Crypto community concerned over impact of infrastructure bill on DeFi

Crypto community concerned over impact of infrastructure bill on DeFi

The $1 trillion infrastructure bill, which the United States House of Representatives was due to vote on this week, has been a source of controversy for members of the crypto community. The legislation contains a crypto-tax reporting provision and a definition of “broker”.

Although the House legislators stated that a vote on the infrastructure bill would be held on Thursday, September 30, Nancy Pelosi announced that the vote on the bill would be delayed to Thursday. Since then, media sources have reported that the infrastructure bill could come up for a vote on Friday, Oct. 1.

The implications of the infrastructure bill’s looming impact may seem obvious to some, but crypto community members voiced their concerns during an “ask anything” panel hosted on September 29 by Enterprise Ethereum Alliance.

Ryan Selkis is the chief executive officer and cofounder of Messari, a crypto asset research and data company. He believes that the infrastructure bill will designate any participant in DeFi platforms as brokers. “This includes stakers and validators, developers, and many more. Technically, the language used here is not practical.

Jeremy Sklaroff is the general counsel for Edge & Node, which works across The Graph ecosystem to decentralize and govern. He said that while the legislation may pass, it unfairly demonstrates a wide way of defining participants in a blockchain ecosystem.

Network validators and miners offer a service, and sometimes earn a transaction charge for their work. The miners and validors would be acting as brokers if this bill is passed. Software developers are even more concerning to me. This team could become a broker if it maintains smart contracts on a DeFi platform, and receives a fee or an incentive with a governance token.

Sklaroff says network validators, software developers, miners, and other members of a distributed ecosystem shouldn’t be considered traditional brokers because they are anonymous participants. Sklaroff thinks that this section of infrastructure legislation would be almost impossible to comply with.

Sklaroff also pointed out that DeFi protocols could be affected by the reference to anti-money laundering and know-yourcustomer (KYC), in the infrastructure bill. The bill specifically requires that brokers report KYC on any digital-asset transaction exceeding $10,000.

The new legislation will place emphasis on broker’s KYC, tax information reporting systems and tax information reporting systems. However, Sklaroff stated that anyone who fails to comply with the law could face penalties or even jail time. Selkis said that the infrastructure bill would likely close down DeFi innovation in America. The IRS would require digital asset recipients with $10,000 or more to report this information. Otherwise, they could face felony [charges].

Selkis agreed with Sklaroff that regulators are more concerned about DeFi protocols than Bitcoin (BTC), and nonfungible tokens or NFTs.

“Bitcoins and NFTs are relatively secure. The infrastructure bill focuses on financial instruments that are built using smart contract platforms. These platforms are designed to reengineer traditional lending and banking.

Every level of the crypto industry is targeted by the Infrastructure Bill

Although DeFi protocols are the most affected by the infrastructure bill’s provisions, Sklaroff pointed out that all industries within the crypto ecosystem will be affected by the legislation.

The bill’s proposed language could, for example, define miners and brokers. The bill would require miners to give information to the IRS such as their taxable net gain, identity of buyers or sellers, transaction amounts and the location of transactions. Miners would not be able to collect this information as they validate blocks only, and not the information within them. Miners would be unable to comply with the law, and would have to stop operating in the U.S.

This is especially concerning for Sklaroff, who mentioned that the U.S. tries to set the regulatory tone worldwide: “If the U.S. fails to clarify the language in the bill, I wouldn’t be surprised if others adopt something similar.”

Related: The fate of the infrastructure bill hangs in the balance. What does its passage mean for crypto?

John Whelan (chair of Enterprise Ethereum Alliance) told Cointelegraph that DeFi measures by institutions ensure KYC and AML compliance. This could be a positive step in the DeFi ecosystem’s development, even if the infrastructure bill is not passed: “All the pain disappears with AML/KYC from an institution standpoint. It is possible to understand who you are interacting with and that funds cannot go where they are not supposed to.

Cointelegraph was also told by Selkis that DeFi could be a positive step for the wider ecosystem, but only if institutions are interested in it.

“We are starting to see more institutional interest for DeFi. I believe that this can be a net benefit for the development the wider ecosystem. However, it is only possible if the systems are interoperable, and the policy framework does not remove the ability to conduct peer-to-peer experimentation. […] It would be common sense to ensure that centralized intermediaries are regulated in the same way as they are now.

Cointelegraph was told by Sklaroff that this is true, but the key question in relation to the infrastructure bill is whether or not a DeFi Project truly is decentralized.

“If the IRS wants to enforce certain requirements one must be capable of pointing to an identifiable person, firm, or group of persons that can say, “Okay, you as this identifiable entity violated this section of the tax code and here are your fines.”

Sklaroff however pointed out that DeFi projects should be decentralized if they are to be enforced or expected to comply with the law.

The infrastructure bill will have long-term consequences

Although the impact of the infrastructure bill’s passage is still unknown, Sklaroff pointed out that the U.S. will continue to push unworkable legislation which will result in the country losing out on a crucial next wave innovation. “Other nations will be there to take up the slack, and they may not have the same values around democracy, human right, and more.”

Although the bill’s negative effects are obvious, Selkis said that it has a long-term positive effect because the crypto community is now focusing on creating committees for policymaking and discussions that will help educate regulators about how the industry works. “The only positive long-term effect that the U.S. crypto-community is actually developing antibodies and organizing for policy-making conversations.”

While this bill is a positive step, Sklaroff stated that it shows that the crypto industry must continue its efforts to educate policymakers.

They need to be able to distinguish between proof-of work and proof of stake. This is an essential part of the industry and how people work. Technical education will allow policymakers to see the absurdity of poorly written bills and help them learn how these technologies can improve their jobs.

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