The industry was caught off guard when the Senate targeted it with new tax rules. But it fought back with a vengeance.
Lobbyists scored a clear victory by winning over Sen. Ron Wyden, the top Senate Democrat responsible for writing tax legislation. | Susan Walsh-Pool/Getty Images
By VICTORIA GUIDA
08/09/2021 04:30 AM EDT
An intense infrastructure bill brawl between Bitcoin advocates, Congress and the White House has revealed a new power player in Washington that’s starting to find its footing: the cryptocurrency lobby.
The industry was first caught off guard when lawmakers and the Biden administration targeted it with new tax rules tucked into the bipartisan Senate infrastructure bill announced last month. But it fought back with a vengeance, showing that startup digital trading platforms and other firms could rally a small army of recently requisitioned trade associations, lobbyists and public relations experts to put up a real defense. Still, they failed to secure changes as of Sunday night.
The top Democrat on the Senate Finance Committee, Ron Wyden of Oregon, took on the White House to shield virtual currency players, as did the top Republican on the Senate Banking Committee, Pat Toomey of Pennsylvania.
Unlike Wall Street banks, the industry was able to direct thousands of crypto enthusiasts on social media to join the battle by providing a real-time play-by-play of Senate negotiations. Jack Dorsey, the top executive of financial payments company Square, called on his 5.6 million Twitter followers to fight bill language that he called “unworkable.” Even Kiss bassist Gene Simmons was involved, announcing in a tweet that he supported an amendment to protect the industry.
“This has definitely been a wake-up call to crypto,” said Kristin Smith, executive director of the Blockchain Association, an industry lobbying group. “But on the flip side, I think Washington is starting to see that crypto is more of a force than anybody ever anticipated.”
The episode, by no means over as the Senate prepared to send the legislation to the House, revealed the increasing influence of digital currency startups that in just a few short years became multibillion-dollar firms as investors flocked to Bitcoin and other digital assets. Their rise is reflected in their Washington operations, which were once dominated by idealists and academics but now employ former elected officials and other seasoned government operators.
At issue in the lobbying battle was a proposal included in the infrastructure bill that would require cryptocurrency trading platforms and other entities defined as “brokers” to report digital asset transactions to the Internal Revenue Service. Lawmakers and the Biden administration included the provision as part of a bid to raise revenue for infrastructure projects — about $28 billion, according to an initial estimate — and also address long-running concerns that cryptocurrency traders don’t pay the taxes they should.
By MARIANNE LEVINE and BURGESS EVERETT
Digital currencies such as Bitcoin and Ether give users the ability to make financial transactions without using fiat money like the U.S. dollar, though they’ve primarily become tools for investment and speculation.
The tax proposal, which surprised many industry advocates when it was first revealed July 28, marked the most consequential piece of legislation to target cryptocurrency in its short life.
“Other industries were probably better prepared to fend off being a pay-for,” said Ed Mills, Washington policy analyst at Raymond James. “This is the first time they’ve really been on the menu.”
Digital currency advocates and lobbyists immediately decried the tax provision as a threat to the industry’s existence in the U.S. They warned it would sweep in technology players that could not conceivably comply with the reporting rules, such as software developers and so-called miners that help validate transactions on the computer networks underlying virtual currencies. They said it also threatened the development of decentralized finance, or DeFi, services that offer lending and trading on automated software protocols with minimal human oversight.
The pushback against the tax provision was driven by groups including the Blockchain Association, only a few years old, and Coin Center, a think tank formed in 2014 — a veritable veteran in crypto terms. The groups were prepared for the moment after expanding in recent years.
"A year ago, we would have [had] about maybe a quarter to a third of the amount of bodies we have working on it today,” Smith said of the cryptocurrency lobbying population in Washington.
For the tax fight, the groups’ efforts were boosted by powerful financial technology firms. Among them were Square, which disclosed spending $440,000 on lobbying in the second quarter of this year, and the massive crypto exchange Coinbase, which in April was the first major trading platform to go public and reported spending $80,000 on outside lobbyists in the second quarter. Coinbase earlier this year hired former Goldman Sachs co-head of government affairs Faryar Shirzad to be its chief policy officer. Shirzad also served on the White House National Security Council.
Influential investors joined the fight as well, including Andreessen Horowitz’s Marc Andreessen, Ben Horowitz, Katie Haun and Chris Dixon, who operate a $2.2 billion crypto venture fund.
Crypto advocates also had allies among digital rights and privacy groups, including the Electronic Frontier Foundation.
Together, the coalition found sympathetic ears on both sides of the aisle, causing headaches for the White House and the bipartisan group of senators who drafted the infrastructure bill. The legislation’s authors found themselves unexpectedly having to defend what was a minor element of the $550 billion infrastructure plan.
Lobbyists scored a clear victory by winning over Wyden, the top Senate Democrat responsible for writing tax legislation. Wyden, who has served in Congress for four decades, has long had a soft spot for emerging technologies.
His Democratic predecessor at the helm of the Finance Committee, Max Baucus of Montana, was hired earlier this year as an adviser to the digital currency exchange Binance.
Wyden teamed up with Toomey and Sen. Cynthia Lummis (R-Wyo.) to offer an amendment to scale back the tax reporting rules so they would not capture software developers and miners. The proposal put Wyden at odds with the White House and fellow Democrats. In response, Sens. Mark Warner (D-Va.), Rob Portman (R-Ohio) and Kyrsten Sinema (D-Ariz.), in cooperation with the Biden administration, came up with an alternative amendment that would have fewer exclusions.
Treasury Secretary Janet Yellen personally spoke with Wyden to push back against his amendment, an administration official said. She and the White House believed his language would tie Treasury’s hands when it came time to develop regulations spelling out the details of how the rules would work.
“Crypto’s success with Wyden is one of the most fascinating D.C. influence developments of 2021, and one I suspect other industries will be studying throughout the rest of the decade,” said Jeff Hauser, who tracks corporate lobbying as executive director of the Revolving Door Project.
Wyden said in a statement that he has spent his career “working from the proposition that Congress needs smart answers to tech policy that actually improve people’s lives.”
“When civil rights groups, tech experts and folks in Oregon raised concerns that this provision could be interpreted to regulate independent developers and force programmers to create government backdoors, I took their concerns seriously,” he said.
Toomey, who worked with Wyden on the amendment, recently disclosed that he had as much as $30,000 in Bitcoin and Ethereum cryptocurrency investments, underscoring the increasing awareness that lawmakers have of a market that reached $2 trillion in value this year.
A visual representation of Bitcoin cryptocurrency. | Edward Smith/Getty Images
Mobilized by tweets from advocates like Coin Center executive director Jerry Brito, who shared with his followers screenshots of amendment text as it was released, the grassroots community of crypto users flooded Senate offices with calls to adopt the Wyden-Lummis-Toomey changes.
Trading platform Kraken urged its customers in an email blast Wednesday to “help us preserve financial privacy and independence in crypto” by pushing for the language.
Much of the crypto world’s ire focused on Portman, who drafted the original tax language. Brito said he was surprised by the proposal after “trying to engage with Sen. Portman’s office for months about tax questions.” The pushback quickly forced Portman to respond.
“The mobilization we have seen has been incredible,” Brito said. “The cryptocurrency community has never been so united in DC.”
The impasse over the competing cryptocurrency amendments helped drag the infrastructure vote into the weekend.
For the industry, the fight will be the first of many to come. Policymakers in Washington are poised to raise even more existential questions about the degree to which the booming market for digital assets should be reined in by the government.
For lawmakers, the episode has created a new sense of urgency to get up to speed on a hot part of the economy that barely existed a decade ago.
“There’s a big impetus that we all should be understanding this a whole lot better,” said Sen. Shelley Moore Capito (R-W.Va.).
Kellie Mejdrich contributed to this report.
CORRECTION: A previous version of this story misstated the status of legislative text tweeted by Coin Center’s Jerry Brito. He shared amendments that had just been made public.
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