The United States Infrastructure Bill, passed in November 2021, has a number of new rules aimed at controlling digital asset use. One major change is an eight-word alteration to Section 60501 of the U.S. tax code, defining digital assets as cash for the first time.
Most digital asset fans and users wouldn’t argue with that definition (after all, the title of Bitcoin’s 2008 white paper includes the words “P2P electronic cash system”). However, the section of the tax code that was altered is the one detailing reporting requirements for business transactions over US$10,000.
Any business transacting more than that amount in Bitcoin or any other digital asset must now gather data such as real names, addresses, phone numbers, Social Security numbers and any other information the IRS deems relevant. They must then report these transaction details to the authorities, and failure to do so will now be a felony.
Foreign currencies were already included under the definition of a $10,000-or-more “cash” transaction, but the changes in the new Infrastructure Bill now bring digital assets under that definition. The “travel rule” will now apply to all digital currency transactions worth over $10,000—something likely to have massive follow-on effects in the digital asset industry.
At the moment, most of that industry’s value is in speculative trading, and most of the transactions would be flows to and from exchanges. When that economy expands to include more “regular” payments and transactions, all businesses will need to report. The new requirements, should they remain, will affect the entire industry as well as other assets and “DeFi” networks. However, the latter is more focused on large financial transactions, whereas much of the BSV economy is focused on small payments and micro/nano-transactions.
Criticisms of the ‘bricks of cash’ definition
A recent Wall Street Journal article criticized the change, saying it would “thwart development of this new technology and effectively ban many uses of digital assets.” Doing this would only “entrench existing financial institutions and big tech at the same time it forces Americans to report one another or face a felony charge,” it said.
The Journal also noted the law may be “constitutionally suspect” under the Fourth Amendment (due to the types of personal information businesses of any size will be required to collect). There is already a bipartisan push in Congress to repeal the 60501 amendment.
Sending Bitcoin, under U.S. law, is now the same as handing someone a brick of cash. And governments around the world do not like transactions in bricks of cash—try it and you’ll immediately draw attention to yourself.
In the U.S., reporting transactions of $10,000 or over has been law since 1984.
Pretty much no one transacts in bricks of cash, despite what you might read on internet forums. Cash these days is intended for small daily purchases, not large transactions. Bitcoin, though, is digital cash—you can transfer as much as you want, to whomever you want, to another address as fast as the network will allow.
You can understand how this idea alarms regulators. There are all sort of checks in the system to prevent people using large amounts of cash at once: it’s usually issued in low denominations to make it difficult to transport and/or secure (inflation has ensured that even a $100 bill is now a “low denomination”). The European Central Bank stopped issuing the EUR500 note, one of the most valuable denomination banknotes in the world, in 2019 and intends to remove them gradually from circulation altogether. Other jurisdictions have signaled that even $100-and-equivalent bills are too high, and have expressed concerns over their use in illicit activity.
Inflation, which is currently a concern in many countries, will only exacerbate the situation in time. Transactions that once fell under $10,000 will soon find themselves over the reporting line.
If anyone thinks simply moving digital assets around in amounts slightly less than $10,000 will solve their problems, well, that’s been tried before, and the authorities are well aware of it. Former New York Governor and Attorney General Eliot Spitzer was one high-profile case, using just-under-$10K withdrawals to pay at least $80,000 for a series of high-priced escorts. He did it so often it triggered an in IRS/FBI investigation on suspicion he might be taking bribes. Attempting to fly under the radar in this manner will eventually lead to attention.
Whatever your opinion on the fairness and constitutionality of cash/digital asset reporting requirements, the fact is that governments today will not tolerate any method of transferring large amounts of value outside the “official” financial system. Any new technology or method that allows parties to skirt these laws will last only as long as it remains obscure and/or small (and effectively useless to most).
Most blockchains themselves are detailed and permanent records of all transactions, so using them for illicit activities and tax evasion is a false promise. New definitions and international regulations will make it easier to identify large movements of value, but all users should be fully aware of these realities before acting.
Watch: CoinGeek New York panel, Investigating Criminal Activity on the Blockchain
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