Blockchain Week in Review – August 2021 | JD Supra

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  • Unamended Infrastructure Bill with “Broker” Reporting Requirements Set for Vote in September
  • CFTC Provides Clarification on Its Regulatory and Enforcement Authority
  • Despite El Salvador’s Strongly Worded Bitcoin Law, Bitcoin Usage Remains “Totally Optional”
  • China’s Shandong Supreme Court Holds Crypto Assets Not Legally Protected
  • Thailand Releases Crypto Custodian Regulations
  • Bitcoin Stability Leveraged in Afghanistan Amid Taliban Takeover

U.S. Developments

  1. Unamended Infrastructure Bill with “Broker” Reporting Requirements Set for Vote in September

The U.S. House of Representatives locked in a date of September 27, 2021, for the vote on a $1 trillion infrastructure bill with a prohibition on additional amendments. The bill was previously passed by the Senate in a 69-30 vote on August 10, 2021.

The final version of the bill contains controversial language implementing stricter tax reporting requirements for “brokers.” This provision requires that gross proceeds, along with names and addresses of the transacting parties, be reported to the Internal Revenue Service. Advocates of cryptocurrency have expressed concerns over the bill’s definition of “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This broad definition potentially encompasses noncustodial blockchain intermediaries, such as miners, developers, and stakers who do not have access to customer information that they would be required to report.

Over the past two weeks, this broker reporting provision has generated waves of controversy within the crypto community, along with creating an impasse within Congress. Previously, a bipartisan group of senators including Patrick Toomey (R-Pa.), Ron Wyden (D-Ore.), and Cynthia Lummis (R-Wyo.) attempted, but failed, to pass an amendment explicitly excluding any individuals solely engaged in the business of “validating distributed ledger transactions,” “selling hardware or software for which the sole function is to permit a person to control private keys which are used for accessing digital assets on a distributed ledger,” or “developing digital assets or their corresponding protocols for use by other persons, provided that such other persons are not customers” of the developer. Concerns from the Biden administration regarding tax compliance given such broad exemption language led to a competing effort by Senators Mark Warner (D-Va.) and Rob Portman (R-Ohio) to narrow the definition of “broker” in a manner that would only protect proof-of-work miners from reporting requirements.

Despite these two rejected amendments aiming to clarify the definition of “brokers,” the version of the bill to be voted on preserves the original language. However, the Treasury Department has indicated that it will not target non-brokers, such as miners, hardware developers, and others, despite the definition in the bill remaining broad. Further, a spokesperson for Senator Portman clarified to The Washington Post that the legislation wouldn’t “force non-brokers, such as software developers and crypto miners, to comply.” The source explained that the intent was to capture more standard broker dealer activities, namely, facilitating trades for clients and receiving cash compensation. Regardless of these clarifications, the broad definition of “broker” in the unamended provision continues to be a source of concern for many.

You can find the text of the bill here.

  1. 2. CFTC Provides Clarification on Its Regulatory and Enforcement Authority

To inform the general public about the jurisdictional reach and authority of the Commodity Futures Trading Commission (CFTC), Commissioner Dawn Stump laid out 10 points that were detailed in a corresponding infographic released by the commission. No novel guidance was included.

The CFTC is not authorized under the Commodity Exchange Act to regulate commodities or commodity “spot” markets, but instead is charged with regulating the derivative markets, including those relating to digital assets and securities. Derivatives are contracts relating to assets, such as a futures contract to buy or sell an asset at a specific price and time in the future. Further, the CFTC is empowered to enforce penalties in relation to market manipulation and fraud in the derivative markets and cash commodities markets.

Since the Securities and Exchange Commission (SEC) also lacks authority to regulate the spot markets, there have been ongoing regulatory concerns and discussion regarding a gap in authority over the commodity spot markets. If a digital asset is categorized as a commodity and not a security by the SEC and the CFTC, then no governmental body currently has the explicit authority to regulate markets where such a digital asset is traded.

See https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement082321 and the infographic linked to above.

International Developments

  1. Despite El Salvador’s Strongly Worded Bitcoin Law, Bitcoin Usage Remains “Totally Optional”

In June 2021, El Salvador became the first country to officially recognize bitcoin as legal tender. The language of the El Salvadorian “Bitcoin Law” appears to compel all merchants to accept payment made in bitcoin, stating in Article 7 that “[e]very economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”

Despite this language, El Salvador’s finance minister, Alejandro Zelaya, stated on August 24, 2021, that bitcoin use is “totally optional” and that there will be no sanctions on businesses not accepting it. Although these statements were not confirmed by the El Salvadorian Central Bank, the Central Bank released a consultative draft identifying technical standards to facilitate the application of the Bitcoin Law. The consultative draft states that the entities obliged to accept bitcoin are those financial institutions interested in providing bitcoin conversion or exchange services, such as digital wallets, digital exchange houses, payment service providers, and other agents including custodians and technology providers related to bitcoin. Although clarity is needed, this consultative draft suggests a much narrower obligation than that expressed by the language in Article 7 of the Bitcoin Law.

The El Salvadorian Bitcoin Law represents one thread in a global trend of countries beginning to recognize and accept crypto assets as functioning tender. Another recent crypto asset bill presented in early August by Uruguayan Senator Juan Sartori states, “Crypto assets will be recognized and accepted by law and applicable in any legal transaction” and “will be considered a valid means of payment … as long as they comply with the rules set forth in the law and the regulations.” However, this bill does not propose explicitly qualifying cryptocurrency as legal tender.

  1. China’s Shandong Supreme Court Holds Crypto Assets Not Legally Protected

In a statement on August 22, 2021, the supreme court in China’s Shandong province stated that “cryptocurrency is not protected by law” when reviewing a case regarding fraud allegations in a purchase of crypto assets.

In the case that led to this statement, first heard by a court in Jinan, Chinese plaintiff Ma entrusted defendants with almost US$10,800 (70,000 yuan) to invest in cryptocurrency; however, these assets were inaccessible once the trading accounts were closed in 2018, after the People’s Bank of China instituted a ban on payment institutions supporting cryptocurrency transactions in 2017. Agreeing with the lower court’s ruling, the Shandong Supreme Court held that since cryptocurrency does not hold legal status, the plaintiff had no remedy to access the locked funds.

This holding runs counter to the prior week’s finding by Shanghai’s Minhang District Court that crypto is protected as virtual property. That case involved a plaintiff who purchased bitcoin mining machines but then claimed the sale was invalid due to the People’s Bank of China 2017 prohibition on cryptocurrency investing. The court ruled that, although bitcoin is not legal currency, it does hold the attributes of a virtual commodity due to its exchangeability, excludability, and availability.

See South China Morning Post Original Reporting of Shandong Supreme Court Case and the Chinese-language explanation of the Shanghai Minhang District Court Case from the court itself.

  1. Thailand Releases Crypto Custodian Regulations

Following a warning in June 2021 regarding impending crypto regulation, Thailand’s Securities and Exchange Commission has drafted new regulations relating to the custody of clients’ assets in digital asset businesses with the goal of enhancing investor protection.

These rules primarily govern what practices crypto custodians must adopt, stating that crypto custodians who accept fiat deposits “shall comply with the principles for decentralized approval authority, multi-sign approval authority, and check and balance, in the similar manner as custody of digital assets.” Further, all assets must be used for the benefit of the client only, and clients’ assets shall be “reconciled every business day to ensure accurate and updated records.” The regulations also prohibit custodians from using clients’ fiat deposits for any benefit, except in the form of a commercial bank deposit, and from using digital assets held in custody for any benefit, including lending to others.

  1. Bitcoin Stability Leveraged in Afghanistan Amid Taliban Takeover

In July 2021, mere weeks before the Taliban coup in Kabul on August 16, Google Trends data revealed a spike in search queries regarding “bitcoin” and “crypto” in Afghanistan. In a 2021 listing of highest cryptocurrency adoption by country, Afghanistan ranked seventh in peer-to-peer exchange volume, according to the Global Crypto Adoption Index released by Chainalysis. In 2020 Afghanistan did not make the list. This data suggests that Afghans have been relying on crypto assets in anticipation of continued economic and political instability. Now, in a financial desert—where banks have shuttered their doors, shut off ATMs, and suspended money transmission services—crypto has provided a rare source of financial stability for Afghans who have been able to access it mid-crisis.

*The authors wish to acknowledge the contributions of summer associate Sabina Beleuz.

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