Abstract

Excerpted From: Asha E. McCorvey, The Hack of the Racial Wealth Gap: How the “American Families Plan” Will Jeopardize the Anonymity of Cryptocurrency Transactions and Potentially Harm Investors of Color, 26 North Carolina Banking Institute 165 (March, 2022) (206 Footnotes) (Full Document)

As technology becomes more entwined with the financial services industry, federal and state governments have increasingly attempted to regulate a type of currency that is shrouded in anonymity. Cryptocurrencies (“cryptos”) are digital currencies that lack a central regulating authority and rely on cryptography to secure transactions. Government officials, academics, and concerned investors have recently called for the regulation of cryptos for a myriad of reasons, including the evasion of government regulations by crypto investors, the volitive and explosive growth of the market value of crypto, and the environmental impact that accompanies “mining” crypto. Consequently, government agencies from around the world are conceiving innovative ideas on how to regulate a market that was arguably created to avoid such rigid oversight.

In April 2021, the Biden Administration announced extended regulations aimed at creating a more comprehensive legal structure for digital currencies. President Biden's proposal, the American Families Plan (“The A.F.P.”), is a robust and comprehensive series of reforms meant to ensure a more equitable tax system and enable the upward mobility of children and families. The A.F.P. and the accompanying American Jobs Plan, President Biden's infrastructure scheme, are purported to be “once-in-a-generation-investments” into the future of the country. President Biden has since consolidated these proposals into “The Build Back Better Framework.”

The A.F.P. includes the “Tax Compliance Agenda” which proposes increased regulatory oversight of digital currencies by subjecting financial transactions, including crypto asset exchanges, to third-party reporting. Specifically, the proposal would require that these asset exchanges provide “comprehensive information reporting on the inflows and outflows of financial accounts” which would also extend the scope of broker information reporting. The proposed reforms in the Tax Compliance Agenda reflect the federal government's desire to regulate the crypto market in order to assist in achieving some of its broader policy goals and to also subject crypto transactions to the same rules as traditional currency.

Specifically, the Biden Administration stipulates that the proposed changes to tax form reporting would significantly increase the effectiveness of the Internal Revenue Service (“IRS”) by encouraging voluntary compliance. In a June 2021 appearance before the Senate Finance Committee, IRS Commissioner Charles Rettig emphasized the necessity of increased measures, stating that a significant portion of profits from crypto investments are underreported since many cryptos “are designed to stay off the radar screens.” The IRS reporting scheme would work in tandem with or function as an extension of crypto regulations proposed by other government agencies. For example, on page twenty-one of the Tax Compliance Agenda, the Financial Crimes Enforcement Network, (“FinCEN”), has recommended that “unhosted” crypto wallets should be subject to detailed reporting for transactions greater than $10,000 that involve organizations regulated by the Bank Secrecy Act similar to a “Form 8300 designed to combat Money Laundering.” Gary Gensler, Chairman of the Security and Exchange Commission (the “SEC”), has also stated that the “Wild West” nature of the crypto market requires government action.

Although the Biden Administration has previously stated that one of primary goals of the A.F.P. is to enable upward economic mobility, scholars and policymakers have expressed concern with the potential privacy implications that accompany the Tax Compliance Agenda. In September 2021, more than 100 U.S. Representatives signed a letter sent to the IRS Commissioner, the U.S. Secretary of Treasury, and congressional leaders to express concern about the tax provision in the A.F.P. Specifically, congressional lawmakers reported that Biden's proposed reforms for financial institution reporting and other “financial services providers” will not “substantially aid” in closing of the “tax gap” and instead will infringe on the privacy of American citizens. In addition, the Blockchain Association, Coinbase, and several other private organizations wrote in a statement that the proposed regulations could cause an increase in “financial surveillance.” Key crypto stakeholders, including private firms and organizations that advocate for the digital rights of individuals, have also expressed concern with the regulations proposed in the A.F.P. and American Jobs Plans, with some positing that Biden's plans have untenable requirements that will have negative consequences on crypto creators. By focusing on the strengthening of IRS compliance to curtail tax evasion, the government could also harm American crypto investors.

The proposed regulations may also have an adverse effect on minority investors. The novelty and relatively simple learning curve of crypto has attracted an increasingly large number of investors of color. According to a June 2021 poll conducted by the University of Chicago, more than 44% of crypto investors are persons of color, with some viewing virtual currencies as the key to generating wealth for people that have been excluded from traditional wealth-building opportunities (i.e., the stock market). Specifically, some experts believe that crypto investments can assist in closing the racial wealth gap between black and white families which has exponentially increased to a staggering estimated $154,000 per family since 1992.

This Note is divided into three segments and will explore how the federal government is responding to the rise in cryptos. Specifically, the Note details how the A.F.P.'s Tax Compliance Agenda will increase oversight of anonymous crypto transactions. Part I will focus on the history of digital currencies and their current role in worldwide financial markets. Part II will explore the potential effect that President Biden's American Families Plan will have on cryptos, if enacted. Part III explores how the increased reporting of crypto assets erodes the anonymity principles at the core of digital currency. Part IV introduces a policy argument that the A.F.P. potentially undermines its goal by imposing burdensome regulations that negatively impact crypto investors of color, many of whom already experience significant barriers in traditional forms of investment. Finally, Part V will conclude this Note by summarizing the legal argument and providing an update on current legislation.

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The policy implications of the American Families Plan could have unprecedented effects on the anonymity of cryptos. Although the proposed regulations could increase investor confidence in digital currencies, these regulations could cause a significant decline in network usage as some users would still prefer for their transactions to occur in private. Notably, these regulations could promulgate further reform with blockchain technology as required government reporting could lead to significant infrastructural changes with regards in public and private networks. Lastly, increased regulation would have a negative effect on crypto investors of color, many of whom are already significantly disadvantaged in accumulating wealth.

Presently, the future as to the passage of the proposed legislation is uncertain. As of December 2021, the A.F.P., through its integration into the Build Back Better Act has passed through the United States House of Representatives in November 2021, but is currently in limbo in the United States Senate. A small cohort of Democratic Senators along with a larger swarth of their Republican colleagues, have voiced opposition to the bill, with some arguing that it's overly broad. In a statement released on December 19th, Senator Joe Manchin (D-WV) reasoned that, “[his] Democratic colleagues in Washington are determined to dramatically reshape our society in a way that leaves our country even more vulnerable to the threats we face” and as such is declining to support the bill in its current status. Consequently, Goldman Sachs reduced its forecast for the economic growth of the United States, noting that the passage of the Build Back Better Act is likely to fail.