On 15 November 2021, US President Biden signed into law the Infrastructure Investment and Jobs Act (“IIJA”). This bipartisan infrastructure package dedicates over $1.2 trillion to upgrading America’s infrastructure over the next decade. Included in the package are new authorities for the US Internal Revenue Service and Treasury Department, giving them the power to establish tax reporting rules for cryptocurrency transactions starting in 2023.
The provision entitled “Information Reporting for Brokers and Digital Assets” in the IIJA is designed to bolster tax-enforcement efforts and help pay for the spending authorized by the bill. The bill mandates that a broker will have to report any digital asset transfer moved to the account of an unknown person or address. The new rules stand to put tremendous emphasis on a broker’s Know Your Customer (KYC) and tax information reporting systems. To lower reporting obligations, a firm will need to have a robust means of identifying customers and accounts that receive transfers.
Passage of the IIJA followed the Report on Stablecoins that was issued by the Presidential Working Group Report on Capital Markets (PWG) which called for stablecoin issuers to be regulated as a depository institution. This report called on US Congress to pass legislation subjecting these firms to prudential supervision and in the intervening period, it outlined existing enforcement authority possessed by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and the Financial Stability Oversight Council (FSOC).
These two events taken together present a sea change in the regulatory expectations for crypto brokers and firms dealing in digital assets. Going forward, these firms will need to have extensive KYC, AML and tax reporting infrastructure. Additionally, if they are issuing stablecoins, they should be prepared to meet the regulatory burdens that are expected of depository institutions including capital requirements and strict disclosure rules.