Crypto firm sounds alarm on law that collects user IDs on $10,000 purchases

Time is running out for the crypto industry to fight a new law that will force US businesses to collect personal information on people who use digital assets worth more than $10,000 to buy stuff.

The new rules will snap into action on January 1, 2024.

Last year, crypto think-tank Coin Center sued the Treasury Department and Treasury Secretary Janet Yellen, which have been charged with implementing the regulation, arguing the new rules are tantamount to “unconstitutional financial surveillance.”

Still, a judge threw out the case in July, saying Coin Center and its co-plaintiffs didn’t have standing to sue because the regulation had not yet taken effect, and any purported harm was speculative.

“This law will apply to all of us in six months, so time is of the essence, and we’ll be appealing to the Sixth Circuit right away,” Coin Center Executive Director Jerry Brito said on X, the social media platform formerly known as Twitter.

Coin Center declined to comment for this story. The organisation and its co-plaintiffs filed their appeal two days after the judge’s ruling.

‘Digital assets are not special’

In court, the Department of Justice argued the regulation was a simple extension of the battle-tested authority of Congress to bolster tax compliance.

“Though our system of taxation is based on voluntary compliance, Congress’s authority to require disclosure of transactions has been upheld since the modern tax system was established,” the government’s attorneys argued. “Digital assets are not special.”

The fight over the inbound law comes as politicians on Capitol Hill squabble over the contours of a regulatory framework for crypto.

US lawmakers have spent the past year brawling over what should be done to stop money laundering and terror financing with crypto, and where to draw the line between providing people freedom to innovate and not allowing them to come to financial harm.

The Infrastructure Investment and Jobs Act

The issue can be traced back to 2021.

As lawmakers haggled over the trillion-dollar Infrastructure Investment and Jobs Act, one of them added a few words almost 2,500 pages into the bill.

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Those words will, from the start of next year, subject people who use crypto to the same reporting standard as cash.

When the regulation takes effect, businesses will have to collect the name, address, and social security number of anyone who pays for goods or services with crypto worth $10,000 or more.

“One of the government’s best defences against tax evasion is collecting information about taxpayers when they send or receive money,” government attorneys argued in court.

“These requirements have survived numerous constitutional challenges by taxpayers unhappy to learn that the IRS is aware of income they receive from sources that would otherwise be difficult to trace.

“Much like cash,” the attorneys continued, “cryptocurrency allows taxpayers to exchange value in ways that might otherwise escape detection by taxing authorities like the IRS.”

President Joe Biden’s administration has previously flagged that it is cracking down on crypto.

In May, during the protracted battle on Capitol Hill over raising the US debt ceiling, the White House tweeted that Congress should “tax loopholes that help wealthy crypto investors” keep about $18 billion in taxes.

Surveillance fears

Although the new regulation mirrors existing cash transaction rules, it may have far-reaching effects, due to the nature of blockchain technology.

The problem is that it may put people’s privacy at risk, Bryan Jacoutot, an attorney at Atlanta-based law firm Taylor English Duma, told DL News.

The transparent nature of blockchains mean that anyone “with enough time and energy” could use the technology to track people’s transactions, Jacoutot said.

Over time, they could identify people who had never been subject to the reporting requirement, and, in turn, anything they had ever done on the blockchain.

“The US government’s going to be able to surveil everybody, even if they don’t enter into business transactions and they’re operating in the law but nevertheless want to remain anonymous,” he added.

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And it could impact certain businesses’ ability to work with the anonymous developers behind many top DeFi protocols.

“As a law firm that does a lot of work in the cryptocurrency industry, we accept a fair amount of cryptocurrency as payment,” said Moishe Peltz, a partner at Falcon, Rappaport and Berkman and a co-chair of the firm’s emerging technology and blockchain practice group.

“The client/attorney relationship is confidential … there’s not a good reason for us to have to disclose to the government the names and identities and the blockchain addresses of the payors for our legal services.”

More trouble than it’s worth

Still, appealing the ruling might be more trouble than it’s worth, according to Jacoutot, who is building out the Bitcoin practice at Taylor English.

“It looks like the court left them an out by dismissing the case without prejudice,” he said. “The judge essentially left open the ability for them to refile the same claim when the time comes.”

Additionally, appealing will limit the arguments Coin Center can make in court, according to Jacoutot.

“It also shoe-horns you into your arguments that you had previously [made] that you may want to sharpen,” he said.

Furthermore, the judge’s ruling in the case was reasonable, he said, in part because the Treasury Department will have a say in shaping how this is enforced once it takes effect next year.

“We don’t even know what this law is going to look like when it’s all said and done. That’s another reason why this judge was hesitant,” Jacoutot said.

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Peltz said it would be difficult for his clients to prepare for the ruling to take effect.

“Without some clarity as to the merits of the case, it’s hard to know what kinds of contingencies people should make,” he said. “Either the rule is going to stand on its merits or it’s not. Unfortunately the court didn’t reach the merits in its decision.”

Jacoutot’s clients have yet to raise the alarm.

“In this particular case, there hasn’t been a huge amount of discussion, at least in my circles,” he said.

Peltz agreed.

“It’s just something we’re going to have to address with our clients that choose to pay in crypto,” he said. “I certainly have clients that would have to raise an eyebrow about paying in crypto if they knew that we would be disclosing their addresses to the government.”

Have a tip about the government’s crackdown on crypto? Email me at aleks@dlnews.com.