According to reports, the US government is proposing a law as part of its Infrastructure Bill that 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.”
Brokers Must Spy on Their Clients
In the US, brokers are required to fill in a form – 1099 – that reports all their client’s trades to the IRS. The form allows the IRS to cross-check what individual taxpayers report as their capital gains/losses for the year. It’s a form of spying.
IRS Wants Everyone in Crypto to Spy on Everyone in Crypto
So, this new definition would mean many people who are not in any way brokers and who are in no position to know their customers, (probably because they do not have customers in the traditional sense) are treated like a stockbroker for the purposes of their reporting obligations to the IRS. This is bad law but highlights four things.
Lesson 1: Hub-and Spoke Laws Must Manufacture Hubs
First, this is the hub-and-spoke world clashing with the p2p world. In my submission to the Australian Senate about making Australia a destination jurisdiction for digital assets I highlighted the problem that our laws were drafted on the assumption there were “hubs” that could be regulated and deputised to police the “spokes”.
Unable to police its own laws, the IRS co-opts brokers to perform unpaid surveillance. This is baked into both the law and their budgets. The IRS needs to manufacture a middleman because it lacks the ability, resources, and vision to police the p2p world. It is a mindset not easily changed.
Lesson 2: Text-based Laws are Flexible but Ambiguous
Second, the “pen paper people” platform on which our justice system runs is incredibly flexible but ambiguous. With the stroke of a pen, vast sets of rights and obligations are changed. But what do the words mean? What does “(for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets” actually mean?Despite best efforts these uncertainties are not often addressed partly because they are deliberate.
I’ve been part of the process of drafting major legislation. I’ve seen first-hand the compromises that go into the language of a Bill. To placate stakeholders and get the Bill passed, imprecise language is used. The “can is kicked down the road” to the Courts. That uncertainty has costs that are almost always borne by the citizens, not the state. Oh, for the imperfect-but-certain outcomes of smart contracts!
Lesson 3: Singapore Wins Again
Third, jurisdictions that do not have these complicated, “hub-and-spoke” dependent, laws in the first place are at distinct advantage in this new p2p world. Singapore, for example, has neither GST nor CGT. It has generous income tax free thresholds. It is no mystery why it is one of the most attractive jurisdictions for blockchain projects. It can afford to be. It can embrace this p2p world because its existing revenue base does not depend on the existence of hubs.
Lesson 4: Protecting the Old vs Embracing the New
Finally, talk of how p2p systems help people avoid their obligations obscures the necessary conversation about whether the old hub-and-spoke way of doing things should be changed. If stocks were traded on public blockchains the IRS wouldn’t need to co-opt brokers for surveillance. It could just trawl the block explorer. Instead of artificially creating middlemen in blockchain ecosystems, why not look at removing middlemen from legacy systems? Think of the savings…