“The tax enforcement agenda the president has put forward is focused on — and this is basic — having people pay the taxes that are owed under current law,” David Kamin, a deputy director of the National Economic Council, told me. “Disproportionately, there is evasion when it comes to those at the top, often because their sources of income are more opaque.” And no market is more opaque right now than the crypto markets.
Portman’s proposal gave the Treasury Department broad authority to define “brokers” in the crypto markets, and compel them to issue 1099s and comply with the tax code. The proposal was too broad, in the eyes of the crypto community, which mounted a furious lobbying effort against it. “I don’t know how Treasury will use that authority,” said Jerry Brito, executive director of Coin Center, a crypto advocacy group. “I fear they’ll use it in a way that has unintended consequences because they don’t understand the technology.”
Senator Ron Wyden, an Oregon Democrat; Senator Cynthia Lummis, a Wyoming Republican; and Senator Patrick Toomey, a Pennsylvania Republican, agreed and fought to sharply narrow who could be defined as a broker. “If 20 years ago everyone would’ve come in with all this inept regulation, you would have lost some of the real opportunities to have the internet grow and prosper,” Wyden told me. “I think the same thing is true here.”
But many in Washington, far from feeling like they’re regulating crypto networks too soon, think they’re entering, if anything, too late. “We spent, to my memory, no time on crypto at the White House from 2009 to 2017,” Jason Furman, who led President Barack Obama’s Council of Economic Advisers during his second term, told me. “I’m sure there were conversations happening within Treasury and within the regulators, but virtually nothing came out of them. So Washington is really behind in dealing with this industry.”
The Financial Crisis Shaped Crypto. It Also Shaped Crypto’s Regulators.
For all the gauzy stories of what crypto could become, there’s the simple reality of what it mostly is right now: a financial market in which highly volatile assets are traded, where scams and hacks and broken promises abound, and with DeFi, where complex derivatives and financial instruments are being invented and swapped. One worry many in the government have is that these markets are thriving through the avoidance of taxes and regulations.
This is a story we’ve seen before: Amazon got an early advantage by dodging sales taxes for years, and Uber and Lyft evaded transportation and labor regulations until they got powerful enough to essentially rewrite those rules themselves. But there are particular dangers to financial instruments designed to skirt oversight. Anyone who lived through the 2008 financial crisis knows the threat of shadow banking sectors.
“It is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market,” Dan Berkovitz, the commissioner of the Commodity Futures Trading Commission, said in a June speech. “In addition to the absence of market safeguards and customer protections in the unregulated market, it is unfair to impose the obligations, restrictions and costs of regulation upon some market participants while permitting their unregulated competitors to operate wholly free of such obligations, restrictions and costs.”