How will U.S. crypto regulations impact NFTs?

by Shekinah Apedo

The U.S. Senate Committee on Banking's hearing, Cryptocurrencies: What are they good for?, echoed varying degrees of FUD (fear, uncertainty, doubt) mostly concentrated on rogue miners, sanctions-evading criminals, and energy consumption. In a bipartisan push for regulation, there were outrageous considerations of identifying software developers and miners as fiduciary players, and that China outlawed mining to strategically force miners to flee to the West, in order to disrupt U.S. financial systems.

On the back of that hearing now comes a draft bill where the White House states that cryptocurrencies will help finance the long-awaited U.S. infrastructure plan: "In the years ahead, the deal will generate significant economic benefits. It is financed through a combination of redirecting unspent emergency relief funds, targeted corporate user fees, strengthening tax enforcement when it comes to crypto currencies, and other bipartisan measures, in addition to the revenue generated from higher economic growth as a result of the investments."

Buried in the hundreds of pages, yet to be made public, is a bipartisan proposal to increase regulations on cryptocurrency transactions. As reported by CoinDesk, the draft legislation redefines broker to include decentralized exchanges and peer-to-peer exchanges, and can be interpreted to apply to "software wallet developers, hardware wallet manufacturers, multisig providers, governance token holders, and maybe even, miners."

More concerning for NFT artists, collectors, and marketplaces is how the bill defines digital assets as "any digital representation of value recorded on a cryptographically secured distributed ledger." The bill has new reporting requirements for crypto brokers, and mandates that crypto transactions exceeding $10,000 be reported to the Internal Revenue Service (IRS). What's the floor for CryptoPunks and Apes? The possibility of NFT marketplaces having to conduct some level of KYC (know-your-customer) and overall due diligence is highly likely. With taxable events already including crypto air drops, liquidity pools, staking, miner's block rewards, and buying NFTs with crypto; this new legislation could further impact participant behavior in NFT markets.

If it passes, the bill is set to raise $28 billion of the $550 billion infrastructure package. As of July 28th, the U.S. Senate has voted with bipartisan support, 67-32, to initiate debates.

UPDATE: On August 10th, the U.S. Senate passed the Infrastructure Bill without editing text that uniquely impacts the cryptocurrency industry. The bill will now head to the U.S. House of Representatives. Minnesota Congressman, Tom Emmer stated: "I, along with bipartisan Blockchain Caucus co-chairs Rep. Darren Soto, Rep. David Schweikert, and Rep. Bill Foster sent a letter to every single Representative in the House raising concerns about the Senate infrastructure bill being paid for by our crypto industry."

The hope is now that crypto industry advocates and like-minded Representatives can create a whole new amendment that addresses the industry's concerns.