The Senate's Crypto Showdown

What you need to know today in crypto and beyond

August 6, 2021

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SENATE SHOWDOWN: There’s a war breaking out in the U.S. Senate over crypto. Late Thursday night, Sen. Rob Portman (R-Ohio) and Sen. Warner (D-Va.) submitted an amendment to the Senate infrastructure bill looking to narrow the tax reporting requirements on crypto businesses. The 11th-hour change was reportedly made at the behest of Janet Yellen at the U.S. Treasury and has the backing of the White House. That may explain why the bill does not go far enough. In a near-inexplicable move, the amendment favors proof-of-work mining over all other consensus mechanisms, which many analysts believe will fracture the domestic crypto industry.

TERRITORIAL WATCH DOGS: Government turf wars aren’t limited to Capitol Hill. CFTC Commissioner Brian Quintenz tweeted Wednesday that the sister agency SEC does not have jurisdiction over “pure commodities or their trading venues,” including “crypto assets.” This follows remarks by SEC Chairman Gary Gensler earlier this week implying most digital assets were under his purview.

BINANCE KOWTOWS: Binance, which has come under scrutiny from regulators globally, said it will take a more proactive stance to compliance and stop Hong Kong clients from opening new derivatives accounts, effective immediately. This comes after the exchange announced last week it is winding down derivatives across Europe as well.

JOINING DEFI: Swisscom, Switzerland’s largest telecommunications provider, will launch a Chainlink oracle node to provide data for DeFi, becoming the second telecom company to enter DeFi after Deutsche Telekom, Germany’s largest phone company. The Swiss firm’s digital asset division will head the program and make sure the oracle node is continuously feeding digital asset price data into the Chainlink network.

LOOKING AT LONDON: Activity in the ether options market is concentrated in higher strike, longer duration calls, a day after Ethereum’s London hard fork went live. This signals bullish sentiment from traders, though analysts are mixed on the long-term implications of the backwards-incompatible blockchain upgrade. At least one (indirect) market participant has soured on Ethereum: Ethan Allen Interiors has announced it will change its stock ticker from ETH to ETD to avoid confusion with the cryptocurrency. The U.S. furniture maker and retailer’s design is meant to evoke “Classic, Country & Coastal and Modern,” not crypto.

–D.K. & H.B.

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Overheard on CoinDesk TV

Sound Bite

“Once somebody has a little bit skin in the game, […] they are more likely to focus on what they think is going to happen rather than what they want to have happen.”
—John Aristotle Phillips, PredictIt CEO, explaining the truth serum effect of prediction markets, 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 that 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

Two! There are TWO crypto tax amendments!

The fight in the U.S. legislature over new cryptocurrency tax-reporting requirements in the Biden Administration’s huge infrastructure bill has continued to get weirder. After industry objections to a flawed initial proposal, there are now two competing amendments about how to scale back its demands. According to the Washington Post, the dispute is now holding up the entire $550 billion bill.

We’ll get into the details but first, take a moment to reflect here. For those of us who’ve been around a while, the fact that anything crypto-related has become the linchpin of such a key piece of legislation is a huge landmark, especially given the technology is only a decade old.

Now quit patting yourself on the back, because I think the house may be on fire.

The whole thing started last week when legislators added new reporting requirements for cryptocurrency brokers as part of the “pay-for” of the infrastructure bill. But the language was so broad and flawed it could have roped in cryptocurrency miners, software developers and other entities who are clearly not “brokers” in any meaningful sense. To be clear, the objection to the provision wasn’t that it would impose taxes on crypto, but that the reporting requirements were technically flawed.

Things seemed to take a turn for the better on Wednesday when Senators Pat Toomey (R-Pa.), Cynthia Lummis (R-Wy.) and Ron Wyden (D-Ore.) filed an amendment refining and scaling back the rule’s definition of a broker, including carve-outs for node validators (miners), software developers and wallet developers. That amendment, though not perfect, received widespread praise from industry figures including CoinShares Chief Strategy Officer Meltem Demirors and Jerry Brito, of lobbying group Coin Center.

From that moment of hope, the situation has rapidly degraded.

A second proposed amendment to the tax was introduced last night by the provision’s original authors, Rob Portman (R-Ohio) and Mark Warner (D-Va.), joined by Kristen Sinema (D-Ariz.). University of Chicago tax specialist Daniel Hemel reviewed the two proposals last night and concluded the main difference is the Warner-Portman-Sinema amendment is narrower. It specifically protects proof-of-work miners and wallet developers, but not protocol developers.

As Hemel observed, it seems very weird that the U.S. government would write legislation favoring proof-of-work mining (e.g., bitcoin), given the widely acknowledged need to at least explore more environmentally friendly consensus algorithms. It certainly contradicts SEC Chair Gary Gensler’s recent commitment to be “technology neutral.” Not that Gensler has any formal power in this process, but you might think he had a bit of influence as a well-informed regulator.

I’m speculating here, but the proof-of-work carve-out might be based on a misapprehension that PoW is somehow inherently and uniformly more decentralized than proof-of-stake systems. Based on the language in the draft, there’s also another, funnier possibility. The Portman-Warner-Sinema tweak creates a carve-out for entities “validating distributed ledger transactions through proof-of-work (mining).” One way to read the line is that someone thinks “proof-of-work” and “mining” are the same thing.

To be clear, I find that funny in a very bleak and depressing way.

The worse news is that support for the still-basically broken Warner-Portman-Sinema version of the amendment is worryingly strong. The White House has issued a statement in support. Treasury Secretary Janet Yellen has reportedly been lobbying for the bad version, too. That would seem to back rumors that Treasury had been involved in crafting the original language, perhaps as a shortcut to imposing reporting requirements on which it had already been working.

Meanwhile, the generally high-pressure environment around the bill leaves little time for nuanced debate and education. A vote on the full bill is now expected on Saturday.

There will be new, tiny-yet-crucial developments on the provision today, probably before I even publish this piece. Figures including Senator Lummis are calling for public pressure to support her version of the provision, and that may be the most important factor in what happens next. So if you feel strongly about this, call your senator. This tool from Fight for the Future makes it easy (h/t to Meltem).

I’ll just close by again pointing out how mind-boggling – and dare I say, big-picture bullish – is the situation. This huge bill is one of the signature pieces of legislation for the new Biden Administration, one of the things that is expected to cement some kind of larger legacy. And it’s being disrupted by an extended fight over magical internet money.

In other words: We made it, fam. Now we just have to keep it.

–David Z. Morris

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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.

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