“This is a deeply misguided provision that, if adopted, will do far more harm than good to US interests,” lawyer Jake Chervinsky wrote in a lengthy Twitter thread.
He explained the bill would expand the definition of a “broker” to include “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets”.
That could lead to increased Internal Revenue Service reporting requirements.
The “brokers” may also been forced to collect customer data including names, addresses and phone numbers.
“This definition is so broad, it could apply to nearly every economic actor in the US crypto industry, if read literally,” Mr Chervinsky said.
“This sounds insane, but it really might happen.
“Most crypto legislation goes nowhere, so it’s easy to ignore. Not this time.
“This provision is part of the bipartisan and otherwise popular infrastructure bill, which is moving quickly through Congress and is highly likely to pass.
“First, it defies logic to adopt a regulation for which compliance is literally impossible, unless the goal is to kill the industry.”
The provision was included to essentially help fund the massive cost of the bill.
It must include “pay-for” provisions to raise revenue for new spending so that it’s revenue-neutral as a whole, Mr Chervinsky explained.
The Joint Committee on Taxation has projected that, collectively, the provisions in the bill would boost revenue by $68.87 billion.
IRS Commissioner Charles Rettig requested broader authority from Congress in June to collect information on cryptocurrency transactions.
Mr Rettig said that these transactions, by design, were often “off the radar screens”, while noting that the most recent market cap in the crypto world exceeded $2.7 trillion and more than 8600 exchanges worldwide.
An original revenue-raising provision that was struck from consideration after losing Republican support involved giving $50 billion to the IRS to beef up its enforcement and tax-collecting initiatives as means to crack down on filers who are not fulfilling their obligations.
Senate Majority Leader Chuck Schumer said he hoped to move forward with a vote on the infrastructure bill this week.
The importance of storage and passwords is best known by crypto enthusiasts who know how easy it is to lose access to their digital assets. A recent survey conducted by Cryptovantage named “Coin Storage Security: A closer look at crypto storage and passwords” aimed to identify investors’ sentiment toward the safekeeping of their crypto investments.
Based on 1,021 United States-based cryptocurrency owners’ responses, most choose to store their digital investments on crypto exchanges, with Coinbase sitting in first place at 34.7%. Wallets from Binance and Robinhood also hold a large user base for storing crypto at approximately 25% and 26%, respectively.
Some 73% of the respondents sided with American finance company SoFi to be the most secure crypto wallet, although less than 9% use it as their go-to wallet. Trying to understand investors’ take on storing crypto passwords, the survey found that “61% of respondents believed their crypto passwords were safe, while about 12% felt theirs were not.”
Surprisingly, crypto investors are widely divided in how they opted to remember passwords to their wallets. The top four methods to remember passwords included password managers (26.6%), handwritten notes (18.6%), password safes (15%) and taking screenshots (10.3%). The report read:
“39.7% of respondents had previously forgotten their crypto password. 95.6% of them were able to recover their investment.”
Out of the lot, 85.7% have used a recovery service to retrieve their lost or forgotten passwords, which highlights the “potential to seriously alleviate some fears and trust issues among current and potential investors.” The unfortunate investors who lost complete access to their crypto wallets ended up losing $2,134 on an average.
The survey also confirmed that roughly 33% of respondents had fallen for a crypto scam, which was mainly targeted through emails (47.7%), websites (45.2%) and fake mobile apps (44.6%).
In addition to scams and password mismanagement, the surveyed investors showed panic-selling as one of the biggest mistakes (38.2%) followed by investing everything in one coin type (32.5%). In this case, password loss amounted to 12.5%, making it the lowest among the group.
Running parallel to the findings above, Cointelegraph reported a study on U.S. consumers’ sentiment toward crypto payments. Based on the 8,000 surveyors, 59% of consumers who have never held crypto are interested in using it to make crypto purchases.
Additionally, more than 60% of surveyed crypto owners indicated their interest in making online purchases through crypto.
However, many crypto traders are feeling increasingly nervous due to the $550 billion bipartisan infrastructure bill that’s currently making its way through U.S. legislature and includes a provision to raise $28 billion from crypto investors, with some warning it could “kill” the industry.
Sign up now for the free CryptoCodex—Join tens of thousands of others who receive the CryptoCodex newsletter every weekday. Helping you understand the world of bitcoin and cryptocurrency, arriving in your inbox at 7am EDT
“This is a deeply misguided provision that, if adopted, will do far more harm than good to U.S. interests,” Jake Chervinsky, a crypto-focused lawyer, wrote in a lengthy Twitter thread laying out how the bill could impact the burgeoning crypto industry and market.
The bill, which this week passed a preliminary Senate vote, proposes taxing bitcoin and cryptocurrency profits to fund U.S. infrastructure investment, with the definition of a broker being widened to the extent that crypto exchanges and wallet providers would need to collect far more information about their users than they currently do.
Any broker that transfers any digital assets would need to file a return under a modified information reporting regime, according to a draft copy of the bill seen by Coindesk.
“The provision includes updating the definition of broker to reflect the realities of how digital assets are acquired and traded,” the document said. “The provision further makes clear that broker-to-broker reporting applies to all transfers of covered securities within the meaning of section 6045(g)(3), including digital assets.”
“Things are moving fast, which can feel scary,” wrote Chervinsky, adding “don’t panic. This provision isn’t final yet and still can be changed.”
Chervinsky warned that “it defies logic to adopt a regulation for which compliance is literally impossible, unless the goal is to kill the industry,” and “this could mean a de facto ban on [crypto] mining in the USA.”
Since China’s bitcoin and cryptocurrency mining crackdown in recent months—in which those who use powerful computers to secure blockchains and validate transactions in return for new crypto tokens were expelled from the country—the U.S. has emerged as a potential new home for many.
However, lawmakers who fear bitcoin and crypto mining could accelerate climate change have signaled they’re unhappy with the industry’s U.S. growth.
CryptoCodex—A free, daily newsletter for the crypto-curious. Helping you understand the world of bitcoin and crypto, every day
Bitcoin and crypto experts are warning the language used in the bill risks broadening definitions of brokers to the extent it includes those that provide hardware and software.
“Unfortunately, in the drafts, we’ve seen the categories of persons who would be obligated to report is so broad that it potentially covers persons who only provide software or hardware to customers, and who have no visibility whatsoever into user transactions,” Jerry Brito, the executive director of Washington D.C.-based crypto think tank Coin Center said via Twitter, adding he was trying to “fix” the bill’s crypto provision.
“It potentially also covers miners’ indexes, the saving grace is that arguably miners’ indexes for that matter do not have customers as defined by the tax code.”
When the Nigerian government suddenly banned access to foreign exchange for textile import companies in March 2019, Moses Awa* felt stuck. His business – importing woven shoes from Guangzhou, China, to sell in the northern city of Kano and his home state of Abia, further south – had been suffering along with the country’s economy. The ban threatened to tip it over the edge. “It was a serious crisis: I had to act fast,” Awa says.
He turned to his younger brother, Osy, who had begun trading bitcoins. “He was just accumulating, accumulating crypto, saying that at some point years down the line it could be a great investment. When the forex ban happened, he showed me how much I needed it, too. I could pay my suppliers in bitcoins if they accepted – and they did.”
According to bitcoin trading platform Paxful, Nigeria is now second only to the US for bitcoin trading. The dollar volume of crypto received by users in Nigeria in May was $2.4bn, up from $684m last December, according to blockchain research firm Chainalysis. And the true scale of crypto flows through Africa’s largest economy is likely to be much larger, with many trades untraceable by analysts.
An array of factors, from political repression to currency controls and rampant inflation, have fuelled the stunning rise of cryptocurrencies in Nigeria. In February, the government took fright and banned cryptocurrency transactions through licensed banks. In late July, it announced a pilot scheme for a new government-controlled digital currency – hoping to reduce incentives for those wanting to use unregulated crypto.
But these measures have done little to dampen trading, with exchanges reporting a continued rise in transactions this year.
Elsewhere, Egypt, Turkey and Ghana have sought to clamp down on crypto trading, wary of potentially vast movements of digital funds beyond their regulatory controls.
Nigeria has one of the youngest populations in the world and is ripe for digital finance. With many people looking for ways to escape widespread poverty, pyramid schemes are proliferating.
Trading in foreign currencies is an everyday activity for many. Remittances into Nigeria from those working abroad, which were worth more than $17bn in 2020, have played a role, as has the way digital currencies can provide insurance against exchange rate fluctuations. The value of the Nigerian naira has plummeted almost 30% against the dollar in the past five years.
There are political factors too. Some see cryptocurrencies as vital protection from government repression.
The clampdown was financial too. Civil society organisations, protest groups and individuals in favour of the demonstrations who were raising funds to free protesters or supply demonstrators with first aid and food had their bank accounts suddenly suspended.
Feminist Coalition, a collective of 13 young women founded during the demonstrations, came to national attention as they raised funds for protest groups and supported demonstration efforts. When the women’s accounts were also suspended, the group began taking bitcoin donations, eventually raising $150,000 for its fighting fund through cryptocurrency.
The sight of young people openly critical of government figures easily manoeuvring around restrictions shocked the country’s political class, according to Adewunmi Emoruwa, founder of Gatefield, a public policy organisation which gave grants to journalists covering the protests.
“I think that EndSars is like the key catalyst for some of these decisions the government is making,” he said. “It caused fear. They saw, for example, that people could decide to bypass government structures and institutions to mobilise. It sent shockwaves and those shockwaves have continued.”
The episode reinforced the need many Nigerians felt to insure themselves against sudden moves by the authorities. Many organisations now keep some of their finances in cryptocurrencies.
Speaking anonymously to avoid reprisals from the authorities, a leading figure in one civil society organisation, whose accounts were also briefly suspended last October, said digital currencies were now a key insurance against hostile interventions.
“We keep some securities in crypto – not too much but enough, sort of as an insurance policy,” they said. “When the ban happened we were, thankfully, able to pay salaries. This way, in a situation like that, we’ll have a way to keep paying our staff.”
In February, the Central Bank of Nigeria responded by telling banks to close the accounts of all customers using cryptocurrencies. Financial institutions would have to “identify persons and/or entities” making transactions in crypto or face sanctions.
The ban was at first a blow to an emerging industry of cryptocurrency brokers who relied on commercial banks to facilitate transactions between sellers and buyers. However, many customers found workarounds, said Marius Reitz, Africa general manager at Luno, a cryptocurrency trading platform.
“A lot of trading activity has now been pushed underground, which means many Nigerians are now depending on less secure, less transparent over-the-counter channels, as well as Telegram and WhatsApp groups, where people trade directly with each other,” Reitz said. The ban has made cryptocurrency trading harder to monitor and less safe. “This also means regulators now have a reduced level of visibility and control of the market, and unfortunately this can expose consumers to a higher risk of being defrauded.”
Platforms have also adjusted, by continuing to facilitate transactions as long as the currency being traded is not declared as a cryptocurrency.
While some platforms experienced a hit in trades, for others, the clampdown has increased demand for cryptocurrencies, not dampened it. In the first five months of 2021, according to Helsinki-based platform LocalBitcoins, Nigerians traded 50% more than in the same period last year.
The Nigerian government’s response to cryptocurrencies has in fact been inconsistent. Announcing the February curbs, the governor of the central bank, Godwin Emefiele, told a senate committee that cryptocurrency was “not legitimate money”.
At the same time, Vice-President Yemi Osinbajo publicly rebuked the move. “Rather than adopt a policy that prohibits cryptocurrency operations in the Nigerian banking sector, we must act with knowledge and not fear,” he said, calling for a “robust regulatory regime that is thoughtful and knowledge-based”.
Another Nigerian government agency, the Securities and Exchange Commission, has been more open to creating a more regulated environment for cryptocurrency transactions.
The reality that cryptocurrencies cannot effectively be stopped had gradually dawned on the government, said the operator of one Nigerian crypto trading platform, speaking anonymously after having been targeted by the authorities. “They know they can’t really stop it. It’s out of their control, and what scares them is they are not used to being in this position.”
* Not his real surname
Bitcoin: the pros and cons
Bitcoin was the first cryptocurrency, created in 2009, and remains the most widely known and valuable. It’s a digital or virtual asset, operating outside of the traditional banking system, and its influence has soared, with a growing number of companies now accepting it for payments.
Each bitcoin is essentially a digital token containing a secret key that proves to anyone in the network who it belongs to. Effectively, each bitcoin is a collective agreement of every other computer on the bitcoin network that the token is real, created by a bitcoin “miner”, and then acquired through a series of legitimate transactions.
Each time bitcoins are spent, it becomes known to the entire network that their ownership has been transferred. Every transaction is stored in a lasting public record called a blockchain, which underpins the entire system, making it possible to trace a coin’s history and preventing people from spending coins they do not own.
For bitcoin’s many advocates, there are several advantages to the virtual system – from the way the blockchain can be used to track things other than simple money, to support for “smart contracts”, which execute automatically when certain conditions are met.
But bitcoin’s biggest advantage is that it is decentralised and so extremely resistant to censorship or regulatory control by a single entity. It’s possible to observe a bitcoin payment in process, but no one can stop it. This has made governments wary: in a conventional financial system, banks can freeze accounts, vet payments for money laundering or enforce regulations.
Thanks to the decentralised nature of cryptocurrency networks, people have been able to make international payments from closed or tightly restricted economies, but this has also made them a haven for illegal activities, from cybercrime to money laundering and drug trading.
Another concern about bitcoins is that they damage the environment. Bitcoin mining – the process in which a bitcoin is awarded to a computer that solves a complex series of algorithms – consumes vast amounts of energy. Miners set up large computer rigs to maximise the chances of being awarded bitcoins. The carbon footprint of this “mining” is now similar to Chile’s, according to the Cambridge Bitcoin Electricity Consumption Index, a tool from Cambridge University that measures the currency’s energy usage.
Advocates of bitcoin say the mining is increasingly being done with electricity from renewable sources. And while the amount of energy consumed by bitcoin has dropped significantly this year, concerns remain. Environmentalists argue that miners tend to set up wherever electricity is cheapest, which may be in places with coal-generated power.