The US Infrastructure Bill will hit businesses and investors who have embraced cryptocurrency. The Act requires crypto exchanges to notify the IRS directly of crypto transactions or face civil and criminal penalties for failing to do so.
It broadly defines a digital asset as, “Except as otherwise provided by Secretary, the term “digital asset means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” This definition could encompass a broad range of digital assets, including traditional cryptocurrencies and even non-fungible tokens (NFTs).
Experts believe that this could have unintended consequences for the cryptocurrency industry. It could push crypto transactions towards unregulated services and private wallet transactions. According to Gibson Dunn, it will be critical for stakeholders in the cryptocurrency ecosystem to advocate for regulators to adhere to the traditional narrow scope of the cash-reporting requirement. In addition, legislators and regulators need to be made aware of the privacy and democratic values served by peer-to-peer blockchain technologies.
The Act could put cryptocurrency at a fundamental disadvantage relative to other forms of traceable currency that have not been subject to cash reporting requirements. Crypto analysts believe it could alienate privacy-conscious customers or those who have embraced the simplicity and agency inherent in managing transactions directly from the digital wallet.
An unprecedented application of cash reporting requirements to cryptocurrency transactions could push digital asset consumers away from the industry participants operating in the US, they said. Furthermore, the global regulatory system could be driven towards a rapidly expanding market of unencumbered alternatives.
Gibson Dun says if the Act is interpreted to apply to certain participants in decentralized finance (DeFi) transactions, it could pose as an existential threat. But at present, it is unclear.