WBD408 Audio Transcription
Hidden Danger in the Infrastructure Bill with Abraham Sutherland & Greg Xethalis
Interview date: Monday 11th October
Note: the following is a transcription of my interview with Abraham Sutherland & Greg Xethalis. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to independent lawyer Abe Sutherland and Greg Xethalis, General Counsel and Chief Compliance Officer at Multicoin Capital, to discuss the onerous new reporting requirements hidden within the Infrastructure Bill.
“This is an amendment to the tax code but it’s really a new criminal prohibition on peer-to-peer transfers and it’s been overlooked.”
— Abraham Sutherland
Interview Transcription
Peter McCormack: Good morning, Abe, good morning, Greg, how are you both?
Greg Xethalis: Great, doing well.
Peter McCormack: All right, so we met yesterday at Unchained and we were talking about the Infrastructure Bill, so we're doing a -- so everyone knows, this is a last-minute-organised interview, but the Infrastructure Bill's on everyone's mind, because it includes crypto provisions. I'm a bitcoiner, so I obviously care about it, but there are two specific provisions in there that you've been focused on, but everyone's focused in on one and you think there's another one people aren't thinking about, or where the consequences are.
So, before we get into it, can you just introduce yourself? Start with you, Abe, so people know who we're talking to.
Abraham Sutherland: Sure, I'm Abe Sutherland and I'm a lawyer. I work independently. I've written a report on this issue for the Proof of Stake Alliance and trying to draw attention to very serious tax and policy issues relating to crypto.
Peter McCormack: All right, Greg?
Greg Xethalis: My name's Greg Xethalis, I'm the General Counsel at Multicoin Capital Management, also recently in private practice have represented folks in the crypto space since the end of 2012, and also a board member at the Association of Digital Asset Markets.
Peter McCormack: I'm sorry you're sharing a mic! I've only travelled with two, so we're just going to have to make this work. Okay, Abe, let's talk about the Infrastructure Bill, let's just get straight into it. What is it that you were telling me about yesterday?
Abraham Sutherland: Okay. There's this broker provision that's gotten all the attention. That's it, we're not going to talk about that one anymore. We're talking about the other provision, it's called 6050I. This is an amendment to the tax code, but it's really a new criminal prohibition on peer-to-peer transfers, and it's been overlooked until now and we're trying to get attention to it, because of the nature of the statute that it's amending. This is using an old statute relating to face-to-face transfers of physical cash and it's adding digital assets to it.
This old statute is such a mismatch to this new technology that it makes it difficult to see the implications here. But what it does, it puts an obligation on recipients of digital assets to report, to verify the identity, social security number, of others and report it quickly to the IRS. And, unique among reporting statutes, this is a felony. So, in reality, this is in the tax code, but what we're talking about here is a criminal statute.
Reporting statutes generally deal with intermediaries, people reporting tax relevant information to the IRS. This one's totally different. This applies to end users, recipients of digital assets, and also the people who send the assets to them in ways that I will explain shortly. It's also unique, because unlike all other provisions, this creates felony liability; that means up to five years in prison for violations.
Peter McCormack: Why do you think people have missed this?
Greg Xethalis: So, it's funny that I think it's not an area that most people deal with on a regular basis. Abe and I have talked about this quite a bit, and when I first read the bill, I thought this was inconvenient, but assumed that it wouldn't penetrate transactions on digital asset networks the way that it does. But it also goes to one of the overarching problems here, which Abe identified, which is if you're looking at appropriate parties to be regulated, whether it's on the tax side or on other sides, you do want to focus on people who are equipped to fulfil a regulator role, not just people who are capable of being regulated, but people who are equipped to it.
6050I creates an enormous problem in that it creates obligations, as regulated parties, with material criminal liability for failure on the average everyday person who is not equipped to fulfil that function. We're not, as regular people walking around, in a good place to capture the PII, the Personally Identifiable Information of other parties, store that for, how many years, Abe?
Abraham Sutherland: Five.
Greg Xethalis: Five years, report it to the IRS, then figure out everyone you transacted with and send them a year-end statement. It's really problematic and I think one of the reasons why it hasn't drawn as much attention is quite simply, it was easier for most people to identify the top-line issues with 6045, with the broker definition; to identify the top-line issues on the digital asset definition. Those were things that were easy to get your head around. And it was also the time pressure of the Infrastructure Bill.
Abraham Sutherland: As we looked for this, we start with the first people to blame, which is Congress. This is an Infrastructure Bill, this was put in there as a pay-for provision to justify this. And we're going to talk more about why this is not a tax act really, but it had no named sponsors, no discussion, no committee reports, no analysis of its consequences, no discussion whatsoever. In fact, we don't even know the justification for it. So, without that being flagged, that was the first problem.
Peter McCormack: Are you referring to this individual provision?
Abraham Sutherland: Yeah.
Peter McCormack: Okay.
Abraham Sutherland: So, this amendment to tax code, section 6050I, along with that amendment to tax code 6045 and 6045A were put in there. There's a one-line CBO report saying, "This is going to add, over ten years, some dollars", and we can come back to that and why that's highly questionable, especially with regard to this, because it's not really a tax provision, it's a criminal provision. But there was no presentation of it. In the first analysis, that's no way to create new criminal offences in our system in this spending bill.
Peter McCormack: Well, I was trying to think through it last night and two things came to mind. Firstly, if you can report on this, it's onerous and difficult. But actually, there are some complexities with this where it's actually unworkable. So, for example, with Bitcoin, I can, if I know an address of yours, if it's public, I can send you Bitcoin without you requesting it, and therefore you've received something and you don't know who it's from. So, it's actually unworkable in certain scenarios.
Abraham Sutherland: Absolutely. And think back to the other provision. People said, "Hey, this could be impossible to reply to this, depending on how the Treasury Department interprets it and applies it". All of those problems are in this, but more so, again because it applies to everybody, so everybody's potentially at…
So, yeah, the reporting part, remember this statute presumes absolutely that there's this in-person transaction with physical objects, and your obligation then is to inspect their ID, to get their social security number, ask them their occupation, and write down the nature of the transaction, look up IRS Form 8300, everybody should look it up, fill out this form, it takes 20 minutes, mail it to the IRS within 15 days.
This statute only makes sense in the context of a face-to-face transaction and it obligates that type of verification. So, number one, somebody who's not in front of you. Number two, what about receipts that don't come from a person, an identifiable person with a social security number?
Peter McCormack: So, okay, let's take this back a step. The original provision for face-to-face, is it above a certain amount; is it above $10,000?
Abraham Sutherland: Right, there's a threshold, there are some important caveats, which also explain why it was overlooked; it doesn't look big here. So, you want me to dig into this stuff?
Awareness of the statute
Peter McCormack: Well, the question I want to ask you, is this common knowledge as a US citizen? I'm not a US citizen. If I lived here, would it be common knowledge, like if I was going to give Jeremy over there $15,000, I would know I would have to collect this information?
Greg Xethalis: Maybe I speak from the wrong position, because lawyers may not be the most common parties. But weirdly enough, the people who been most prosecuted for violating the $10,000 tax reporting are actually practising attorneys, for whatever reason. I think there's some understanding, particular among people in the crypto community, there's an understanding of currency transaction reports, suspicious activity reports, because we've grown up -- particularly bitcoiners, the focus of regulation from 2012 to 2013, when it first started.
When it first started, it was FinCEN, it was the May 2013 report. That was the first guidance followed by the IRS in 2014. So, we started looking at this industry from a money services perspective, people who were registering with Financial Crimes Enforcement Network, people who were making, and when I say "people" here, I mean these institutions making reports on transactions that either have suspicious nature, or are over $3,000 in value.
Abraham Sutherland: I would say a lot of people don't. Part of this has to do with the limitation and part of it already has to do with selective enforcement and how it's been interpreted. This is for car dealerships, lawyers, businesses that take in this revenue; and if you're in that industry, yes, you know about it, because the IRS agents are checking on you and they may come in and do an 83 audit, or whatever.
The main limitation is, the cash, or pretty soon digital assets, have to be received in the course of your "trade or business". That's been interpreted pretty narrowly to make it manageable, right. So, if you're a car dealership, coin dealer, something like that.
Peter McCormack: But it's not just a provision for business, is it; it is for citizen to citizen as well?
Abraham Sutherland: If it's received in the course of your trade or business.
Peter McCormack: Oh, so it's only a business provision?
Abraham Sutherland: Yeah, but there's an important twist here. So, the first thing is, trade or business is not a clear thing. You can be an individual, you don't have to have an LLC, your activity can be a trade or business. Secondly, the impact of this and also the felony liability also does fall on anybody working with a business.
So, just to give one example, I pay you $10,000 in Bitcoin for any reason in your trade or business. You say, "Hey, thank you. Now, I need to fill out this Form 8300, give me your social security number, a photocopy of your passport, your occupation, and whatever other information Secretary Yellen might require". I say no. You say, "No, I need it to comply with this law", I say, "No way, I'm not giving that to you. That's my private information". That's a felony on me.
Peter McCormack: So, it's quite interesting, because I deal a lot with US companies, and I do have to fill in these forms. When I submit a first invoice, they send me the form to fill in. Most of it doesn't make sense, but it feels like a document to identify who I am.
Greg Xethalis: A W-9?
Peter McCormack: Yeah, is that what it is?
Abraham Sutherland: Yeah, that's something else.
Greg Xethalis: That's a different world.
Peter McCormack: How much stuff is there?! It feels like there's so much bureaucracy and I wonder how effective these things actually are?
Greg Xethalis: Well, we actually have something called the Paperwork Reduction Act and it didn't work well enough.
Peter McCormack: Right, okay. Because, it creates a lot of bureaucracy, a lot of reporting requirements to try and track criminals, but in the end criminals will always find a way to route around these things anyway. So it's just, I wonder how much damage these kinds of provisions are doing? But anyway, let's go on. So, it feels like we're lucky we've got Abe looking into this, because nobody else was.
Greg Xethalis: Very.
Peter McCormack: It was going to slip through. Abe, is this malicious, or incompetence?
Abraham Sutherland: You don't want to speculate too much on motivations of individual senators putting this into the bill, right. But that's one of the problems; there's no justification, there's no explanation, there's no description of the evil that this is trying to address, so it makes it really difficult to do that.
Look, if all that matters to you is tax collection and privacy considerations don't matter, and if you're not familiar with what digital assets, as they call it, technology means, you can see how they look at this. Because basically right now, we have an existing system of surveillance under the Bank Secrecy Act and the tax code which means that generally speaking, large transfers, the government has eyes on them, right.
The one exception in principle is peer-to-peer stuff. Number one example of that, of course, is cash. Now, we have this 1984 statute, which kind of clamped down on that and said, "Hey, if there are peer-to-peer transfers of cash, we're going to catch some of that". If that's your world view, you look at a Bitcoin and you say, "Well, the only thing I notice about that is Abe might send that to Peter and the government might not hear about it, and that might lead to crime, might lead to underreporting of incomes". So, that's the best-case scenario for how you look at this.
But the reality is, this technology is not a substitute simply for cash; it's a substitute for everything else that's done with value and so many other things. What this does is say, in this example, it eliminates the peer-to-peer element and any cover transaction, because you've got this additional requirement to verify and directly report. I don't want to focus on the legal infirmities of this, but highly constitutionally suspect under the Fourth Amendment --
Peter McCormack: The Fourth Amendment being -- there was a specific case regarding this, wasn't there?
Abraham Sutherland: Not on this issue.
Peter McCormack: No, but I'm trying to remember. You'll have to remind me what the Fourth Amendment is. The first and second are easy to remember!
Abraham Sutherland: Security and privacy means it prohibits unreasonable searches and seizures.
Peter McCormack: Oh, searches and seizes, okay. I think, was that the one that came up with regard to Ross Ulbricht's case, I think?
Abraham Sutherland: I can't say.
Peter McCormack: Yeah, I think it was. I'd have to double-check, but we'll put it in the show notes. But I'm often hearing about things that the federal government does that are unconstitutional and they seem to pass.
Abraham Sutherland: Yeah, we don't want to lead with that. We're working on it, great work by Coin Center and Peter Van Valkenburgh fleshing that out. The first thing is to get people to understand what this does and what it could do, right. One of the problems with this type of regulation, the statute's really short. The existing regulations are long and the regulations the Treasury's going to come up with to try to make this work, because the language of the statute doesn't work with digital assets, that's a big question mark. So, we have to work with what we know now, and there's a lot of uncertainty with that.
But under the statute itself, we can say, "This is what must happen, this is how the Feds must enforce it, this is what it does prohibit on the face of the statute", and we can identify these problems. But what we have to do is elaborate how these elements of this statute, which once again apply to physical objects, might, in some cases must, but also might apply to digital assets; and that's the bigger picture of why this has been slow to catch on, because that's complicated. So, at some point, I want to run through these elements.
Peter McCormack: Let's do it, let's run through it.
Abraham Sutherland: Okay. So, the way I look at it, there's five pieces to this statute, five things that need to happen and if those things happen, under the current rules, you have 15 days to report the information about the transaction, description of the transaction, nature of the transaction, details about the cash or digital assets received, the other party's social security number, address and other information. So, now we're going to back up and say, "When does this get triggered?" so that this obligation under the statute happens; there's five pieces.
The first is a receipt. This is really important. Remember, this is in the tax code, but this has nothing to do with taxable income. It's not about what your tax duty might be, it's not even about revenue; it's about a receipt, so it's explicit in the regulations. This could be custody, right. I hand you something, you're holding it, it's not yours; you might have to report that.
Peter McCormack: So, we're in Unchained Capital, they manage multisig wallets --
Abraham Sutherland: Multisigs, beautiful. What happens when you have a receipt, a 2-of-3 receipt with three different parties; who's got to report it? Who might be committing a felony if they don't report it? Now, there's a big complication here, which is element five when we come to the exemptions, so I'm going to elaborate on that. But you have the nature of a receipt and as you mentioned before, the first one is, it's not a face-to-face transaction. Somebody might send me Bitcoin to an address. Probably I've received it, even if I don't know it's there. I can't stop it; I can't make a condition necessarily of inspecting their driver licence before they send it.
Greg Xethalis: The best example of that is the Buy Bitcoin guy behind Janet Yellen putting up a UPC code, or the guy going on college game day getting $30,000 worth of Bitcoin because he held a UPC code. How's he going to comply with something like this? He's not.
Peter McCormack: Yeah, he can't; it's impossible.
Abraham Sutherland: So, the first element is just a receipt. Again, it doesn't have to be taxable income, and that's important, because what they're really trying to do here is discourage, originally, the use of cash, right, "Criminals use it, bad guys use it, we're going to smoke them out. Legitimate people can use banks, and now we've got something to go after the criminals who are using cash; stigmatise the use of cash and push people back into legacy financial institutions".
Why would you go through the hassle and risk of using cash? You've got to give up your private information to some other business you're dealing with; they've got the burden of complying with the statute, facing massive fines, or even prison for not doing it; why do it? Why not just go use a bank? Then, under the Bank Secrecy Act, we're going to come back to that, the government gets everything that they need.
Greg Xethalis: Abe, one point that I think is important and I know you know the answer to this, obviously the $10,000 number has been adjusted for inflation over the years, correct?
Abraham Sutherland: No! So, this magic $10,000 figure dates to 1970 with the Bank Secrecy Act.
Peter McCormack: Okay, so before I was born, okay.
Abraham Sutherland: And they said, when banks are inspected, it was just banks, "When you get $10,000 in cash, file a report, because there's bad stuff going on". That's about $65,000 in today's money.
Peter McCormack: Yeah, which is a sizeable amount of money. $10,000, these days, I might buy Jeremy's car off him for $10,000.
Abraham Sutherland: So, that hasn't changed. This statute came in in 1984; they used the $10,000 figure again. Now that would be, what, about $25,000. But let's focus on this, because this is the second element. The transaction has to be over $10,000. In cash, that's relatively straightforward, but there's a lot of grey areas, even with cash. So, related transactions count, and those can be over the course of a year, up to a year; payments on a single transaction count. I lend you $50,000; you pay me back $2,000 at these intervals. Every time we trip the $10,000, I've got 15 days to report you again.
Peter McCormack: Every ten?
Abraham Sutherland: Every ten.
Peter McCormack: Hold on. If you're using an exchange and you're a trader and you're putting money in, out constantly, because you're constantly maybe funding your account and then withdrawing, so every time?
Abraham Sutherland: Yeah, well we'll wait until we talk about the Bank Secrecy Act and the institutions, because this is the kicker, but it's the final point. This is where it gets complicated, but yeah. So, transaction with cash is relatively clear, but you can still get tripped up and, hey, they're not looking too closely.
But with digital assets, it's a lot different. So, people say, "Oh, we just won't do transactions over $10,000". No. Any transactions within 24 hours from the same party count, related ones over a longer period of time. So, if you're thinking about a business dealing with this restriction, what procedures are they going to have to put in place? Any transaction could end up being a reportable transaction, because it could add up over time, they could end up being related.
Peter McCormack: Streaming sats for podcasts?
Abraham Sutherland: Yeah.
Peter McCormack: How do you know which sats have come from which person and when you've triggered that $10,000? What about… Hold on, so it also has to be the value of the Bitcoin at the time in dollar terms?
Abraham Sutherland: Yeah.
Peter McCormack: But that changes all the time.
Abraham Sutherland: That's right. Let's say I lend you 10 Bitcoin and you pay me back at a certain rate. It's on me -- look, we're reading into the statute; remember, the statute doesn't make sense. But under the obvious reading of it, it's the valuation at the time received. So, yeah, you've got to keep track, and let's say every ten days, it adds to $10,000, it depends on the valuation over time.
We haven't even talked about weird things like NFTs, right. Digital assets, anything counts. How do you value something? Sometimes it's easy, sometimes it's not. But yes, let's say you pay me X Bitcoin per day. When that triggers the $10,000 completely depends on --
Peter McCormack: Well, there's an exchange rate for Bitcoin and NFT is a subjective value?
Abraham Sutherland: Yeah.
Peter McCormack: Okay! What other parts of this, because you said there were five?
Abraham Sutherland: Okay, so just to wrap up on transactions, so that's kind of open-ended and unclear in a way that really matters with digital assets, didn't matter as much with cash. It can add up in what counts as a related transaction, single transaction, and so on.
The next requirement is really important, and this is again one reason why people said, "Oh, no big deal", in the course of your trade or business, so the recipient. Now, this only applies to the recipient. The payer can commit a felony by not cooperating, but it's the recipient's duty to do this.
Peter McCormack: You can force someone to commit a felony?
Abraham Sutherland: Arguably, yeah.
Peter McCormack: And what's the general punishment for this type of felony?
Abraham Sutherland: Well, as I mentioned, all the reporting statutes under the tax codes, I mean in most cases, it's fines, etc. But all of them are misdemeanours, with the exception of this one, which is a felony, which means up to five years in prison. The fines are big. If it's a wilful violation, the minimum fine per form is $25,000. It can also be just forfeiture of the amount, "Oh, you didn't report that, then give me that".
Peter McCormack: Oh, is that like when someone goes on a plane with more than $10,000 and they don't declare it, and then they just take it from them?
Abraham Sutherland: Yeah, different statute, but the same idea. They can just say, "Oh, you're going to forfeit".
Peter McCormack: Because, I heard about some guy who went on a plane with, I can't remember, it was a while ago, like $60,000 or something and he didn't declare it, and they just took it. It's fucked! Okay, right, let's carry on.
Greg Xethalis: And there's a separate question on how you treat your Ledger or your Trezor when you're boarding the plane, but they have not applied. This statute does not apply the digital asset definition to that. That's a separate question, because you're bringing property into… yeah.
Peter McCormack: Well, you're not actually. You're bringing a device that accesses it.
Greg Xethalis: I agree with you 100%, but it's a subtlety that not everyone grasps.
Peter McCormack: Yeah, because otherwise, you can still have the private keys in your head. So, if you have it in your head, are you carrying it? Yeah, for another day! Okay.
Abraham Sutherland: The one element we've kind of glossed over, but just for one second, is the definition of digital assets, which was another issue that was discussed, how broad it is, in the Infrastructure Bill; but it means any form of digital value existing on distributed ledger technology.
Now we're going to get to the fun one. This is the final element. So, you've got these things, you've got a receipt; it may not be yours, but you've got it. It's over the threshold, or it might be, or it adds up to over the threshold. It's in the course of your trade or business, which could be anything; mining, staking could be business, lending can be a business. You don't have to have a business LLC to qualify here, and there's no good definition of this, right, it's all defined by the courts. It's regular gain-seeking activity over time, and it's defined by the Supreme Court and judicial decisions. Or, $10,000, and here's the kicker: unless a financial institution is already reporting that same transaction, okay. So, this exempts financial institutions and banks. They're not covered by this statute.
Peter McCormack: Because they've already got the Bank Secrecy Act?
Abraham Sutherland: Under the Bank Secrecy Act, they've got something else that's basically the same, a currency transaction report requirement. And if they're reporting it -- first of all, if they receive it, any financial institution never has to file a Form 8300. But other people who receive it don't have to report it if the other party is a financial institution and it's their job to report it.
Peter McCormack: Fine.
Abraham Sutherland: So, this is Bank Secrecy Act, this is the tax code and this is how they work together. The obvious intention of this and effect of this is to discourage the use of cash before, now the actual peer-to-peer use of digital assets, by encouraging you to go back and use a bank.
Peter McCormack: Oh, okay.
Abraham Sutherland: Why would I send you $10,000 in digital assets, where I've got to give you my social security number, do all this stuff which is totally incoherent and inconsistent with the nature of the technology, right, the reason we're excited about it?
Peter McCormack: So, if I was a suspicious person, I would wonder whether the banks have lobbyists who would be keen on such a provision; if I was a suspicious person?
Abraham Sutherland: I mean, yeah. At some point we've got to ask this. I don't think people have been paying attention to this. At some point, not yet, we've got to ask whether cryptocurrency organisations and exchanges are looking at this, because they're going to be exempt. There's an argument that this benefits them as well.
Cryptocurrency exchanges are money transmitters under federal law. That makes them a money service business. That means they're governed by the Bank Secrecy Act, and they are responsible for complying with the Bank Secrecy Act obligations. I'm going to go a level deeper; this gets complicated. Remember last fall, when Treasury floated some proposed new regulations under the Bank Secrecy Act?
Peter McCormack: I don't, but -- okay, yeah.
Abraham Sutherland: There was uproar, because only a couple of weeks was given and there was a suite of regulations. One of them was important. Under the Bank Secrecy Act, remember we're talking about 6050I; this is the tax code. But under the Bank Secrecy Act, there's this currency transaction report requirement, and one of the proposals there was to extend that definition of currency to include digital assets, to require financial institutions to report to FinCEN all of these transactions over $10,000 in digital currency, basically digital assets.
That proposal, there was uproar, it was pulled, it's pending now. That proposal's a big problem, I'm very concerned about it, but they at least went through the rule-making procedure, right. The people spoke up. In this case, the people didn't have a chance to speak up. It was sneaked in, there was no discussion, there was no invitation, there was no explanation of its consequences by its sponsors. That provision isn't in place yet. That provision, if and when it is in place, is going to be what requires the Coinbases and the Krakens of the world to report similar information to the Treasury Department when there's a transaction over $10,000 in digital assets.
Peter McCormack: Is that a concerning provision? I mean, we wouldn't want any of these ideally.
Greg Xethalis: It is, but it at least is imposed on the financial institution parties that have the possibility of developing a regulatory infrastructure to comply, as well as the -- this is apart from the financial privacy issues, which obviously are paramount. But there are also technical and security issues that come into play where, if you're a regulating centralised financial institution, like Coinbase or Paxos or Gemini, they have an infrastructure in place. They have systems that are designed to hold this type of personal customer information, they're regulated on a state level.
Peter McCormack: Honeypots.
Greg Xethalis: Exactly. But what you're creating when you start imposing those obligations on non-regulated parties is, do I want you to hold my personal identifiable information for five years?
Peter McCormack: Well, it's weaker security, honeypots.
Greg Xethalis: Yeah.
Peter McCormack: I mean, one of the biggest problems with this invasion of privacy is that we're all being constantly hacked and having our data stolen at the moment, and this is a real problem. The onerous KYC requirements, or data that people have to collect, has created honeypots that means everyone's had their data stolen.
Abraham Sutherland: And this applies to any person in a business. Last week I bought a car, and just to test this out, I paid in cash. This is the Form 8300 and what they collected from me. It's a car dealership, they're used to this. They file it, they mail it to the IRS, there's a way to do it online. At the end of the year, they're going to send me a statement, and then they're going to hold this in their files for five years. Any violation of that technically could be a felony.
This means that anybody receiving digital assets in the course of their trade or business are going to have this, or something like this. This is the existing regulation; it's all that we have to go off of. But your gardener, you have a contract for $10,000, paying in digital assets, they're in the role of collecting this personal information and storing it.
Peter McCormack: I mean, there's an awful lot of information that would be collected if they do this. I mean, the bureaucracy in this for what? All right, anyway, let's continue. So, have we covered all five points now?
Abraham Sutherland: Basically, I want to do a little bit more on the Bank Secrecy Act, right, and this is another reason why it's missed; it's complicated. We've got the tax code over here, we've got the Bank Secrecy Act over here, we've got regulations, which unfortunately are a little bit too invisible to the public; all the stuff going on with financial institutions. 1970, that meant a bank. Now, it means anybody who's involved in monetary instruments makes you a money transmitter and you've got these obligations.
I'm going to give one more point to illustrate how inappropriate it was to rush this through in a spending bill. These provisions under the Bank Secrecy Act that I've just mentioned, the new ones that will extend the CTR, the Currency Transaction Report, the Bank Secrecy Act obligations to report receipts and transfers of $10,000 in digital assets that only applies to financial institutions, those are not in place yet.
This one is being rushed through. If 6050I amendment becomes law, unless the Treasury doesn't catch up with that other one, you've got an absurd situation where you and I are subject to 6050I, but financial institutions are not subject to the same reporting requirement under the Bank Secrecy Act.
Greg Xethalis: Which suddenly means, when I withdraw digital assets from Coinbase, what happens?
Abraham Sutherland: This technically means that when you get digital assets from Coinbase, you have to comply with the reporting requirements.
Peter McCormack: So, I have to fill in a form for Coinbase?
Abraham Sutherland: Yeah.
Peter McCormack: This is fucking ludicrous! This is where I now start to think, I think sneaking it into the Infrastructure Bill sounds malicious, but this bit also then sounds incompetent.
Greg Xethalis: Well, it's also probably important to remember that the Infrastructure Bill had a lot of things that weren't read.
Peter McCormack: But are these bills used as opportunities to sneak things in generally?
Greg Xethalis: Well, you're going to have a lot of things that are gathered together without opportunity for review from the people who are actually legislating. This is problematic, because it's a new economy, it's a new technology. Developing the rules for this space is not easy, and there are people who are trying to responsibly create rules, regulations, legislation around the digital asset space that would promote responsible innovation here; there are a lot of them. But they're not the ones with the pen on this, and it's reflective of a problem that you can't rush things that could stifle innovation, as well as attack personal privacy and constitutional rights.
Peter McCormack: Okay.
Greg Xethalis: And, the upshot and unfortunate piece is, the Infrastructure Bill is, in all likelihood, going to pass and there is nothing that is reasonably going to be done to change it from passing.
Peter McCormack: By when; when will it pass?
Greg Xethalis: I don't know the legislative calendar. I know there were some votes last night; I don't think the Infrastructure Bill was among them.
Abraham Sutherland: Last I heard was somebody announced end of the month as another drop-dead slot, but who knows.
Greg Xethalis: There's a balance intention between the Build Back Better Act reconciliation and the Infrastructure Bill, and there are a couple of different sides of the Democratic party that are going back and forth on what has priority there. So, that's going to delay things. In all likelihood, unless that whole process blows up, this will pass.
Then the question is, what is our obligation, as people in this community, in the digital asset community, to try and work to remediate it and be able to address it? I think the first step is to amplify voices like Abraham's, which are speaking with specificity to the problems that will arise, and the problems that are most traumatic to the everyday user.
Peter McCormack: Can this provision be amended before the bill passes?
Greg Xethalis: Sure.
Abraham Sutherland: Absolutely. Everybody can say it's impossible and maybe it is, but of course.
Peter McCormack: Okay, so that's goal one. And if the bill passes with the provision, you can have it repealed. So, it just needs dealing with.
Abraham Sutherland: Look, we're focused now on getting the facts out there and putting this pressure on. How that unfolds over time, I fully believe the lack of awareness of this means that people were aware of this.
Peter McCormack: Okay, and just you really want Jack Dorsey, Brian Armstrong, Jesse Powell, everyone to be aware.
Abraham Sutherland: I want people who work in crypto to read my report and say, "How will this affect me?" and I want them to ask their lawyer, their accountancy firm, their intern, to write up a memo and say, "How will it affect me?" So, the Proof of Stake Alliance Report that is out there is not designed to list all of the scenarios that might apply because, again, a lot of this statute doesn't make any sense and it's unclear.
But I go through these five steps and somebody should say, "What's our business? How do I use these things? How might I use them in the future?" That's the other thing about innovation. This is going to clamp down on this; we don't even know what these uses are. I don't list all of the applications, because I'm trying to give people the elements so they can figure that out.
The first step is for people to walk through and say, "Wait, this will count". And then a lot of the time, they're going to get to the end and say, "Well, it might not count, because the other party's a financial institution", and that's when I want them to say, "Wow, is this the world we want to do?" The Bank Secrecy Act came in 1970 and what it meant is these existing intermediaries became critically valuable to the government for what? General crime fighting and tax enforcement.
Now, we've evolved to the point where there's new options with this technology to do things, essentially, peer-to-peer. That undermines this thing that's relatively new, it's only 50 years old, for what the government relies on for this enforcement. And what they're trying to do here is stigmatise its use to funnel, to push things back, either to make you just route a transaction through it, or just increase the list of financial institutions; because, if we're all a financial institution, then we all have to report everything that we touch.
So, that list of what counts as a financial institution has been expanding since 1970, and this goal is to kind of freeze that centralised model in place, because of the extent to which the IRS, but the government in general, relies on these so-called intermediaries, these middlemen, to report your and my financial details to the government.
Greg Xethalis: I think the thing that's also a little troubling about it is digital assets, particularly Bitcoin, but most digital assets that don't have really robust privacy enhanced features, have alternative systems to allow the type of data-driven, analytical, regulatory analysis. You look back at Silk Road, you look back at the Pipeline ransomware, you look at the businesses that companies like Chainalysis and Elliptic have built. I recall academic papers from 2014 talking about the ability to actually trace information and deanonymise, even then when we had few touchpoints that were actually reporting information on individuals.
This is not operably applied to this technology. There are alternate means of providing visibility into transactions that may be suspicious that don't rely on invading and creating potentially criminal obligations on the individual, and it's just not good policy.
Peter McCormack: For an ideal scenario though, this really needs to be picked up by senators to challenge it? That's the only way it can be challenged, right?
Greg Xethalis: So, Abe's correct. Technically this can be amended in advance, but that's trying to stop the world's largest tanker as it's coming to port. It's slowing down -- or, I shouldn't say when it's coming to port, it's at sea. You're not going to move this unless the whole thing falls apart, so the bill's not going to get reopened in all likelihood.
Abraham Sutherland: Then we get more no-votes. At the end of the day, this is in Congress, it's in a bill that's already there.
Peter McCormack: But the provision can be repealed?
Greg Xethalis: Afterwards, yeah. So, that's what I think we need to be focused on, which doesn't mean ignoring the possibility of amendment before passage. But realistically, we're looking at, is there a will from the industry to try and educate on not only the technology, but the problems with this particular legislation, and to really push towards having some sort of repeal or fix.
Abraham Sutherland: Something remarkable, in my opinion, happened eight weeks ago. Somehow, the crypto public, bitcoiners, got up in arms about that broker provision. That broker provision's pretty arcane stuff. It had to do with -- I think the whole thing's problematic; most people are accepting it. It had to do with some arcane details about how it might be interpreted to sweep in miners and other developers. Pretty advanced stuff to really get your head around, but that happened; that kind of blew me away.
This one is much more salient. This applies to you and me. Again, there's this $10,000 threshold. People need to understand that it's more than that. If you're an NFT marketplace that's somehow going to impose this, it's not like you're completely exempt if you're selling or buying NFTs that are under $10,000; that's not the way it works.
The crimes are available now for everybody, because this is a bizarre provision that criminalises end-user behaviour, not true middlemen. So, I look back at that, and I was amazed at the time that it got that leverage, because it was a fine-tuned nuanced point. This one's very complicated, but the upshot, when you look at the cases that are covered by it, is much more immediate and dramatic, and goes straight to the heart.
To be honest, it really raises some deep questions, right. People ask me, "How do we fix it? Let's amend"; you can't amend this. This goes to the heart of the dangers of peer-to-peer technology, and they're there. The sponsors haven't laid them out, so it's not my job to defend yet or to offer alternatives. People say, "How are you going to fix it?" Well, they haven't told me what they're trying to do, they haven't told me what their values are, they haven't given me any evaluation of the consequences for my privacy and freedom, and how this is going to entrench banks and existing institutions. All I have to do is say, "You didn't do this"; that's enough to stop it.
But it does raise deep questions about government surveillance and this being a tax bill, it's all about tax collection. Well, what's the trade-off? At what point do we say, enough surveillance? Maybe that's not worth the trade-off, if we're going to respect people's autonomy and dignity. That's a fundamental conversation. And there's other aspects too: money laundering, counterterrorism. Those are real questions, but they need to be addressed head on and not swept into a --
Peter McCormack: Well, we're heading towards complete surveillance of every single financial transaction. So, Janet Yellen wants to bring down to $600…
Abraham Sutherland: There's another thing floating out there now, which will require banks and financial institutions to report, at the end of the year, everybody who had net inflows and outflows of their account over whatever threshold they decide; it might be $600; it doesn't matter if it's $10,000, they'll have to flag it.
Peter McCormack: I saw this great tweet yesterday. Somebody put, "The government can lose trillions of dollars, but they want to know what I spend $600 on"! Yeah, look, big questions, big questions, it's all important stuff. What's the call to action here, Abe, what do you want to see happen? Tell people who are listening.
Abraham Sutherland: I want everybody who works in this space to at least have an answer how this would affect them. That's the purpose of the report. Again, I wish I'd done more scaremongering, list the transactions, list the things that might trigger this, but it's too broad. If you work in NFTs, if you work in Bitcoin, if you work in DeFi, you might have ten receipts an hour, a day, that qualify. The statute says you need to report the social security number of the sender. There is no sender. Does that make you a felon? Does that mean you can't use that technology? Probably not.
Probably, the Treasury will come out and say, "Oh, we don't mean it. The statute requires that information, but…" and they'll try and patch it up. I don't think that's legal, I don't think that's right, that's not the way you govern a country. But we need people to raise these questions and say, "How do these tokens move around?" and then, when you notice how it's going to be exempted because of the Bank Secrecy Act, and how that's going to undermine digital assets by entrenching existing financial institutions, it'll help piece together the big picture.
Peter McCormack: All right. Where do people find this? I mean, I'll put a link in the show notes; where do they find this from you?
Abraham Sutherland: Proof of Stake Alliance; that's where my report is.
Peter McCormack: And your brand-new Twitter!
Abraham Sutherland: Yeah, I guess so. My brand-new Twitter @abesutherland.
Peter McCormack: Okay, right, appreciate you coming on. We'll get the message out. We all need to get over to this conference now. Greg, great to meet you too.
Greg Xethalis: Absolutely.
Peter McCormack: Thanks for doing this. I'm sorry I had little time to prepare and it's quite a complicated thing, so I just had to let you roll with it.
Abraham Sutherland: Excellent.
Peter McCormack: All right, take care, guys.
Abraham Sutherland: Thanks.
Greg Xethalis: Thank you.
