Crypto Venture

US Crypto Companies, Venture Investors Voice Concern Over Infrastructure Bill

Even as the U.S. House readies to debate the proposed $1 trillion infrastructure bill, crypto companies and investors are worried that unclear and hazy language concerning the industry could ​increase federal regulations and stifle innovation and investment in the country.

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“I think what founders and investors want is clarity — not risk,” said Spencer Bogart, a general partner at San Francisco-based Blockchain Capital. “They don’t want the ground shifting under them.”

The infrastructure bill — which passed through the U.S. Senate Tuesday — would raise about $28 billion over a decade by requiring increased tax compliance and imposing tax-reporting requirements for cryptocurrency brokers. The fact crypto makes up a small part of the bill can be considered a watershed moment for the industry, as it’s a clear indication lawmakers view digital assets as a significant part of the economy moving forward, and want the ability to monitor and regulate it as it is expected to grow.

While much of it is nothing new for crypto brokers except for likely tighter tax enforcement — for example, large players in the space, like Coinbase, already have observed reporting requirements — the vague definition of  “brokers” used by the bill could allow for new, tighter regulations for those who mine, develop software and build other infrastructure around the crypto ecosystem.

Those in the crypto space worry the regulation will put new tax-reporting obligations on companies and even individual miners that have no direct role in a crypto transaction, but will need users’ data they currently do not have to give to the IRS.

That possibility has sounded some alarms in the industry.

Venture dollars pour in

Crypto and blockchain has been an increasingly popular area for venture capital. This year already has seen record money for the industry. To date, nearly $6.5 billion of venture has been invested in the sector — more than doubling the $2.6 billion last year saw.

Deal flow also has seen an uptick from last year, with 257 rounds being announced already this year compared to 278 in 2020.

“Crypto has gotten quite large,” Bogart said. “I imagine there will be a lot of pushback if no one can come to a reasonable solution.”

If not, U.S. companies could suffer, and investment in U.S.-based firms may well lessen, say those in the industry.

“I think it’s a very real possibility investors will look outside the U.S. when investing in crypto,” said Yash Patel, general partner at Telstra Ventures, which is currently evaluating investment opportunities around the consumer and infrastructure aspects of crypto.

Patel said some crypto exchanges already are timid about entering a U.S. regulatory environment where there was uncertainty before the infrastructure bill — especially with the  Securities and Exchange Commission voicing the opinion that crypto falls under securities law — and with foreign markets such as Southeast Asia taking off.

While the U.S. venture market is booming when it comes to crypto, so is the worldwide venture market. Crypto companies outside the U.S. have taken in $2.4 billion of funding so far this year.

“I think it’s a sad state of affairs,” Bogart said. “We’ve looked at (crypto) companies outside of the U.S. because of regulations.”

Companies closely watching

Pat White, co-founder and CEO of San Francisco-based Bitwave, fears his company is one of those that will have more tax-reporting requirements with the current language in the bill.

Bitwave supplies back-office software solutions to enterprises that accept cryptocurrencies and helps them with bookkeeping and other accounting practices.

Despite not being a direct part of crypto transactions, White said Bitwave could have reporting requirements, but would not have access to the necessary data to comply.

“There are already clear regulations in place when it comes to taxes,” he said. “We all know you pay capital gains tax when you sell crypto. When you mine it, you pay income taxes. The rules are there.”

Instead, White said, the government is trying to inconsistently apply new rules.

“This will punish compliance-conscientious miners from the United States, and have a chilling effect on innovation,” he said.

Wait and see

Patel remains hopeful changes will be made as the bill works its way through Capitol Hill. Last-minute amendments by senators earlier this week seemingly had some support before ultimately being left behind — in some cases due to procedural issues rather than disagreement.

“I just think there are unintended consequences senators are not thinking about,” said Patel, who thinks this could negatively affect digital wallet makers, infrastructure developers and miners who validate transactions from an investment perspective.

Labelling crypto companies that do not touch transactions as “brokers” and expecting them to have user data also would bring up significant privacy concerns, he adds. He compared it to if the government decades ago would have asked email providers to pull information from every email that went through their servers.

“No one would have asked that,” he said.

“However, I do remain optimistic that the House will make this more feasible for everyone,” he said.

Methodology

Crypto, as defined in this article, includes startups in the Crunchbase dataset that are working within the industries of cryptocurrency and blockchain. Funding numbers include pre-seed, seed and all venture rounds.

Illustration: Dom Guzman

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