This week saw virtual currencies be the focus in many venues. John and Elliot discuss statements from the head of the SEC and the fine levied against BitMEX by FinCEN for regulatory violations. They also review the negotiations in the US Senate, during the debate on the Infrastructure Bill, surrounding tax reporting by participants in the virtual currency ecosystem.
A Busy Week in Virtual Currency TRANSCRIPT
John Byrne: I'm good. Elliot, I hope you're staying safe and everything. And, everybody out there is doing their best, as variant comes back. So, doing fine otherwise.
Elliot Berman: Yeah. We are too so far.
So, this week, there was a lot of conversation and a lot of activity in the virtual currency space. There was a statement by Gary Gensler, the head of the SEC. FinCEN issued a pretty hefty fine.
The US Senate actually talked about virtual currency, probably got a little bit over their skis about what they knew about it as part of the negotiation, the infrastructure bill.
So where would you like to start?
John Byrne: You know, I can't think of two more appropriate people, two Medicare-eligible lawyers talking virtual currency. I bet the groups are really excited about this but wait, that's what the Senate is, but we'll try, we'll try [laughter]. We do understand the BSA space.
So, a couple of things, FinCEN did issue a civil money penalty. A hundred million dollars BitMEX and they characterize it as the oldest and largest convertible virtual currency. They violated the BSA and FinCEN regs (regulations) because they operated as an unregistered futures commission merchant and provided MSB services. So that's a willful failure to comply with the BSA. So that was interesting.
You mentioned Gensler. He was the former head of the CFTC. And obviously, now he's the head of the SEC, and he's made some strong statements regarding the need to regulate certain aspects of virtual currency as securities. So that's going to be interesting.
We've already talked about in past sessions that Yellen and Powell and the fed have expressed concerns. So, there's a lot of focus here, but as you point out. You identified what went on in the infrastructure bill. So maybe talk a little bit about that. That was an interesting debate.
t's pretty clear that a lot of senators aren't clueless but definitely needed more information. And that was part of how the debate sort of wage.
Elliot Berman: Yeah. As part of the infrastructure bill, of course, there's always the question when you're going to spend a trillion dollars, can you raise some revenue to help offset it?
The original idea was to raise revenue by enhancing IRS efforts to go after tax evaders that didn't make it through the process for political and other reasons. So, when they went back to the drawing board, what they came up with was that we have this virtual currency environment, and we need better tax reporting from the players in that environment so that we can be sure that everybody who's investing, taking profits, et cetera, is properly reporting those profits and therefore paying their proportionate amount of tax. So that was what was proposed. Obviously, I'm giving a very high-level version of it. What seemed to get air into everybody down the rabbit hole was the whole question of who did this new reporting and enhanced reporting obligation apply to.
It didn't seem as though anybody had too much heartburn about the idea that the exchanges should do it. And in fact, the larger, more mature, and sophisticated ones are already doing it. If I've got it right, I think it was the president of Coinbase who came out and said, yeah, that's fine. We're already doing it.
He didn't seem to break a sweat about it, but there are groups in the pro virtual currency process called miners, and there was a big sudden hoo-ha about the fact that the definition as it was written was mainly targeting exchanges. It was written too broadly and was going to drag miners and other ancillary players in.
And why is that a big issue? Some of these ancillary players really don't have any of the client information, and their function doesn't really align very well with the idea of tax reporting. The echo chamber of the political process sort of took off from there.
John Byrne: Yeah. Well, one of the groups said that the language was so broad it could arguably apply to internet or telecom service providers, as you said, and it could also apply to miners and those that aren't in the system. So, the crypto industry got together, and there's a house caucus actually on Blockchain. I guess they're called the blockchain caucus.
The Republicans, and the Democrats, said cryptocurrency tax reporting is important, but they've got to prioritize; amending the language and their words to clearly exempt non-custodial blockchain intermediaries and ensure that civil liberties are protected.
So, a couple of ways of looking at this is, on the one hand, it's actively considered. So, the crypto world looks at this and says, we're at the big boy table, so we're part of the debate. So that's the good part, but we also have a lot of education to do so I think that's interesting.
I would anticipate that the Treasury Department was never planning to make these regs (regulations) so broadly if this were to occur. So, I think there'll be a lot more. It can't happen until 2023 anyway, so there's a lot that can go on between now and then.
Just a quick political question. The fact that people opposed giving money to the IRS to go after tax evaders in this environment is, in my humble opinion, insane, separate from the crypto debate. But that is just so unfortunate because we know tax evasion is a major problem for our economy. So that's unfortunate that they had to look for these other pay-fors to try to make up some of the funding.
Elliot Berman: We've tended to be thoughtful about our political statements, but if you look at a lot of countries where their economies have problems and where they have major political challenges, tax compliance tends to be very low and for us and Senate to not feel like tax compliance is an important component of things, is a little trouble.
John Byrne: Right. So, I think more to come on the crypto part of this, and obviously, as we just said, fines against equities, FinCEN has that on their radar as well.
The bank agencies have opined on this law, and our law enforcement partners constantly talk about the need to educate themselves better, so they understand this. We do the same thing in the AML community.
Elliot Berman: All right. Well, just a reminder for everybody, we do this [podcast] every week, and you can find us on Spotify and iTunes and wherever you get your podcasts. So please tune in and subscribe.
There's lots of other great content that you can find on those platforms as well, as on our website at amlrightsource.com.
John, I'll talk to you next week. Have a great day. Bye-bye.