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28 September 2021

The Proposal To Regulate Digital Asset Transactions Should Be Struck

The Proposal To Regulate Digital Asset Transactions Should Be Struck


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In a broad range of situations, the proposal would require Americans to collect and report to the government the Social Security number of persons from whom they receive digital forms of monetary value — along with that payer’s name, birth date, address, profession, and reason for the transaction.

It does this by adopting wholesale the reporting regime that applies to the in-person receipt of large amounts of physical currency.

This old law concerns the centuries-old technology of physical coin and paper currency, and it primarily governs face-to-face transactions involving more than $10,000 in cash.

The section 6050I proposal would impose onerous surveillance and reporting duties on all Americans, with fines or prison for those who fail (or perhaps are unable) to comply.Nominally, the subject of the regulation is “cash,” but it’s not really cash that’s being regulated; it’s people.

To understand how the government does, and might, keep tabs on taxpayers in order to maximize its tax receipts, it’s helpful to start with an extreme but hypothetical reporting regime, and then back away to get closer to the present reality.

Banks (and other financial intermediaries such as “brokers,” the subject of the separate, much-discussed digital asset reporting provision in the infrastructure bill) are already required to inform the government when something notable happens with money you’re sending or receiving.

And even if nothing triggers a reporting requirement, banks are ready to share even your boring data with the government when asked.

So requiring all transactions to be filed with the government is already unnecessary, because much of that is already taken care of by banks.

The government does not like this, of course, because it might not learn who received what from whom.

Arguably, and more charitably, the reason many Americans don’t know about the laws regulating their use of physical cash is that those rules were indeed drafted, debated, and enacted following Congress’s respectful study and recognition of how Americans actually live and go about their economic lives as citizens whose prosperity, autonomy, and liberty are the very goals of good government.

But no similar argument can be made about the proposed tax provision’s impact on Americans who might use digital assets.

If all you care about is tracking every taxpayer’s receipt of money, physical cash and digital assets indeed look a lot alike: All you will notice is that, with both forms of monetary value, the government might not learn about it when you receive some.

So governments are inclined to think the use of digital assets, like the use of cash, should be regulated and even discouraged.

And indeed, the proposal to amend section 6050I does just that, purporting to treat physical cash and digital assets exactly the same.

But physical cash and digital assets aren’t used in the same ways, so the proposal to lump them together under the statute does not treat them (or the humans that use them) the same.

Painting them both with the same brush under section 6050I fails to understand or respect how digital assets are (or might be) used and what makes them an innovation to begin with.

That does make sense because these institutions already have a similar requirement to report large cash transactions under the Bank Secrecy Act.

In late 2020 the Treasury proposed to amend, on an expedited timeline, the Bank Secrecy Act regulations for reporting large cash transactions to include transactions in digital assets. Following thousands of public comments on this and other proposed regulations, the proposal was slowed to allow further consideration.

To require reporting, the receipt of cash must be in the course of the recipient’s trade or business, but this limitation does not provide the safe harbor some might expect.

As this overview of section 6050I shows, the use of large amounts of physical cash invites high-stakes questions over exactly what transactions require reporting.

Those questions are multiplied when “cash” is extended to “digital assets.” And when filing a Form 8300 is clearly required, the nature of digital asset transactions raises another host of questions over how it would even be possible to comply with the information collection and verification requirements.

It’s not feasible, in this space, to list the range of transactions that would trigger Form 8300 reporting — much less to explore the less-certain cases that will depend on the interpretation of the statute’s terms against a technology that was unimaginable when the statute was written.

This means that “an exchange of digital assets for other digital assets” is also reportable, raising further questions about the meaning of the term “digital asset” and the uses of them that might trigger the statute.

Receiving digital assets as repayment of a “loan” would require reporting.

Already, digital asset technology enables its owners to lend, lock up, submit to the partial or complete custody of others, and otherwise deploy digital assets in ways that are difficult to analogize to physical cash or even to computerized but bank-centric financial technologies.

In sum, digital assets are not merely, or even primarily, a substitute for physical cash.

2 In comparison, a separate and much-discussed tax provision in the infrastructure bill would require exchanges and other “brokers” involved with digital assets to report their customers’ tax information to the government, a revision of section 6045.

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