Bitcoin enthusiasts struck it rich this year as the cryptocurrency surged. Now they’re preparing for battle in Washington to protect their industry’s ascent.
Advocacy groups are gearing up in Washington for a lobbying push in 2018, looking to limit legislation that would subject cryptocurrencies to more regulation and change tax-reporting requirements. Organizations such as the Chamber of Digital Commerce, Coin Center Inc. and the Bitcoin Foundation say they’re concerned about stifling innovation.
Their top targets include a Senate bill that would include digital currency in an update of money-laundering laws, requiring more entities to police potentially illicit transactions. Some advocates are also backing a House bill that would exempt crypto transactions of up to $600 from capital-gains tax reporting.
The lobbying comes after bitcoin skyrocketed past $17,000 this year and debuted on Wall Street with a new breed of futures contracts. While many in the financial industry predict it’s just a matter of time until regulators subject cryptocurrencies to stiffer regulation, proponents argue that over-regulation would be akin to impeding the rise of the internet.
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“This technological innovation must be allowed to develop, be rolled out and tested in real environments without material interference or overburdening regulations, especially at the initial stages of its adoption,” Llew Claasen, executive director of the Bitcoin Foundation, a non-profit advocacy group, wrote in a Nov. 30 letter to the Senate Judiciary Committee.
The committee is considering anti-money laundering legislation that would deploy new tools and close loopholes to undercut terrorism financing, counterfeiting and other criminal activity, Chairman Chuck Grassley, an Iowa Republican, said in a prepared statement for a Nov. 28 hearing.
The bill includes a section that would expand the definition of “financial institution” to include an issuer, redeemer or cashier of “digital currency” and “any digital exchanger or tumbler of digital currency.” That would require bitcoin handlers to report suspicious transactions and shoulder the same anti-money laundering obligations that banks have as law enforcers raise concerns about digital currencies being used in illegal activity.
Compliance Burden
The Bitcoin Foundation is pressing the committee to remove the section on cryptocurrencies from the Senate bill or limit the language to digital currency exchanges. Applying the provisions to issuers of digital currency is misguided and the burden of compliance would be greater than the benefit from developing the technology in the U.S., the foundation said.
Coin Center, a non-profit research and advocacy organization in Washington, has met with members of Congress and their staff about the bill to argue that while the policy goals make sense, the language as drafted isn’t needed, said Peter Van Valkenburgh, director of research. The Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, which tracks illicit payments, issued adequate guidance in 2013 for people using virtual currencies. The language should either be removed or the FinCEN guidance incorporated, he said.
The Chamber of Digital Commerce, a Washington-based trade association comprised of more than 130 companies representing the digital asset and blockchain industry, agrees the language is unnecessary. It’s also sent a statement to the committee and met with staff, said Amy Kim, the chamber’s global policy director and general counsel.
Technical Assistance
A spokesman for Grassley didn’t respond to email and telephone requests for comment about the concerns. Ashley Schapitl, a spokeswoman for Dianne Feinstein of California, the top Democrat on the committee, said the senator is working with the Justice and Treasury departments to get technical assistance as the bill moves forward.
While some people may have concerns there’s not enough regulation, it’s less of an issue in the U.S. than in other jurisdictions, said Yaya Fanusie, director of analysis for the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies in Washington.
The best thing lawmakers can do is consult the cryptocurrency industry when drafting new legislation or regulation to better understand it, and to be very clear about what definitions are used, Fanusie said.
“You have to be very precise because we’re talking about a new industry and new terminology,” he said.
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A bipartisan bill introduced in September, the Cryptocurrency Tax Fairness Act of 2017, is also needed to bolster consumer confidence, said Representative Jared Polis, a Democrat from Colorado and a co-sponsor of the measure with Arizona Republican David Schweikert. The bill would exempt all transactions up to $600 from tax reporting.
Polis said the measure is designed to remove an impediment from using digital currency for daily commerce.
“Clearly, there needs to be a more formal safe harbor if we ever expect widespread use,” Polis said. He tried, unsuccessfully, to get the bill included as an amendment in the House tax measure.
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The IRS classified digital currency as property in 2014, meaning transactions are subject to capital gains tax. Using bitcoin or other virtual currency to purchase goods and services is considered exchanging property, and all the transactions must be tracked for gains and losses, said Bryan Skarlatos, a tax attorney at Kostelanetz & Fink LLP who has lectured and written about bitcoin.
Setting a $600 exemption would not affect people buying or selling digital currency for investment purposes, which accounts for the overwhelming majority of bitcoin traffic, Skarlatos said. But it’s needed to avoid having reporting requirements be a regulatory drag, he said.
“You’re basically inviting people to become out of compliance with the law, and that’s never a good place to be,” he said.
