.

In addition to making business adjustments and adopting defensive strategies, several DeFi protocols are also attempting to promote the operation of DeFi policy advocacy organizations, aiming to push for the introduction of more friendly regulatory policies.

One representative is the DeFi education fund primarily funded by Uniswap, which was originally named the DeFi Political Defense Fund. In June, it received a grant of 1 million UNI through a vote in the Uniswap community to engage in legal analysis, policy advocacy, information dissemination, and other areas of work. Chief legal officers from several leading DeFi projects, including Uniswap, Aave, and Compound, are also involved in the organization's specific operations, thereby promoting policy-making that can represent the interests and positions of millions of DeFi users.

Recently, YFI founder Andre Cronje and others also initiated a proposal to fund the DeFi legal advocacy organization LeXpunK_DAO with $1 million, while hinting that Curve and SushiSwap would also participate, aiming to promote a series of constructive activities in the DeFi industry, such as launching milestone position papers, providing legal defense for DeFi developers against regulatory lawsuits, and proposing "safe harbor" legislation to legalize key aspects of DeFi.

4. Conclusion

Overall, the regulatory landscape for the cryptocurrency industry in the U.S. has become increasingly apparent. However, from the perspective of many KOLs in the cryptocurrency industry, the hasty formulation of policies that are difficult to implement and highly damaging to the industry by many regulatory agencies and lawmakers, who are not familiar with the operational mechanisms of the cryptocurrency market, is not conducive to the development of the cryptocurrency industry and does not align with the goals of policy-making.

As the all-out defense battle from various sectors of the cryptocurrency market unfolds, the future regulatory landscape for cryptocurrency in the U.S. warrants further attention.