The Morning Dispatch: Cryptocurrency in the Senate

Happy Thursday! The Dispatch’s softball season continues …

… because our playoff game was rained out. We’ll give it another go next week.

Quick Hits: Today’s Top Stories

• Consumer prices continued to climb in July, with the Bureau of Labor Statistics reporting a 0.5 percent month-over-month increase in the Consumer Price Index, putting prices 5.4 percent higher than July of last year. Oil and gas, used cars, hotels, and airline fares were the biggest drivers of the inflation.

• After an hours-long amendment “vote-a-rama,” the Senate passed Democrats’ $3.5 trillion budget resolution on a 50-49 party-line vote in the wee hours of Wednesday morning. The vote was less a piece of concrete legislation than a measure of intent, authorizing congressional committees to develop specific legislation in the months ahead along the resolution’s broad spending guidelines. Even the sticker price may be subject to change: Sen. Joe Manchin, a crucial swing vote, voted yes on the resolution, but said in a subsequent statement that he had “serious concerns” about passing a $3.5 trillion bill.

• The White House on Wednesday called on the Organization of the Petroleum Exporting Countries (OPEC) to increase production and exports, arguing that rising oil prices could imperil the ongoing economic recovery from the pandemic. 

• A new CDC study found no increased risk of miscarriage among pregnant women who receive Pfizer and Moderna’s COVID-19 vaccines. “COVID-19 vaccination is recommended for all people 12 years and older,” the agency said in a Wednesday statement, “including people who are pregnant, breastfeeding, or trying to get pregnant now or might become pregnant in the future.”

• Two days after the U.S. slapped new sanctions on Belarus and its authoritarian leader Alexander Lukashenko, the Lukashenko regime took several retaliatory actions Wednesday, including revoking its consent of the appointment of U.S. ambassador Julie Fisher and suspending negotiations of a number of joint projects with the U.S. government.

• A federal judge on Wednesday rejected the effort of Rudy Giuliani, Sidney Powell, and Mike Lindell to dismiss the defamation lawsuits brought against them by Dominion Voting Systems.

Crypto Takes Center Stage in the Senate

When Senate and White House negotiators released the full text of their bipartisan infrastructure package last week, there was bound to be some bickering over surprises that ended up in the 2,702-page behemoth of a bill. They’re building a train station where?My tax dollars are going toward studying what?

There was some of that. But the final snag that reared its head prior to the bill’s passage in the Senate earlier this week had nothing to do with roads or bridges. Rather, it concerned tax reporting requirements on cryptocurrency brokers.

Despite its $1.2 trillion topline figure, the infrastructure deal “only” authorizes about $550 billion in new spending. Although the nonpartisan Congressional Budget Office estimates the package will add about $256 billion to the deficit over the next decade, the agreement’s negotiators maintain that it’s fully paid for: By repurposing unspent COVID relief funds, recovering fraudulent unemployment insurance claims from the past year, delaying a Medicare rebate, and cracking down on the burgeoning cryptocurrency market, which by some estimates has surpassed $2 trillion in size. 

The bill wouldn’t implement any new taxes on cryptocurrency—the government currently treats it as property and imposes a capital gains tax on any profits earned—but theoretically, mandatory third-party reporting to the IRS would increase compliance. If you know the IRS is aware of all your Bitcoin transactions, you’re less likely to attempt to evade the taxes you owe. Congress’ Joint Committee on Taxation estimated the clause would generate about $28 billion in revenue over the next 10 years. ​​

The alternative to the cryptocurrency pay-for was a bolstering of IRS enforcement that Republicans balked at, so the digital asset provision remained in the bill—but the industry wasn’t happy about it. A joint statement from the Blockchain Association, Coinbase, Coin Center, Ribbit Capital, and Square claims the clause would “place unworkable requirements on crypto technology,” classifying as brokers even crypto market participants who don’t engage in any trading.

“Whether it’s a miner, or an operator, or a validator, they’re not providing the service that a broker is … where they’re bringing two entities together to effectuate a financial transaction,” Perianne Boring, founder and president of the Chamber of Digital Commerce, a trade association that advocates for the digital asset and blockchain industry, told The Dispatch. “That’s not what miners do. … They’re running the network itself—and they don’t have clients.”

To remedy the situation, a bipartisan group of senators—Democrat Ron Wyden of Oregon, and Republicans Pat Toomey of Pennsylvania and Cynthia Lummis of Wyoming—introduced an amendment to the bill that would exempt miners and developers from complying with the reporting requirements. 

“While Congress works to better understand and legislate on issues surrounding the development and transaction of cryptocurrencies, it should be wary of imposing burdensome regulations that may stifle innovation,” Toomey said. “By clarifying the definition of broker, our amendment will ensure non-financial intermediaries like miners, network validators, and other service providers—many of whom don’t even have the personal-identifying information needed to file a 1099 with the IRS—are not subject to the reporting requirements specified in the bipartisan infrastructure package.”

The White House pushed back, siding with a competing amendment from Democratic Sens. Mark Warner, and Kyrsten Sinema, and Republican Rob Portman that would exempt some—but not all—of the intermediaries listed above from the provision. The differences held up final passage last week, forcing the two rival groups to hash out a compromise over the weekend that would explicitly exempt all types of digital asset miners and implicitly exempt developers. 

“We’ve worked with the Treasury Department to clarify the underlying text and ensure that those who are not acting as brokers will not be subject to the bill’s reporting requirements,” Portman, Warner, Toomey, Sinema, and Lummis said in a joint statement on Monday. “While we each would have drafted this solution differently, we all agree it’s important to ensure that these obligations are properly crafted to apply only to entities that are regularly effectuating transactions of digital assets in exchange for consideration.”

The compromise received the support of the White House—and the overwhelming majority of senators—but under Senate procedure it had to be adopted unanimously to be included in the final bill. One senator, Richard Shelby, objected on Monday—not because he opposed the amendment itself, but because he wanted the Senate to add his unrelated amendment boosting military spending.

So what happens now? With the legislation set to be taken up by the House in the coming weeks, the bipartisan Blockchain Caucus in Congress’ lower chamber has already pledged to force the issue. 

“The House must consider amendments to this provision that exempt entities that don’t conduct crypto transactions and keep blockchain software development, cryptocurrency mining, and more in the United States,” the Caucus co-chair, Rep. Tom Emmer, said. “Crypto is not a partisan issue—the bipartisan Blockchain Caucus is working to educate Members so we can fix this dangerous provision when it comes to the House.”

But some on the Senate side believe the same outcome can be achieved with or without an amendment. After failing to update the bill’s language on Monday, Sens. Portman and Warner entered a colloquy—a conversation between lawmakers on the Senate floor meant to clarify the intent of a bill—into the record. 

“Am I correct that under our provisions, it is our understanding that Treasury and the IRS will not treat these miners as brokers?” Portman asked Warner in a scripted dialogue. 

Warner’s reply: “The Senator is entirely correct in his analysis of the application of the bill.”

Still, many who were pushing for the amendment would prefer to change the underlying legislation. “If you give the agencies the opportunity, they’ll go directions you don’t necessarily want them to go,” a senior Senate aide told The Dispatch. “We would like to clarify in law what the agency is going to do.”

If none of this happens and the deal is signed into law as is? Crypto miners and node operators “have no way to comply [with the reporting requirements] because they don’t have access to that information,” Boring reiterated. “Therefore, those entities would not be able to operate in the United States legally. So they would either be an illegal operation at risk of enforcement, or they’d have to close their businesses here and go somewhere else.”

This specific issue will likely be worked out before it has a deleterious effect on the digital asset industry, but the fight is indicative of cryptocurrency’s rapidly accelerating reach—and policymakers’ struggle to keep up.

“Right now, we just don’t have enough investor protection in crypto,” Securities and Exchange Commission Chairman Gary Gensler said in a speech last week. “Frankly, at this time, it’s more like the Wild West. This asset class is rife with fraud, scams, and abuse in certain applications. … If we don’t address these issues, I worry a lot of people will be hurt.”

But as the events of the past week have made clear, this ‘hurry up and do something’ approach can often do more harm than good. 

“Let’s recognize if we gathered all 100 senators in this chamber and asked them to stand up and articulate two sentences defining what in the hell a cryptocurrency is, that you would not get greater than five who could answer that question,” Sen. Ted Cruz said on the Senate floor Monday. “Given that reality, the barest exercise of prudence would say we shouldn’t regulate something we don’t yet understand. We should actually take the time to try to understand that. We should hold some hearings, we should consider the consequences. We shouldn’t destroy people’s lives and livelihoods from complete ignorance.”

The Latest on Congress’ Spend-a-Rama

Yesterday was a very sleepy day in Washington—and not just because the heat index reached 107 °F. The day before, the Senate slogged through a 15-hour-long “vote-a-rama” amendment process—a prerequisite to adopting a budget resolution through which Democrats hope to pass their $3.5 trillion “human infrastructure” package later this year. The majority party’s power to block amendment votes is limited in the budget reconciliation process, and the minority party typically takes advantage. Although the votes are non-binding and almost entirely performative, Republicans forced Democrats to take a stance on a host of hot button issues: critical race theory, fracking, federal funding for abortions, and more. The whole thing wrapped up around 4 a.m. Wednesday morning.

But unanimous, 99-0 symbolic votes against defunding the police are far from the only thing the Senate’s been up to this week. It’s both passed the aforementioned $1.2 trillion infrastructure package and adopted its budget resolution for fiscal year 2022. The latter was strictly along party lines, but 19 Republicans—including Minority Leader Mitch McConnell—bucked Donald Trump to cross the aisle and support the former.

“Infrastructure is popular with both Republicans and Democrats,” McConnell told the Wall Street Journal. “The American people, divided, sent us a 50-50 Senate and a narrowly divided House. I don’t think the message from that was, ‘Do absolutely nothing.’ And if you’re going to find an area of potential agreement, I can’t think of a better one than infrastructure, which is desperately needed.”

Both legislative vehicles now head to the House, where they will be taken up at some point in the next few weeks. We’ve only got so much space here, but for more on the process, be sure to read Harvest and Ryan’s Uphill from this week—and ensure you’re subscribed to receive it in your inbox by clicking here!

As Harvest and Ryan note, the reconciliation process is now punted to the various committees, who have a framework, budget, and deadline under which to operate. Per a letter from Majority Leader Chuck Schumer, the respective House and Senate committees have until September 14 to draft the legislation. But differences among progressive and moderate Democrats mean a bumpy road ahead. 

Sen. Bernie Sanders, for example, originally called for a $6 trillion reconciliation package, almost double its current size. But $3.5 trillion will likely end up being too much for moderate Sens. Kyrsten Sinema and Joe Manchin. “I voted ‘YES’ on a procedural vote to move forward on the budget reconciliation process because I believe it is important to discuss the fiscal policy future of this country,” Manchin said. “However, I have serious concerns about the grave consequences facing West Virginians and every American family if Congress decides to spend another $3.5 trillion.”

Things could get even more testy in the House. In a letter to Democratic leadership on Tuesday, the Progressive Caucus—which has 96 members—pledged that a majority of their group will not vote for the infrastructure package until the Senate has sent a budget reconciliation package their way.

Moderates, meanwhile, are urging exactly the opposite.

Worth Your Time

• Writing in his Substack newsletter yesterday, Erick Erickson spoke effectively to many of our country’s institutional woes. “The United States is now fairly evenly divided and no one trusts institutions,” he writes. “The media has destroyed its own credibility. The bureaucracy can be bullied by special interests. People are too cynical to trust politicians. So they trust their friends and a community that each has increasingly built online or through political interaction to look and think just like themselves. The result is now a handful of groups that claim independent thought, expert input, political power at different levels, and remarkably stake out positions to be exactly opposite the other.”

• In his latest Slow Boring post, Matt Yglesias attempts to answer one of the more pressing questions of our time: Why has everyone gone so crazy? “Most people don’t actually need to consume any political news to decide which coalition they align with and then vote accordingly,” he writes. “But that would be boring. What’s entertaining is to tell people that we’re not just having the same old political arguments over and over again, but that the people on the other side of those arguments are a direct and immediate threat to you and your family. … This is a really big country. There are over 100,000 K-12 schools in the United States. If you assume optimistically that in any given year, one out of every 100 teachers say or do anything racist at any school in the United States, that still leaves you with 1,000 racist teacher incidents per year. You could do a dozen ‘racist teacher’ stories per week and still be leaving racist teachers on the table. But at the same time, some other outlet could be doing 1,000 ‘woke administrator out of control’ stories per week. And we’ll all be clicking and sharing and arguing about those stories nonstop.”

Presented Without Comment

Toeing the Company Line

• In this week’s Capitolism(🔒), Scott Lincicome breaks down the “tens of billions of dollars for subsidies to renewable energy companies” contained within the bipartisan infrastructure bill just passed by the Senate. He argues that “most of the bill just re-ups the same industrial policy model—top-down subsidies doled out by federal bureaucrats—that has repeatedly proven a failure in the United States, imposing high costs and often undermining, rather than advancing, the government’s very own objectives.”

• Yesterday’s Dispatch Podcast also analyzed the infrastructure bill, as well as the much larger “human infrastructure” bill that Democrats hope to pass via budget reconciliation on a party-line vote. The gang also discusses a recent report from the U.N. on the state of climate change and discouraging news about the Taliban’s string of victories in Afghanistan. They also bid good riddance to New York Governor Andrew Cuomo.

• Jonah’s midweek G-File (🔒) examines Cuomo’s resignation, and notes that, while it’s a good thing the governor is resigning, it’s not necessarily a great sign for our political institutions that that took as long as it did. “While it’s good that norms against piggishness are being strengthened, it’s dismaying that the more important norms that Cuomo violated seem to be weakening,” Jonah writes. Cuomo, he points out, not only blundered into one of the pandemic’s deadlier policy mistakes by forcing nursing homes to receive patients early on—he subsequently did his best to spike investigations into the matter. “What’s unforgivable is that Cuomo knew he screwed up. He knew his decision was disastrous. And he covered up the evidence while preening over his ‘leadership.’” 

Let Us Know

With things like cryptocurrency, where do you usually find yourself on the early adopter-to-Luddite scale? Are you generally eager to try out the newest technologies or do you hold out until you have no other choice?

Reporting by Declan Garvey (@declanpgarvey), Andrew Egger (@EggerDC), Charlotte Lawson (@charlotteUVA), Ryan Brown (@RyanP_Brown), Harvest Prude (@HarvestPrude), and Steve Hayes (@stephenfhayes).