American regulators’ attitude to cryptocurrencies seems to swing back-and-forth like a pendulum. One minute they wish (and act) to ban everything crypto-related as competition to fiat money, the second – they “let go of the reins”. The current swing is towards strengthening government control.
In a now typical for the US move, the signal initially came from an influential, though already retired, official. Former US presidential candidate, ex-First Lady Hillary Clinton described cryptocurrencies as “very interesting and somewhat exotic” but able to harm the US dollar. During a panel discussion at the Bloomberg New Economy Forum, she stated: “What looks like a very interesting and somewhat exotic effort to literally mine new coins in order to trade with them has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilizing nations, perhaps starting with small ones but going much larger.“
Also, according to Clinton, “Bitcoin is definitely a threat to the dollar… There’s a whole new layer of activity that could be extremely destabilizing and, in the wrong hands or alliances with the wrong people, could be direct threats to many of our nation-states and certainly to global currency markets.“
And it wasn’t even a part of a campaign speech – the statement was made to people who are well aware that crypto is not even close to undermining the American fiat’s role as the world’s reserve currency. However, clearly targeting journalists, Clinton added that the amassing of crypto in the wrong hands could pose a direct threat to entire states.
Furthermore, the New York Times now reports that the CEO of the largest cryptocurrency exchange Binance Changpeng Zhao agreed with Clinton but stressed that fighting cryptocurrencies is useless: “I agree with her [Clinton] that it is a potential threat, but my response is very different. It is not a kind of threat that can be fought like terrorism. It is technological innovation. You can’t fight it. You have to accept it and own it”.
This is important, as Changpeng Zhao has recently pursued a policy of maximum compliance with all authorities and emphasizes his willingness to follow all the necessary regulations.
The result was what it was. On November 16, Joe Biden signed into law the Infrastructure Investment and Jobs Act – which injects another “bucket” of dollars into the American economy but disregards the interests of the cryptocurrency sector, or, more precisely, it actually hurts them.
For example, the law includes the new definition of the term “broker”. It now requires crypto market participants, node operators, and miners to report all cryptocurrency transactions over $10,000 to the regulator. Of course, anyone familiar with the subject is perfectly aware that neither miners nor node operators have access to such data.
The amendments to the bill were debated in the Senate back in summer and caused a massive stir in the cryptocurrency community. And for a good reason: those legislative innovations oblige every company, even indirectly related to cryptocurrency, to collect and share with regulators their customers’ names, addresses, and transaction information.
The new law means that either cryptocurrencies in the United States will lose their very essence and meaningful distinctions from fiat or the development of the cryptosphere in the States will be stifled, forcing businesses to move abroad. In any case, if nothing changes, it will be difficult to grow any crypto business in the United States.
Let’s take a closer look at what’s going on. President Joe Biden signed into law the infrastructure bill that imposes strict rules on businesses and brokers using digital currencies. The initiative is supposed to make their work transparent to the IRS since the considerable infrastructure spending should at least partially be compensated for by taxes, and the White House views crypto as a tax evasion tool.
As a result, the new law (this part of it will come into force in 2024) creates risks of overstated requirements for a wide array of people, such as node operators. They can now be mandated to collect and share user identification information that they simply don’t have access to. In particular:
– Any digital asset is equated to cash.
– Brokers must file tax returns for all transactions over $ 10,000.
– The reports must contain information on the sender of digital assets.
– Businesses and individuals that do not disclose such information are considered criminals.
Clearly, the new regulations will primarily affect centralized exchanges like Binance and Coinbase. The latter has already called the situation “catastrophic”. Coinbase CEO Brian Armstrong tweeted: “The infrastructure upgrade looks like a disaster if I understand it. Criminal felony statute that could freeze a lot of healthy crypto behavior (like DeFi). Our team is looking into this further to try and figure out what exactly the implications are. The Coinbase exchange itself is centralized and compliant with the requirements of American regulators. For us, not much changes, as the platform doesn’t feature decentralized finance services. There are some elements in the Coinbase wallet, but the exchange can easily distance itself from them in case of any issues. Coinbase is involved in writing cryptocurrency regulations in the United States. Perhaps the exchange will be able to influence the situation and push through amendments to the bill.”
But we can say right away that American regulators (and above all the SEC), relying on the new law, will look for any opportunity to “nail down” the DeFi sector. The department has already made its intentions clear.
Legally, from 2024, DeFi projects will have to collect data about all their US users. But since this area remains anonymous, many projects may refuse to work with American clients altogether or at the very least move to another jurisdiction.
DeFi users will also have problems. They receive money from liquidity pools and smart contracts with no single sender. So in effect, while not formally banning DeFi, the law makes them incompatible with regulations.
To be continued…