Senate Wants to Raise $28B From Crypto Taxes

What you need to know today in crypto and beyond

August 2, 2021

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Today's must-reads

Top Shelf

INFRASTRUCTURE BILL, REVISITED: Following pushback from cryptocurrency lobbyists and activists, an updated version of the U.S. Senate’s bipartisan infrastructure bill has cut some controversial crypto language. An earlier version of the $1 trillion stimulus package, which would be partially funded by a $28 billion tax on crypto transactions, would levy impossible requirements for many crypto operators through an “expanded” definition of the word “broker.” The revised bill pared back that definition but still does not exempt decentralized exchanges, miners, node operators and software developers.

FLYING HIGH: Square’s Cash App service’s bitcoin yearly revenue rose 200% to $2.72 billion (from $875 million) while bitcoin gross profit jumped to $55 million from $17 million, according to the company’s Q2 shareholder letter. The company also reported an $45 million impairment loss on its bitcoin holdings.

DOWNGRADED: Research by Moody’s downgraded El Salvador’s rating and continued its negative view on the country’s economy partly because of the government’s passage of a law that will make bitcoin legal tender in the country, the rating agency announced Friday. Moody’s noted a “deterioration in the quality of policymaking,” in the country.

CBDC RACE: The whole world is trending towards a CBDC. João Manoel Pinho, a director of the Central Bank of Brazil, said that a significant migration from paper currency to digital means of payment will take place in Brazil in the next few years, a move that will include the use of a CBDC. Similarly, Federal Reserve Governor Lael Brainard said on Friday that one of the main reasons why the U.S. needs a digital dollar is that other countries are racing to issue their own.

JPEG GEMS: The NFT market has exploded over the past week setting record highs in trading volume and average prices. On Ethereum, NFT trading volume reached $171 million last week, up 338% from the equivalent week last month, analytics firm OKLink said. Meanwhile, OpenSea saw record trading volume on Saturday and Sunday amid a frenzy for CryptoPunks, ArtBlocks and Bored Ape Yacht Club digital collectibles.

–Helene Braun

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Overheard on CoinDesk TV

Sound Bite

“This is a desperate attempt by a bunch of senators to try and find revenue from any source they can.”
—U.S. Rep. Tom Emmer (R-Minn.) on the new bipartisan infrastructure bill under discussion in Congress, during an appearance on CoinDesk TV’s “First Mover.”

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A Paradigm Shift in Mining

The dynamic crypto mining industry has been even more active following China's crackdown. The global hashrate has largely shifted to North America, making the U.S. a key mining hub where institutions now take central stage.

In this sponsored webinar on Aug. 10, Foundry CEO Mike Coyler explains how this new demographic of miners has special requirements, which the company has been catering to through its rapidly growing Foundry USA Pool and other services. Register for free.

What others are writing...

Off-Chain Signals

–H.B.

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Putting the news in perspective

The Takeaway

The New Type of Startup

Let me tell you about the biggest ah-ha moment I ever had covering crypto. It's maybe the ah-ha moment that has kept making everything else make sense from that day forward.

The insight answered this question: How did digital tokens create a new and different way to make it worthwhile for teams to devote years to building some online product?

If you weren't there for the ICO era, here's an oversimplification: Folks were raising money to build services that would be open source and charge no platform fees to their users. They did this by selling tokens, which weren't stock in the company but typically some kind of access enabler for some part of the new service.

There are a lot of forms tokens take, but here's the simplest: Most of these ICO startups created some kind of marketplace, enabling a connection between people who needed a service and those who could provide it. While the marketplace itself didn't charge fees, it would only enable transactions in the native token.

The ICO era may have passed but what clicked for me then is still relevant now.

Take that initial idea and add complexity and innovation and that gives you the plethora of companies created in this vein up through today. In truth, basically no one uses the model above, but the idea started there.

So this part about not charging fees for building these marketplaces kept bugging me. How would the creators make money?

I think it clicked while I was talking to a founder making a decentralized auction site, like eBay. The big selling point was that the protocol would allow folks to host all these items for sale and it wouldn't charge anyone any money for them to host the listing or for the protocol to manage bids on it.

Obviously, this is a very nice deal for users but how the heck did it make sense for this team to spend a lot of time and money to build it?

This was what was so clever about the ICO model, though. It created an incentive to build something valuable that the creators could eventually walk away from and let run itself. The way it did it hit me that day, so let me help you see it, too.

Once this insight slips into place, it's fairly easy to make other token projects make sense from here.

EthBay

Let's imagine a simple decentralized eBay. Let's call it EthBay.

On EthBay, to host a sale, sellers would need to hold a certain amount of EthBay tokens. They wouldn't need to pay to sell, but they would need to buy that token and prove it to EthBay for as long as they wanted to run listings. Once they were done selling, the merchants would be free to unstake and sell their tokens.

Most projects quickly walked away from the idea of the token as the transaction medium of their protocols because it created too much friction for users, but requiring businesses running on one to stake some token could be used to protect users, because bad operators could lose their stake.

So the staking requirement creates demand for the token and it slows what's called "token velocity" – the speed at which a token gets sold after a new person attains it. (Note: slower token velocity should increase price so long as there is demand.)

Obviously, more listings would require more tokens and eventually other services would get built on top of EthBay that would also require tokens to operate (such as arbitration services).

The pure idea of an ICO was this: A team would create some finite supply of token that made sense for them, set aside a portion to use to attract early adopters with giveaways and promotions, set aside a portion for the team and investors, and set aside a portion to sell to the public.

The sale to the public would serve as their operational funds to get off the ground. Then, if they built it and the people came, the token value would start going up.

So here's the insight:

It was that rising value in token value that would, in theory, pay for all the hard work of the founders and the team. If they built a good product, the tokens they had set aside for themselves would go from, say, 10 cents in the ICO to $1.00 by the time the team was ready to wrap.

But only if the finished product created a marketplace that users wanted to use.

Just the beginning

Tokens were a nascent concept when this clicked for me. Folks didn't know whether to think of them as arcade tokens or receipts or insurance or licenses. The truth is they are all those things and more now.

Still, whenever a new project doesn't quite make sense to me in cryptocurrency, I try to picture where the token sits in its particular concept, how the creators envision value going to that token and how they can see that token making their work as builders worthwhile.

Looking at new projects through that frame, I have found, can make them much less baffling.

–Brady Dale

Crypto State 2021: Middle East

Even though many countries in the Middle East restrict or outright ban activities related to blockchain technology, the region is having its crypto moment. From Dubai’s first-of-its-kind Bitcoin Fund listing to the Bank of Israel’s trial of a digital shekel, interest is picking up in the region as crypto companies work closely with regulators in the Middle East and North Africa (MENA) to gain some clarity about oversight of digital currencies.

Join us as we jet-set through the Middle East on our #CryptoState2021 virtual tour and explore how different markets are thinking about crypto, their roadblocks and challenges, and crypto’s impact on the region. Register for the Crypto State: Middle East virtual tour on Aug. 11.

The Chaser...

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