Weekly Update — DeFi Regulation 11/24–12/1/2021
President Joe Biden to sign the bipartisan infrastructure bill into law
The tax code includes provisions for digital assets like cryptocurrencies and nonfungible tokens. There are two potential ways crypto investors will be impacted. 1099-Bs overstated. Each “Broker,” which will mostly be exchanges, would be required to report their cryptocurrency gains in a type of 1099 form.
Instead of using a third party, such as an exchange, investors own their private keys and cryptocurrency holdings when using a self-custody wallet. Coinbase would issue a 1099 to an investor if they sold $100,000 worth of bitcoin from their Coinbase wallet and deposited the funds into their self-custody wallet.
As a result, lobbyists within the cryptocurrency industry plan to lobby for amendments to the provisions as well as standalone bills before the provisions take effect in January 2024. The Treasury Department determines who is subject to the provisions, according to Ivory Johnson, certified financial planner, chartered financial consultant, and founder of Delancey Wealth Management.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
House Sends Infrastructure Bill With Crypto Tax Provision To US President
A controversial cryptocurrency tax reporting requirement was included in the bipartisan infrastructure bill passed by Congress. House members voted to pass the bill with at least 218 ayes on Friday night, fulfilling the Biden administration’s key priority amid controversy over whether a separate Democrat-led bill would move forward.
Tax reporting requirements in the bill that sought to expand the IRS’ definition of a broker has raised concerns among cryptocurrency companies. Also in the bill, a provision amending Tax Code section 6050I has scared crypto industry members. Senate supporters resisted the provision allowing the industry to propose amendments to modify the infrastructure bill, where it originated.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
How language in the infrastructure bill could roil the crypto markets
The cryptocurrency industry has lobbied hard against language in the Senate’s bipartisan infrastructure bill that could choke the crypto ecosystem. Crypto brokers would have to report customer information to the Internal Revenue Service under the bill.
The language of the bill has yet to be finalized as of Monday, but it can still be amended before it becomes law, or even through another bill, according to Kristin Smith, executive director of the Blockchain Association, an organization that works to change public policy on behalf of cryptocurrency. As uncertainty over the new bill weighed on sentiment, bitcoin prices fell more than 5% Monday, according to Coin Metrics, and ether prices fell 1.8%.
In other words, this bill requires crypto companies to report information to the IRS they do not have and cannot obtain. To remain revenue neutral and ultimately get Republican support in the Senate, Chervinsky said the infrastructure bill needs to include a large number of “Pay-fors,” or provisions that generate revenue for the government to offset new spending. Crypto is merely an innocent bystander caught in the crossfire of the bill, not a target,” said Wang.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Bank Of France Official: Existing Regulatory Frameworks ‘Constrained’ By DeFi Characteristics
According to the head of the French central bank, European regulators should better oversee decentralized finance. In his remarks, Denis Beau focused mainly on digital currency and the institution’s pilot program. Moreover, the French central bank participates in a project led by the European Central Bank, which could lead to a digital euro. During his remarks, Beau discussed the emergence of crypto-focused regulation in Europe, pointing out that more regulations will need to be put in place, which is also very important.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
DeFi — the ‘Wild West’ of crypto — is next on regulators’ hit list
Powell says it is unlikely that there will be a significant growth of DeFi that doesn’t require existing regulation in the future. Michael Hsu, acting Comptroller of the Currency, compared DeFi activity to Wall Street practices that contributed to the 2008 financial crisis during a Senate hearing in September.
One of the biggest questions regulators are facing is how to deal with DeFi, David Carlisle, director of policy and regulatory affairs at crypto analytics firm Elliptic, told CNBC. Is it possible to apply regulatory standards for centralized intermediaries to a few markets where there isn’t a clear centralization?
Carlisle says that regulatory officials are concerned that DeFi services may present themselves as decentralized when they may not be. “We see instances where development teams and founding teams of the protocol have influence over its governance.” The rules call for countries to identify individuals with “Control or sufficient influence” over DeFi programs.
Rick McDonell, former FATF executive secretary, told CNBC that DeFi protocols may provide similar functionality, but they do not have the oversight that regulators require to ensure safe and efficient financial markets. A lack of effective surveillance in these markets creates a substantial risk of fraud, money laundering, sanctions evasions, and other criminal activity.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Defi — Risks, Regulations, And What’s To Come
DeFi uses decentralized applications, also known as “DApps”, where users receive their own crypto-asset wallet, which they can use to purchase, sell, or trade crypto-assets.
We have yet to fully understand the legal frameworks and securities laws that may apply to digital tokens issued as part of the operation of a DApp, and transactions taking place on a DApp involving crypto assets, and the nature of activities taking place on the DApp.
IIROC and the CSA have asserted that CTPs that act in this custodial capacity are subject to securities regulation whenever a user has a contractual right to delayed delivery of a crypto-asset through the CTP. CTPs that maintain an ongoing custodial function must register as investment dealers with IIROC and are subject to various securities regulations.
Because of this, the regulations focus on the CTPs rather than the inherent crypto-asset itself and other intermediaries. Recently, a ban on crypto-assets in China led traders away from CTPs that could be captured by current regulations to DApps.
We may see regulators limiting what types of crypto-assets traditional financial institutions, such as banks, can invest in until they can grasp DeFi and the increasingly complex algorithms underlying crypto technology.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
To join our weekly newsletter for News, Updates & More click here
