August 4, 2023

Good morning and happy first full week of August recess.

Top Points

• Senators Elizabeth Warren (D-MA), Roger Marshall (R-KS) reintroduce the Digital Asset Anti-Money Laundering Act with two new sponsors from last year: Joe Manchin (D-WV) and Lindsey Graham (R-SC).
• Senators Elizabeth Warren (D-MA), Bob Casey (D-PA), Richard Blumenthal (D-CT), and Bernie Sanders (I-VT) send letter to heads of Treasury and IRS, urging them to quickly implement strong tax reporting rules for crypto brokers.
• Leaders of the House Energy and Commerce ("E&C") Subcommittee on Innovation, Data, and Commerce send letter to Apple CEO, Tim Cook, asking for clarification of the App Store's guidelines and whether they are limiting emerging technologies like blockchains and NFTs.

Digital Asset Anti-Money Laundering Act

On Friday, Senators Elizabeth Warren (D-MA), Roger Marshall (R-KS), Joe Manchin (D-WV), and Lindsey Graham (R-SC) introduced the Digital Asset Anti-Money Launder Act of 2023 ("DAAMLA").

DAAMLA Text.

Background

The Bank Secrecy Act ("BSA") aims to combat illicit finance by directing financial institutions to develop anti-money laundering programs, collect information on customers and certain cash transactions over $10,000, report suspicious activities, and more.

Financial institution under the BSA is defined broadly to include banks, credit unions, brokers and dealers, currency exchanges, and money transmitters. 31 U.S.C. 5312.

The Bill

DAAMLA would expand the BSA's definition of financial institutions to encompass:

• unhosted wallet providers, miners, validators, and "any other person facilitating or providing services related to the exchange, sale, custody, or lending of digital assets that the Secretary shall prescribe by regulation." DAMLA § 3.

As a result, all persons fitting under this expanded definition would become subject to the BSA's anti-money laundering requirements.

In addition, DAAMLA would:

• Direct FinCEN to finalize a proposed rule requiring banks and money service businesses to verify customer IDs and report crypto transactions involving self-hosted wallets. § 3(b).
• Direct Treasury to issue rules requiring financial institutions to mitigate risks posed by privacy-enhancing digital assets and transactions involving privacy-enhancing technologies, like mixers. § 3(e).
• Direct Treasury, the SEC, and the CFTC to examine the adequacy of, and firms' compliance with, AML and countering-the-financing-of terrorism programs with respect to crypto transactions. § 4.
  • Note: A slimmed down version of this section (applies only to Treasury) was included in a Lummis-Gillibrand amendment attached to the Senate-passed NDAA.
• Direct FinCEN to require crypto kiosk owners and operators to verify customer IDs via a government-issued ID and collect the names and addresses of transaction counterparties. § 5.
• Direct the DEA to issue recommendations on how to reduce drug trafficking and money laundering involving crypto kiosks. § 5(c)(2).

How does it differ from last year?

So What?

The bill is unlikely to pass, but shows there are at least a few Senators on both sides of the aisle who view crypto more as a tool for illicit finance than a beneficial technology.

Democrat Senators Send Letter to IRS re Digital Asset Tax Rules

On Tuesday, August 1, Senators Elizabeth Warren (D-MA), Bob Casey (D-PA), Richard Blumenthal (D-CT), and Bernie Sanders (I-VT) sent a letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel, urging them to write strong implementation rules for new crypto broker reporting requirements included in the 2021 infrastructure bill.

Letter here.

Background

The Infrastructure Investment and Jobs Act (IIJA) included new reporting requirements for digital asset brokers. See IIJA § 80603.

The IIJA defined a digital asset broker broadly such that it could be interpreted to include third-party service providers, such as miners and wallet providers.

• See IIJA § 80603(a) (adding to the definition of broker under 26 USC § 6045: "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person").

The IIJA also left room for the Treasury Secretary to determine the "form" of reports digital asset brokers must file and to modify the definition of "digital asset" included in the act. IIJA § 80603(b),(d).

January 1, 2024 is the effective date for the reporting requirements to kick in. IIJA § 80603 (c).

However, Treasury has yet to propose implementation rules for the new reporting requirements. Further, a proposed rule is generally just the first step in the rulemaking process, followed by a notice-and-public comment period, and then issuance of a final rule (though proposed rules may also be withdrawn).

(More background on federal rulemaking process here).

The Letter

In their letter, the Senators urge Secretary Yellen and Commissioner Werfel to "act swiftly to implement strong tax reporting rules for cryptocurrency brokers." Letter at 1.

According to the Senators, strong rules are necessary to avoid Treasury losing roughly $1.5 billion in tax revenue per year, make it easier for the IRS to "go after large-scale tax cheats," and ensure all crypto users "pay their fair share." Letter at 2-3.

To this end, the letter directs several questions to the Treasury Secretary and IRS Commissioner asking when and how they intend to issue rules and implement the IIJA's digital asset broker reporting requirements. Letter at 3-4.

Related Legislation

While there's broad recognition the law, as currently written, is unclear, legislative proposals introduced so far have focused on narrowing and delaying the IIJA's new reporting requirements by amending the statute.

Here are quick summaries of two bipartisan bills addressing the IIJA's broker reporting requirements and one by Senator Ted Cruz (R-TX) to repeal them entirely.

• ​Keep Innovation in America Act ("KIIA") (Bipartisan)
  • Narrows definition of broker, narrows scope of information that must be reported, and delays effective date of reporting requirements to January 1, 2026.
    • Amended digital asset broker definition would read: "any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers."
  • Sponsors: Reps. Patrick McHenry (R-NC), Ritchie Torres (D-NY), Warren Davidson (R-OH), Ro Khanna (D-CA), Tom Emmer (R-MN), Eric Swalwell (D-CA), David Schweikert (R-AZ), Darren Soto (D-FL), French Hill (R-AR), Byron Donalds (R-FL), Erin Houchin (R-IN), Wiley Nickel (D-NC).
• ​Lummis-Gillibrand RFIA § 802​
  • Similar to the KIIA, narrows definition of broker, narrows scope of information that must be reported, and delays effective date of new broker definition to January 1, 2026.
    • Amended digital asset broker definition would read: "any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of crypto assets at the direction of their customers."
  • Sponsors: Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY).
• ​S. 695, a bill to repeal the provisions of the IIJA that impose new information reporting requirements with respect to digital asset transfers.
  • Repeals IIJA § 80603 in its entirety.
  • Sponsor: Senator Ted Cruz (R-TX).

Quick Hits

Commerce Committee Leaders Send Letter to Apple re Blockchains and NFTs

• The Chairman (Rep. Gus Bilirakis (R-FL)) and Ranking Member (Rep. Jan Schakowsky (D-IL)) of the House E&C Subcommittee on Innovation, Data, and Commerce sent a letter to Apple CEO, Tim Cook, regarding the App Store's policies and whether they are limiting innovative potential of blockchains and NFTs.

• ​Letter.

SEC v. Terraform Labs Pte. Ltd.

• SDNY Court denied Terraform Labs' Motion to Dismiss ("MTD"), finding, among other items, the SEC adequately pled that UST and LUNA qualified as securities.
  • But see Opinion at 33:
    • "Much as the orange groves in Howey would not be considered securities if they were sold apart from the cultivator's promise to share any profits derived by their cultivation, the term 'security' also cannot be used to describe any crypto-assets that were not somehow intermingled with other investment 'protocols,' did not confer a 'right to purchase' another security, or were otherwise not tied to the growth of the Terraform blockchain ecosystem." (emphasis added).
  • Judge Rakoff rejected Judge Torres' approach in SEC v. Ripple of distinguishing between crypto asset sales made directly to institutional investors and crypto asset sales occurring on exchanges where they buyer doesn't know who the seller is.
    • "[T]he Court declines to draw a distinction between these coins based on their manner of sale such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not." Opinion at 40.
  • Judge Rakoff rejected Terra's major questions doctrine and fair notice defenses.
  • ​Opinion.
  • Insightful thread by Ji Kim of the Crypto Council for Innovation 👇

More Crypto Tax News

• IRS says digital asset staking rewards are taxable when received.
  • ​IRS Rev. Rul. 2023-14​
  • Note: Section 808 of Lummis-Gillibrand would clarify that mining and staking income would not be taxed until the recipient sells or disposes of the asset.
  • Helpful thread 👇

Opinion

• Pass the Stablecoin Bill Now
  • ​Op-Ed in CoinDesk (Austin Campbell).

Event Recaps

• Rep. Mike Flood (R-NE) hosts "Flyover Fintech" in Lincoln, NE
  • ​Recap (Blockchain Tipsheet).
• "FOUND3R Town Hall in New York Has a Simple Message: Web3 Is Only Getting Started"
  • ​Story (Amanda Smith; Decential).

NEW to CHC+

• Recently added:
  • Side x side comparison of key provisions in the FIT for the 21st Century Act and the Lummis-Gillibrand Responsible Financial Innovation Act.
  • CHC+ Members check it out here.
• Not yet a member? Sign up here.
  • Use code "TRYCHC+" to access CHC+ content free for one month.

Look Ahead

• House returns to session on September 12.
• Senate returns to session on September 5.

Use Case of the Week

ChangeDAO's "Awaken Your Inner Child" project supports Upbring's Crypto Endowment Fund for Better Childhoods and builds community around the cause of child welfare using art, storytelling, and blockchain technology.

More here.

Trivia

Last Week:

• Q: What former Senator from Indiana championed establishing an August recess as a way to modernize Congress, allow lawmakers to plan family vacations, and reconnect with their constituents back home? Hint: His efforts ultimately culminated in the Legislative Reorganization Act of 1970 which mandated an official August recess period.
• A: Senator Gale McGee.

This Week's Q:

• What official sponsor of the FIFA Women's World Cup 2023 has partnered with over 65+ crypto wallet providers to expand its payments network?

Thank you for reading and please enjoy your weekend.

Sincerely,

GSL

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