Congress Faces Regulatory Roadblocks in Crypto Sphere, Once More

• Tax Week: The Battle Over The Definition of A 'Broker'
• The Power Struggle and its Implications
• Defining a 'Broker' - A Thorn in the Crypto Industry's Side
• Consequences of the Broadened 'Broker' Definition
• The Bigger Issue

Tax Week: The Battle Over The Definition of A 'Broker'

It delves into the power struggle between the United States' administrative agencies and our elected representatives, particularly in the context of the evolving definition of a broker.

The Power Struggle and its Implications

The U.S. Treasury Department is on the verge of finalizing a new, expanded definition of a broker - a development with significant tax reporting consequences. This provides yet another opportunity for Congress to demonstrate renewed ambition in setting clearer rules across various aspects of our lives touched by regulation, and to curb the growing power of administrative agencies.

While it may seem that the broker issue is primarily relevant to the digital assets industry, the process behind creating this new definition serves as a stark reminder of the imbalance between the power wielded by regulatory agencies and the role of Congress in setting boundaries.

Recent court rulings on issues such as greenhouse gas emissions and student loan forgiveness have ramped up the pressure on Congress, suggesting that our elected lawmakers must shoulder the responsibility of answering these difficult questions.

Defining a 'Broker' - A Thorn in the Crypto Industry's Side

The Infrastructure Investment and Jobs Act, debated by Congress in the summer of 2021, contained language that defined a "broker for digital assets-related tax information collecting and reporting purposes. This definition sparked serious concern within the crypto industry, as many felt it was too broad and could unfairly target those not actively involved in any broker-like activities, such as software developers.

Despite agreement from several Senators that the definition was too broad, no amendments were made due to fears it would delay the bill's enactment. As a result, the fate of the digital asset economy in the U.S. was put into the hands of the Treasury Department, with hopes that the IRS would interpret the definition in line with Congress's original intensions.

Consequences of the Broadened 'Broker' Definition

Fast forward two years, and the fears about the broker definition have materialized. It's clear that the Treasury expanded the scope of what it considers a broker, overlooking the statutory language set by Congress. This has led to an unfavorable situation for entities like decentralized finance (DeFi) software developers and non-custodial wallet software providers who shouldn't be classified as 'brokers'.

Under the new definition, a broker's reporting requirement has become a collection and reporting requirement. This means those in a position to know information about other people - a term that remains ambiguous - are now expected to collect and report data. This development has given the IRS an alarmingly broad interpretation of who can be considered a 'broker'.

The Bigger Issue

This instance of broad interpretation by regulatory agencies is not an isolated case. In some instances, agencies have been deemed to have exceeded the power granted to them by Congress.

Proposals like Rep. Patrick McHenry's Keep Innovation in America Act, which aims to narrow and refine the definition of a broker, seem to be ignored by the Treasury Department. If the broker rule proceeds without modifications, it could lead to the near-total collapse of the crypto industry in the United States.

While the issue of defining a 'broker' may seem minor compared to the larger disputes between Congress and the administrative agencies, it serves to highlight the wider issue at hand: who should be the ultimate decision-maker in governance? Congress must seize control from federal regulators and re-establish democratic control over rulemaking.

Edited by Jonathan Stoker