The cryptocurrency industry got a lesson this week in last-minute congressional wrangling.
A controversial crypto provision, which would impose tax-reporting requirements on a broad cross-section of digital asset holders, slipped into the Senate infrastructure bill despite pushback from the industry's nascent lobbying arm as well as bipartisan support for an amendment that would have alleviated their concerns.
The controversial provision started its life innocently enough as one of numerous "pay-fors" intended to help fund the $1 trillion package, but it has since sparked a debate over which entities in the crypto industry qualify as "brokers" and thus should be required to report to the IRS.
The current bill defines brokers as any company or individual that effectuates the transfer of digital assets. While the industry was prepared for such a requirement to target crypto-exchanges, many argue the current language is too broad and could end up placing onerous requirements on non-custodial players such as software developers and miners.
So began a week-long saga that tested the limits of the crypto industry's pull on Capitol Hill. Lobbyists for trade groups such as Coin Center and the Blockchain Association pressed lawmakers to refine the language — and for a moment it looked like they might be successful.
In response to the lobbying push, Sens. Ron Wyden (D-Ore.), Cynthia Lummis (R-Wyo.), and Pat Toomey (R-Pa.) proposed an amendment that would have exempted the types of companies that weren't explicitly handling digital assets for customers (i.e. miners and developers). With such high-level, bipartisan support, the amendment looked like a shoo-in, especially with the endorsement of Treasury Secretary Janet Yellen, who said it provided "clarity."
So why did it ultimately fail? The short answer is old-fashioned congressional horse trading.
Senator Richard Shelby (R-Ala.) objected to the amendment, which required unanimous consent, after his own amendment calling for $50 billion in additional military spending was nixed by the likes of Senators Bernie Sanders (I-Vt.) and Ted Cruz (R-Texas) (Sanders on principle and Cruz because he wanted a "clean bill").
Wake-Up Moment for Crypto
The last-minute loss has left the crypto industry reeling but not without hope that revisions could come later in the House or perhaps in the rulemaking process at the IRS.
"We're certainly disappointed that we weren't able to secure any changes to the original language," Kristin Smith, executive director of the Blockchain Association, told Cheddar. "I am also optimistic that there may be a pathway in the House for us to work on something, and we're working through that strategy now. Certainly, it's not over yet."
Smith also sees the defeat as a wake-up moment for the industry.
"Those of us working on crypto policy in Washington knew that we were under-resourced and that the community needed to be more engaged and more unified, and I think it took an event like this to do that," she said. "In the months ahead, we're going to see a tremendous amount of money and resources coming in to help the effort."
Smith added that the Blockchain Association plans to hire additional in-house lobbyists in the coming months, as well as potentially bring in more outside lobbying firms.
As for the companies potentially impacted by the bill, some are taking the news in stride, even as they remain concerned about how it will affect other players in the space.
"I think we'll be defined as a broker, just because we're in the business of buying and selling digital assets, so I expect that we will be required to issue 1099s to all of our customers," said Chris McAlary, CEO of Coin Cloud, which operates kiosks for buying and selling crypto. "I'm cool with that. I think that's a reasonable expectation of our business model. I think some of the other non-custodial actors that this really threatens are the miners, the software developers, the node operators, the decentralized exchanges, and the liquidity providers."
McAlary said he is more disappointed with the legislative process itself. "The crypto industry has certainly woken up to how this process works, and I think a lot of people have been let down."
Multiple crypto-companies have stressed, however, that their frustration with the provision does not reflect a general distaste for regulations, which they see as crucial to growing the industry.
"My general feeling with regulation is that it should set guardrails for industry to help the government protect and serve the public interest," said Anne Fauvre, COO of Oasis Labs, a crypto software company that could be impacted by the new reporting requirement.
She compared the situation to how the automotive industry asked the Clinton administration back in the 1990s to set national emissions standards under the Clean Air Act because a uniform standard was better than a hodgepodge of state rules.
"What's been really disappointing about this process is that I don't think the Biden administration or anyone in the Senate really thought about engaging with the crypto/blockchain industry in the U.S.," she said. "In fact, I think what probably happened is [lawmakers] were looking for things to pay off the spend and frankly thought adding this in would not lead to much pushback."
That's exactly what lobbyists like Smith hope to avoid next time.
"Moving forward, we'll have a full set of tools in the toolbox at our disposal in order to prevent situations like this from happening in the first place," she said.