‘Know-nothing” Washington officials are scary. Sometimes they rush to do the wrong thing just to avoid the “Do-nothing label.” A recent example is the effort to regulate technologies they do not understand, namely cryptocurrencies.
The most recent crypto debate surfaced in an abnormal way. Congress tacked a provision onto the massive infrastructure bill, adding a hastily written tax-reporting requirement for digital currency transactions.
For years, most lawmakers were apathetic about crypto and abdicated crypto matters to the executive branch, or ignored the technology entirely. But some in Congress took a sudden interest in crypto when they saw a way to milk it as a new source of revenue. Lawmakers in Washington are meddling with a technology that they clearly don’t understand. Sen. Ted Cruz, R-Texas, was probably being overly generous when he said that maybe five members of Congress know anything about the topic.
Bureaucrats have been no better. In the absence of clear federal laws, bureaucrats were making a mess, misinterpreting court rulings from nearly a century ago as an excuse not only to regulate cryptocurrencies but to pick and choose which ones to suppress and which to leave alone. The prime example came late last year when the SEC arbitrarily decided that some digital assets are securities and it filed a sweeping lawsuit against the payments company Ripple Labs. Ripple, which uses the XRP cryptocurrency in its cross-border payments product, now faces a multi-billion-dollar SEC lawsuit. Ripple has countered that the SEC has offered a free pass to other cryptocurrencies like Ethereum, which many argue is more akin to a security than XRP.
Instead of stepping in to cut the red-tape debate, Congress wants to tax the industry. The Senate included a rider in the infrastructure bill, creating a new reporting requirement that anyone who helps to transfer “digital assets” must then give oodles of information to the IRS about everybody involved. This “Big Brother” approach is part of why the IRS wants to double its size—hiring 87,000 new agents to chase taxpayers. Fortunately, it’s not too late to fix this before it becomes law. The House of Representatives could still strip the reporting language from the bill—and should do so.
Cryptocurrencies are not Economics 101. They are complex and deserve careful consideration from our legislators. They involve higher-level economics blended with techno-savvy. But this is no excuse for congressional dithering, and the SEC’s case against Ripple makes that blatantly obvious. Congress must offer bureaucrats some clearer guardrails around digital assets or we will end up losing the national initiative on this transformative technology.
Around the world, electronic transactions are replacing physical wallets with cyber-wallets. Paper checks are on the way out, with the Federal Reserve saying households now average writing only three checks a month. Online payment services continue to proliferate. It is not just PayPal and Square and ApplePay, but also Wild Apricot, Stripe, Nium, and a host of others. The lines between those technologies and the notion of cryptocurrency are getting blurry as new technologies are applied.
If this ridiculous and chaotic situation is not resolved soon, many of America’s greatest innovators – those building virtual currency projects that could revolutionize our economy – could flee the country in exasperation.
Instead of trying to expand the regulatory state, Congress should think about the massive economic growth if crypto was addressed by thoughtful legislative consideration instead of piecemeal regulation.
And the IRS should not try to spy on every financial transaction. What Congress is doing to cryptocurrency reporting is not only a problem for their system of blockchains. It could be the start of more government chains for each of us.
Former U.S. Congressman Ernest Istook is a practicing attorney and is founder of the non-profit, Americans for Less Regulation.