It’s tax szn. While all eyes are still on market structure in the Senate, the House is moving forward with various tax proposals which (if done right) could be the second biggest driver of adoption to crypto after market structure legislation. There were also a lot of developments as the banks and their prudential regulators grapple with what banking on blockchain means for the industry, and a ZCash vulnerability which forced people to ask hard questions about the give-and-take for permissionless systems that also enabled privacy making auditing and catching such vulnerabilities real-time more difficult.
Here’s everything that happened last week in crypto law:
Crypto Tax Bills Dropped
The House Ways and Means committee is circulating seven tax bills ahead of an upcoming hearing. These bills took what was previously the discussion draft bill prepared by Representatives Max Miller and Steven Horsford and split them into different bills covering various topics from stablecoins to staking and a range of other issuers. This is a bipartisan effort and tax issues are one of the rare things that can get passed in Congress after August in an election year, so definitely something to keep an eye on.
Tl;dr– While all eyes are on market structure, crypto tax issues are almost as important to get right when it comes to ensuring America stays the crypto capital of the world. I like the strategy of releasing these as a set of bills with different sponsors for each to optimize their political capital to get their bills passed, but it makes it hard to determine a reasonable compromise. If crypto is giving up the benefits of being able to wash trade, then there needs to be fixes to things like staking taxes (for issues like this to stop happening) and de minimus use of crypto for purchases.
OTHER STORIES
Prudential Regulators Hearing: The House Financial Services Committee held a hearing with the heads of the NCUA, Fed., FDIC, and OCC. NCUA Chair Kyle Haupman came out swinging against claims that stablecoins rewards would somehow harm the credit unions he oversees. Love to see it.
Illinois Crypto Tax: At 4:00 AM without any industry input or forewarning, Illinois snuck a .2% tax on crypto at the last minute into its budget bill. Maybe having SOME experts weigh in would have told them this is disastrous and, if implemented, would affect not just crypto but also digital bank transfers. Oopsie Doopsie.
ZCash Vulnerability: A security auditor using AI was able to find a flaw in one of the shielding protocol which allowed people to withdraw tokens from the pool which they didn’t contribute. It seems like the only people potentially effected would be people with their tokens in that shielded pool, but it is a reminder that with privacy also comes the risk of unknown threats being exploited outside of public viewing.
Vault Advocacy: After prediction markets and stablecoins, I think the next big crypto consumer product is going to be vaults and smart-contract controlled asset deployments. So big ups to Crypto Council for Innovation for forming a group focused on the issue. Hoping there is a way for The Digital Chamber to team up with them on some work in this area.
Banks That Hate Market Structure Tokenizing Deposits: Well well well, how the turn tables. For anybody wondering why some banks REALLY opposing market structure legislation, look no further than this recent effort from the major players to tokenize deposits. Stablecoin yield isn’t a threat to deposits, they are a threat of a different blockchain-enabled product line banks are trying to push forward.
DeFi PAC: Love to see this new PAC focused on funding campaigns of politicians who see the value of DeFi. Crypto PACs are a force in elections as of late, so great to see DeFi getting a seat at the table.
UK Doing UK Anti-Crypto Things: The UK cannot stop shooting itself in the foot, between its disastrous stablecoin rules to recent efforts to block advertising prediction markets by soccer teams. Honestly, it reminds me to how the U.S. was trying to kill crypto a few years ago. Hopefully they see the error in their wats like the U.S. has.
Over the Counter (“OTC”) Prediction Markets: Galaxy Digital and Arca executed a $10 million OTC trade over Clarity Act passage prediction market positions, showing institutional scale has reached prediction markets. This is the Bitcoin Pizza Day for prediction markets as institutional scale hedging.
CME Loves Crypto (but only theirs): Big week for the Chicago Mercantile Exchange as they slam crypto products they don’t offer (perpetual futures) while making buckets of cash on 24/7 crypto trading. Honestly, I can respect the hustle, but it’s crazy these TradFi actors don’t think people can see their blatant regulatory capture attempts and think people believe they have legitimate concerns over anything but their bottom lines.
CFTC Allows Settlement Normalization: The CFTC has followed the SEC’s lead in allowing entities to settle civil claims while denying liability. This is how it works in all other civil litigation so it made no sense for the regulators to not allow it in theirs while having the full weight and funding of the American government when it pursued civil claims.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Farcaster. Any typos or errors are intentional to prove I am not AI. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
Outro/Disclaimer: In late 2022, while I was at Polsinelli, I started preparing weekly updates for attorneys at the firm to stay abreast of the latest Web3 legal developments. I now post the weekly updates on my personal blog every Tuesday, where I also provide links to more obscure legal developments and otherwise discuss industry trends and stories. Please note, the views and opinions I express are solely my own. They do not reflect the official stance or endorsement of the Digital Chamber or any of its members.
The NFTtorney 