October 20, 2021

Volume XI, Number 293

Advertisement
Advertisement

October 19, 2021

Subscribe to Latest Legal News and Analysis

October 18, 2021

Subscribe to Latest Legal News and Analysis

So Close... The Cryptocurrency Industry Shows its Strength Even While Failing to Secure an Amendment

As the United States Senate considered H.R. 3684, the “Investing in a New Vision for the Environment and Surface Transportation In America Act (INVEST in America Act)”, an attempt to modify legislative language concerning cryptocurrency failed on a procedural basis. The Invest In America Act is an historic $1 trillion bipartisan bill that, if passed, will fund physical infrastructure in the United States, including spending for roads, bridges and public transportation as well as providing funding for high speed internet, electric vehicles and modernizing the power grid. Much of this bill is to be funded though increasing the national deficit, in other words, debt, as well as some spending cuts. A portion of the bill is to be funded by new sources of revenue, including tighter enforcement of cryptocurrency transaction reporting, which has been estimated to amount to $28 billion over 10 years, accounting for approximately 25% of all new revenue sources under the bill. This would mandate reporting of cryptocurrency transactions by certain intermediaries and other affiliated parties. In some ways the crypto tax provisions of the Act shows how the cryptocurrency industry has been legitimized by government regulators, being viewed as stable and secure enough to serve as a primary revenue source for public works projects over the next 10 years. That said, there is real concern that these provisions of the Act will effect the growth of a fledgling digital asset industry since it has the potential to drive a lot of activity outside of the United States, which in turn could decrease the amount of revenue actually raised.

Under the Act, a cryptocurrency broker will be obligated to report digital asset transactions to the IRS. As introduced, Section 80603 of H.R. 3684 contained a broad definition of a “cryptocurrency broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” For taxing purposes, this definition means a sale on behalf of someone else. Many in the cryptocurrency industry are concerned that parties who are not acting as true brokers, such as cryptocurrency miners, developers, network validators and stakers, could be caught in this definition. The U.S. Department of the Treasury, the Congressional Joint Committee on Taxation and others believe the language in H.R. 3684 is sufficiently clear that reporting requirements only cover actual brokers who have custody over assets.

In a sign of growing lobbying strength of the blockchain industry, Sens. Patrick Toomey (R-PA), Mark Warner (D-VA), Cynthia Lummis (R-WY), Kyrsten Sinema (D-AZ) and Rob Portman (R-OH) reached a compromise on an amendment to the Act that would have alleviated some of the concerns of the crypto community. The authors intended for their amendment to clarify that the definition of “broker” applies only to persons who regularly effectuate transfers of digital assets on exchanges where people buy, sell and trade cryptocurrency.  Persons who solely engaged in validating distributed ledger transactions would not be covered for those activities, whether they utilize proof-of-work, proof-of-stake or other new consensus mechanisms. Further, the definition clearly would not have applied to individuals solely engaged in selling hardware or software with the sole function of permitting someone to control private keys used to access digital assets.

Cloture in the Senate and Why the Cryptocurrency Amendment Failed Even with Widespread Support

Cloture in the Senate is the procedure by which a vote can end debate without also rejecting the bill, amendment, conference report, motion or other matter it has been debating. Under Senate Rule XXII, the process usually begins when the Majority Leader files a cloture petition containing the signatures of 16 Senators who express a desire to close debate on a matter. The petition then lies over in the Senate for 48 hours plus one hour after the Senate convenes. Cloture can be invoked with the vote of 60 Senators.

Senators who desire to offer revisions to a bill or amendment on which cloture has been invoked must submit their amendments in writing before the cloture vote takes place. First-degree amendments, which propose to change the text of a bill or a committee amendment in the nature of a substitute, must be submitted in writing when the Senate is in session no later than 1:00 p.m. on the day after the cloture motion is filed. The Senate voted to invoke cloture on the Invest in America Act on August 8, 2021, by a vote of 68-29 (3 not voting). Sens. Portman, Toomey, Warner, Lummis, Sinema and Portman reached a compromise on their revised amendment only the next day.

Under Senate rules, amendments offered after cloture is invoked require the unanimous consent of all 100 members of the Senate.  On August 9th, Senator Toomey requested unanimous consent that the compromise cryptocurrency amendment be adopted.  Senator Richard Shelby [R-AL] “reserved the right to object”. The Senator had an amendment to increase defense spending by $50 billion and asked Senator Toomey if he would agree to a unanimous consent request to add his (Shelby’s amendment). Toomey agreed, but Senator Bernie Sanders [I-VT], Budget Committee Chair, objected to the Shelby amendment, which was viewed as a poison pill for Democrats (and Sen. Shelby ultimately did vote against final passage of H.R. 3684). Therefore, Senator Shelby objected to the Toomey amendment, killing amendment in the Senate.

Next Steps and Cryptocurrency in the House

Although the blockchain industry came up short with this amendment, the fight is far from over. Cryptocurrency advocates are lobbying to change the bill in the House by adding the failed Senate bipartisan amendment. In addition, the House Congressional Blockchain Caucus sent a letter to the entire House expressing concerns about the Senate provision in H.R. 3684. Advocates state that they are asking the House to tax cryptocurrencies fairly with minimum administrative burden.

Shortly after the Senate completed action on H.R. 3684, Rep. Anna Eshoo [D-CA], the chair of the powerful Committee on Energy and Commerce, sent a letter to Speaker Nancy Pelosi [D-CA] requesting that the Speaker amend the bill with regard to the broker definition in Section 80603. She noted the bipartisan amendment which failed on a procedural objection had the support of Treasury Secretary Janet Yellen.

Additionally, there are numerous impediments to passing the Act in the House, which puts its fate in doubt. House Speaker Nancy Pelosi has vowed not to take up the Senate bipartisan infrastructure bill until that body passes a separate huge $3.5 trillion budget through a process called reconciliation under which a bill can be passed with only a majority.  Meanwhile, nine House Members sent the Speaker a letter saying they would vote against the House budget reconciliation bill unless she brings up the Senate infrastructure bill first. Speaker Pelosi has said she will not do that. The House is scheduled to return early from its recess on August 23rd. Stay tuned.

Finally, even if the Act passes in its current form, the IRS would need to approve implementing regulations. These regulations could ultimately include much of the clarity that cryptocurrency advocates are seeking.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XI, Number 230
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
Shareholder

Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with...

212.413.2843
Julius W. Hobson, Jr., Polsinelli PC, Public Policy Attorney, Long Term Care Regulation Lawyer,
Senior Policy Adviser

Julius W. Hobson, Jr., strives to meet client public policy goals and objectives based upon the client needs and capabilities. Julius has more than 40 years’ experience in public policy, working both inside and outside of government. He has a deep-rooted understanding and compassion about the public policy process — both legislative and administrative. He primarily serves health care clients with particular emphasis on physicians, hospitals, home health, and long-term care providers. 

202.626.8354
Daniel L. McAvoy Shareholder Investment Funds Securities & Corporate Finance Mergers, Acquisitions and Divestitures Corporate and Transactional Joint Ventures and Strategic Alliances
Shareholder

Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

212-413-2844
Advertisement
Advertisement
Advertisement