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U.S. House passes infrastructure bill with implications for cryptocurrency as regulators move toward regulating stablecoins
11 November 2021
On 5 November 2021, the U.S. House of Representatives passed the bipartisan IIJA by a margin of 228-206. Thirteen Republicans in the House voted for the bill, more than offsetting the six progressive Democrats who voted 'No' on passage of the bill. This followed a 69-30 vote in the United States Senate, which occurred in August and saw 19 Republicans join all 50 Democratic senators to pass the bill. The IIJA contains $1.2 trillion in spending on infrastructure projects such as roads, bridges, clean water, broadband, public transit, including $550 billion in new spending. To help pay for the additional spending included in the package, the IIJA contains a variety of financing provisions. One of the most prominent of these provisions is a reporting provision designed to raise additional tax revenue from the buying and selling of digital assets and cryptocurrencies.
The provision entitled "Information Reporting for Brokers and Digital Assets" mandates that all digital asset brokers (as defined by the IIJA) have to report any digital-asset transfer in which the digital-asset is moved to account where the person or address is unknown to the broker. The provision states that a digital-asset broker will constitute, "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." There was widespread concern that this definition of "digital-asset broker" was overly broad, with many senators and proponents of cryptocurrencies favoring alternative language that would have specifically exempted cryptocurrency miners, validators and software developers involved in the creation of digital wallets. Proponents of the alternative language feared that the initial definition had the potential to harm innovation in the sector, possibly causing software developers to move overseas if it was determined that the new rules applied to miners and software developers. The Treasury Department acknowledging these concerns, as Treasury Secretary Janet Yellen endorsed the compromise language. Despite the support from Secretary Yellen and a bipartisan group of Senators, the compromise language did not make it into the final bill text prior to passage.
Once the IIJA is formally signed by President Biden (a signing ceremony is expected to take place the week of 15 November 2021), the Department of Treasury will be responsible for drafting regulations to implement the "Information Reporting for Brokers and Digital Assets" provision. Treasury and the IRS will also have to write regulations pertaining to the mandated disclosures to clients that are included in the provision. In addition to reporting on transactions that go to unknown addresses or persons, digital asset brokers will also have to deliver a tax form to all their clients, establishing a taxable basis in the digital assets they transact through the broker each year. Following the announcement that Treasury Secretary Yellen had endorsed the compromise language, it is widely expected that the final regulations will exempt validators, miners, and software developers from the reporting requirements included in the IIJA.
U.S.-based financial firms--such as cryptocurrency exchanges and banks--planning to offer digital assets to their clients should be prepared to comply with the new reporting rules when they come into effect for the 2023 tax year. Foreign exchanges and financial firms that allow U.S. clients to transact digital assets are also expected to be subject to the regulations. Firms will also have to upgrade their KYC systems to ensure that they can properly identify their clients, their accounts and addresses, the beneficial owners of these accounts, and the accounts and addresses to which their clients will be transferring digital assets. This will be of paramount importance since reporting obligations would kick in at the point when a broker is unaware of the account or address to which the digital asset is being transferred. Additionally, firms must upgrade their tax-preparation capabilities including the possibility of cost basis calculations, since they will have to produce increased volumes of Forms 1099 issued to all their U.S. account holders on an annual basis after 2023. And, in order to properly report U.S. account holders to the IRS, cryptocurrency exchanges will likely be required to collect certified TINs as part of a Form W-9 remediation. There is also a risk that the IRS could expand the information reporting to transfers by non-U.S. clients in the final regulations.
IHS Markit offers a robust suite of tax solutions and reporting tools to help financial institutions comply with existing and emerging rules. Our KY3P and KYC programs address the requirements of the travel rule for cryptomarket participants, including the tracking of SLAs, audit mechanisms, and the ability to ensure complex onsite and remote due diligence is being conducted to meet requirements. KY3P standardizes supplier-risk assessments including those of policies, procedures and document, and supplier interviews, providing measurable observations.
1 November 2021
Working Group Report Calls for Stablecoin Issuers to be Regulated as Depository Institutions
A recent report was issued by the President's Working Group (PWG) on Financial Markets, chaired by Treasury Secretary Yellen with representatives from all major financial regulatory agencies. It focused on "payment stablecoins," those designed to maintain a stable value relative to a fiat currency with the potential to be used as a widespread means of payment. A major finding of the report was that stablecoins present a systemic risk to the financial system and it called for Congress to pass legislation that would require stablecoin issuers to be regulated as depository institutions, requiring them to submit to supervision by the Office of Comptroller of Currency (OCC) and Federal Deposit Insurance Corporation (FDIC). If Congress fails to act, the report outlined interim steps that would rely on existing jurisdiction of the Securities and Exchange Commission (SEC) as well as the Commodity Futures Trading Commission (CFTC), and potential designations of stablecoin issuers as systemically important financial institutions by the Financial Stability Oversight Council, which the Treasury Secretary chairs. Members of the working group include the Chairman of the Securities and Exchange Commission (SEC) and the Chair of Commodities Futures Trading Commission (CFTC), the Comptroller of Currency, the Head of the FDIC, and the Chair of the Board of Governors of the Federal Reserve System.
Stablecoins pose systemic risk to the financial system including specific risks to market integrity and investor protection. These market integrity and investor protection risks include possible fraud and misconduct in digital asset trading, such as market manipulation, insider trading, and front running, as well as a lack of trading or price transparency. These risks could be exacerbated in an instance where a stablecoin was not able to hold its value to the fiat currency it is pegged to potentially triggering a run on the stablecoin issuer. This would be especially true in cases where there are transactions involving significant amounts of leverage. Stablecoins also pose illicit finance concerns and risks to financial integrity, including concerns related to compliance with rules governing anti-money laundering (AML) and countering the financing of terrorism (CFT) and proliferation.
The OCC and FDIC have implored Congress to act immediately by enacting legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal regulatory framework. The legislation that is contemplated should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level by the OCC and FDIC. Another recommendation called for requiring custodial wallet providers to be subject to appropriate federal oversight and giving the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards. Stablecoin issuers would also be limited when it came to their affiliations with commercial entities. These restrictions would also potentially be extended to custodial wallet providers, such as limits on affiliation with commercial entities or on use of users' transaction data.
If U.S. Congress were to follow through on the recommendations laid out in the "Report on Stablecoins," it would have immediate and profound impacts on a sector that has seen tremendous growth in the last few years. Having to register and be regulated as a depository institution would subject stablecoin issuers to a level of oversight that would be orders of magnitude greater than the industry receives currently. They would need to greatly upgrade their operational and compliance infrastructure in order to comply with all the requirements that are mandated for regulated entities. Even if legislation is not enacted in the near term, the report outlined numerous approaches that regulators could take to address the risk posed by stablecoins in the near term. These included the use of existing enforcement powers by the SEC and CFTC as well as potential systemic risk designations of stablecoin issuers by the FSOC. The SEC and CFTC have already moved aggressively to police some of the worst abuses related to stablecoins and following this report; these actions are only expected to increase in frequency and severity.
IHS Markit stands ready to help these firms meet any new compliance and operational obligations that they face in the wake of the report, combining our robust suite of software products with our managed service and consulting services.
8 October 2021
World Leaders Agree to Tax Deal That Would Eliminate Digital Service Taxes
A landmark deal which included 136 countries and jurisdictions was announced on 8 October 2021 after years of negotiations and is a major achievement for Treasury Secretary Yellen, mainly because international tax havens, such as Ireland, finally agreed to join the deal. This minimum tax would hit all major international enterprises operating in these countries but would not apply to small businesses. Countries such as Ireland secured changes to the agreement in exchange for agreeing to be part of it, such as a commitment that the 15 percent rate would not be raised at a later date. The only countries not to join the agreement were Kenya, Nigeria, Pakistan, and Sri Lanka. In addition to implementing a global minimum tax, the agreement forces companies to pay taxes where they operate — not just where they have their headquarters. The deal is scheduled to culminate in a multilateral convention that would be ratified in 2022 to be implemented by 2023.
One detail that remains to be finalized is the exact formula for determining how much companies will owe across the various jurisdictions they operate in. The framework calls for reallocating some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Specifically, the new rules would apply to MNEs with global sales above EUR 20 billion and profitability above 10 percent. It calls for 25 percent of the profit above the 10 percent threshold to be reallocated to market jurisdictions where the profits are earned. The global minimum corporate tax rate of 15 percent would apply to companies with revenue above EUR 750 million and is estimated to generate around USD $150 billion in additional global tax revenues annually.
In a major victory for the United States, Treasury Secretary Yellen secured a commitment from the other countries to scrap plans for any digital service taxes on American tech companies. Many countries have turned to these taxes in order to get badly needed tax revenue from behemoth American corporations such as Facebook, Google, Microsoft and Apple, which do business in these countries but pay little to no taxes in those countries. Getting rid of these taxes which were seen as uniquely targeting U.S. companies was a major priority for Treasury Secretary Yellen and members of Congress. If this commitment is followed by concrete action, it could greatly increase the chances of a multilateral convention being codified into American law by 2023.
Potential Business Implications
The announcement by the OCED and Treasury Secretary Yellen of the global minimum corporate tax deal represents a paradigm shift when it comes to international corporate taxes. For decades countries have competed with each other in a race to the bottom to attract multinational corporations. It relied on the principle that corporations should pay taxes where they are headquartered, rather than where they generate their profits. This system led to controversial tax strategies by some of the world's largest corporations, which saw them paying little to nothing in corporate taxes in the countries they were headquartered in. While the U.S. has a higher corporate tax rate than the agreed upon minimum rate, it is a major winner from the deal as a result of the agreement to ban digital service taxes. The U.S. is the corporate home of many of the world's largest technology companies, which were the main target of these taxes. Another provision sure to catch the attention of multi-national provisions is the commitment to tax profits where they are earned. This will cause a large shift from major industrialized economies and international tax havens, to less developed countries across the globe.
Following announcement of the deal, its elements have made their way into the text of the reconciliation bill moving through U.S. Congress. The Democrats in the House of Representatives have stated that they hope to vote on and pass the reconciliation bill during the week of 15 November, which could lead to potential Senate passage of the bill before the close of that month. While it is still uncertain as to whether the reconciliation bill will pass, it seems increasingly likely that any change to the U.S. corporate tax code during the Biden administration would incorporate elements of the global corporate minimum tax deal that Treasury Secretary Yellen negotiated.
Our tax solutions can help businesses comply with the new rules envisioned by the taxation formula as the final details of the convention and reconciliation bill come together.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
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