How the Infrastructure Bill Could Change Crypto

Cryptocurrency's path to legitimacy runs through Washington, but it's an opportunity dressed as a threat.

various cryptocurrencies
(Image credit: Getty Images)

Cryptocurrency markets have continued to grow in size and popularity over the past few years, leading some investors to speculate that they are on their way to becoming a mainstream asset class, and others to insist they already are.

The infrastructure bill currently before Congress certainly is a step in that direction, as it contains a provision specifically addressing cryptocurrencies. But this same provision could threaten this burgeoning market for crypto by enforcing stricter reporting requirements and other burdens required of securities registered with the Securities and Exchange Commission (SEC).

These digital tokens, unlike any other asset class, have no one governing body overseeing them. Nor do they have a centralized, regulated exchange where people can trade these unregistered securities.

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This might change soon enough if legislation before Congress passes and future decisions change this nebulous treatment.

Let's explore the infrastructure bill's nod toward eventually setting up the SEC as a crypto regulator.

How Are Cryptocurrencies Presently Regulated?

That's a trick question, in a sense, because they really aren't – at least not in a straightforward way. As Daniel Gouldman, co-founder of Unbanked, puts it:

"The regulatory expectations for cryptocurrencies are a bit blurred. Different regulators claim to regulate it; the SEC uses a Supreme Court ruling from 1946 (SEC vs. Howey) to determine what does and does not qualify as a security. The [Commodity Futures Trading Commission] has said cryptocurrencies should be regulated more like a commodity. The IRS taxes it as property, and an advisor at FinCEN recently called crypto 'just another means of payment.'"

As compared to assets such as stocks, which trade on public markets and have regulations from the SEC and FINRA to hold public companies and brokerage firms accountable, cryptocurrencies currently have no one party responsible for overseeing them.

To date, the only intervention seen by the SEC has come from its third stated mission above (capital formation), in that they reserve the right to regulate any initial coin offering (ICO) or crypto issuance which meets the regulatory definition of "security." ICOs represent the crypto world's equivalent of an initial public offering (IPO), in the stock market. The SEC takes fraudulent ICOs seriously and has gone to some lengths to regulate their issuance to the investing public if they detect any semblance of impropriety or fraud.

But to date, few initial coin offerings have been regulated. In fact, anyone with the technical chops can create a new virtual currency and launch it to the public through ICO. The SEC typically only gets involved in these when they detect scamming or any sort of fraudulent activity.

What Could the Infrastructure Bill Do to Crypto Regulation?

Despite the dearth of a clear regulatory framework overseeing crypto in the U.S., legislation currently sits in the House of Representatives that could be a step toward determining its fate, for better or worse.

The infrastructure bill, targeted at investing $1.2 trillion over the ensuing eight years, would have tighter tax reporting requirements levied on brokers who facilitate cryptocurrency trading, among other types of trading. This would raise a projected $28 billion from more stringent information reporting for cryptocurrency transactions.

Specifically, the Senate bill includes a provision which would impose reporting requirements for "brokers" about crypto transactions for standard items most stock brokers report on investments already (opens in new tab) – basic data such as price points at purchase and sale, etc.

At issue with the legislation isn't stricter reporting requirements, but rather, the definition used for the term "broker." Some people feel it has been defined too broadly in the current infrastructure bill, causing the requirements to potentially fall on all participants in the crypto market. This means not only would brokers need to report, but also other entities in the crypto value chain, such as developers and crypto miners.

Though, there appears to be support for narrowing the definition. According to Gouldman, "There's a bipartisan consensus among Democrats and Republicans alike that cryptocurrency should be regulated carefully just as [the United States] did with the regulation in the early days of the internet."

This overly broad choice of language could have damaging effects if left unaltered, hence what has led to the bipartisan consensus (something rarely seen in Washington these days) that it needs to be fixed.

Given the broad bipartisan support, it stands to reason that if an amendment could be allowed to proceed, it would likely pass, fixing the issue.

Broker definition aside, the proposed changes aim to accomplish more than simply finding another source of funding for the bill, but also accomplishing a few goals that regulators would like to see met long-term: better reporting, transparency and integrity.

For now, the infrastructure bill's language doesn't change how the SEC – or any other regulatory body, for that matter – sees cryptocurrency. What it does provide is a first step for crypto regulation, as well as more clear guidance for the future.

What Does This Mean for Crypto Going Forward?

Taking this first step toward better reporting and transparency could be the first of many ahead for the cryptocurrency asset class. Sentiment about regulation on crypto appears mixed, with some reasoning that would erode the core value proposition of cryptocurrency in the first place: a decentralized, transparent and anonymous store of value and unit of account that largely protects people from fraud and criminal activities.

On the last two points, there's still room for improvement, to be sure.

However, to allow crypto to flourish and fulfill the potential its biggest proponents advocate, Gouldman offers advice to the U.S. government.

"[The government] needs to build a regulatory framework that properly balances the responsibilities around tax obligations, anti-money laundering concerns and fraudulent behavior with innovation, entrepreneurship and consumer privacy and rights," he says.

With these tenets in mind, the infrastructure bill awaiting approval in Congress could have huge implications for how these digital tokens are treated by federal regulators and the public at large going forward.

The question of whether these unregulated securities should be regulated is quickly becoming moot as many see it as an inevitability with the size and scale of the asset class. Instead, lawmakers would do well to recognize their mere consideration of including crypto provisions in this bill indicates that crypto is here to stay.

As such, they'd be wise to be careful and precise about how they handle this burgeoning asset class and its potential.

Riley Adams
Contributing Writer, Kiplinger.com

Riley Adams is a licensed CPA who works at Google as a Senior Financial Analyst overseeing advertising incentive programs for the company's largest advertising partners and agencies. Previously, he worked as a utility regulatory strategy analyst at Entergy Corporation for six years in New Orleans.