Something that can often be neglected by such reasoning is the nature of illegal payments. People conducting illicit transactions, either by selling drugs or conducting other criminal activities, are the ones less likely to abide by these rules in the first place. And even though the receiver is responsible for reporting, hardly ever will someone engage in trade with criminals if they aren’t performing criminal activities themselves.
Additionally, as Michele Korver, chief digital currency advisor to the director of FinCEN, recently shared in a Department of Justice journal, “…as mainstream adoption of cryptocurrency has grown, the percentage of transactions used to promote or conceal crime has also decreased.”
But regardless of the disputed merits of surveillance to stop or prevent criminal activity, these reporting requirements are often difficult or impossible to abide by in the context of bitcoin transactions. Pseudonymous by nature, Bitcoin is also permissionless, and peers in the network do not have the necessary information to provide the IRS and the FinCEN. And even if they did, the probable consequences of such addition to the bill could be harsh. The privacy and thus the security of regular Americans would be at risk.
To a certain extent, these requirements are similar to know-your-customer (KYC) procedures used throughout the financial system. Third parties, usually financial intermediaries, often collect extensive amounts of data from their users to comply with the law. However, the long-term effectiveness and downstream consequences of these tactics are rarely discussed. KYC and similar strategies more often than not don’t deliver on their promises and end up increasing the attack surface for every single individual.
Furthermore, the extent to which the Infrastructure Bill seeks to regulate bitcoin and cryptocurrency transactions might backlash because, faced with the impossibility of reporting, people and businesses might be pushed away from engaging in such trades in the U.S. altogether — ultimately risking the country’s current leadership status in technology and finance. Innovation will naturally gravitate towards the places that welcome it the most.
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For a more complete and detailed discussion of this recent addition to the infrastructure bill, please see Abraham Sutherland’s “ The Proposal to Regulate Digital Asset Transactions Should Be Struck .”
