Author: Nicole Rankin

It’s critical to keep lines of communication open – even when we don’t agree

The Chamber of Digital Commerce hosted Blockchain Education Day at the New York State Capitol in Albany on January 17, 2023. As the world’s largest blockchain trade association, our mission is to promote the acceptance and use of digital assets and blockchain technology. For the first time in New York, our Blockchain Education Day provided our members, that include the world’s leading innovators, investors, operators and digital asset mining companies, an up-close opportunity to promote the industry through education and advocacy in direct coordination with state policymakers, regulatory agencies, and industry advocates.  

With lawmakers back in Albany for the 2023 Legislative Session, the Chamber recognized that now is the time to engage the New York State Legislature and stakeholders to highlight the benefits of blockchain technology and digital assets. The goal was to help establish a responsible, pro-growth environment for digital assets and blockchain technology in the state of New York. 

Why, New York?

New York has implemented several laws and regulations at odds with the industry over the years. Most recently, Governor Kathy Hochul approved a two-year moratorium on digital asset mining operations that use proof-of-work (PoW) authentication methods to validate blockchain transactions (A.7389-C (Kelles)/S. 6486-D (Parker)). Governor Hochul has also vetoed study legislation (A.9275 (Vanel)/ S.8343 (Sanders)) that would examine the impacts of blockchain technology and the industry as a whole, in New York. To date, no other industry has been singled out the way digital assets have in New York. That’s why we invited our members who have operations in the state to attend Blockchain Education Day. 

Key takeaways from these conversations:

Include funding for a cryptocurrency and blockchain task force in the state’s budget. Policymakers should understand the technology before driving the blockchain industry out of New York.  We support this approach led by Assembly Member Vanel and Senator Sanders, and urge lawmakers to include funding for this study in this year’s budget. Governor Hochul, citing the cost of the task force, recently vetoed legislation (A9275 / S8343) that would establish a cryptocurrency and blockchain task force to study the industry’s impacts. Blockchain technologies may offer solutions to a host of challenges facing the state; an investment in fully understanding the technologies is important. 

Invest in the digital asset industry, and promote sustainable energy job growth and development. The industry will bring high paying jobs and technology training in areas where it is needed most and increase union jobs.

Include the Bitcoin mining industry’s sustainable energy mix in Climate Leadership & Community Protection Act (CLCPA) standards. The industry’s sustainable energy mix is 58.4%, making it the most sustainable industry globally and leading all industries in compliance with CLCPA.

Digital assets technologies are an emerging, global financial industry. Digital assets have been adopted by over 100 million individuals worldwide and proof-of-work mining is the foundation of this ecosystem. Digital assets are creating an opportunity for millions of people in less fortunate economic circumstances to access the financial system by storing their savings in a medium that is independent of rapidly increasing inflation, banks fees, and long-standing inequities in our banking system.

It’s crucial that New York remains a leader in global financial services, rather than hindering an industry that is important to its future. Working together, the blockchain and digital asset industries and New York State can set the standard for expanding sustainable, ethical, business growth. 

The Chamber of Digital Commerce submitted comments to the Financial Stability Board (FSB) addressing the regulatory, supervisory, and oversight challenges raised by the vast network of crypto-asset activities and global stablecoin arrangements worldwide. 

Digital currency and crypto service providers have the capability to bring tremendous improvements to our national and international financial systems by enabling frictionless, instantaneous transferability of value. It is imperative that lawmakers contemplate a regulatory scheme that can appropriately mitigate risk, but any regulatory scheme needs to be principles-based. Much of the recent turbulence in the crypto markets can be addressed with measured regulatory oversight.

The Chamber’s response focuses on four overarching principles (below) that should be a theme in any framework to regulate and supervise crypto-asset activities moving forward. Any new or introduced regulation must be workable to exist effectively in all relevant jurisdictions.

1. Balance Risks of Crypto-assets with their Potential for Innovation. Each type of risk associated with the various crypto-asset activities should consider the potential benefits.
   
2. Promote Cross-Border Cooperation while Maintaining Cybersecurity and Data Privacy. Access to data is necessary to facilitate cross-border cooperation, but breadth of access must be weighed against the need for security and user privacy.
   
3. Create Comprehensive Risk Management Guidance that is Proportional to Market Size. A company’s market size is critically important as businesses often make decisions on what they believe to be a best practice but have limited standards for comparison.
   
4. Require Disclosures that Sufficiently Protect Consumers and Promote Transparency. Disclosure requirements should be principles-based and reflective of the risks and information relevant to the particular market participants’ activities and size.

As with any regulatory framework the devil will always be in the details, but the FSB should embrace a principles-based framework and with a deep appreciation for the acceptance and use of digital assets and blockchain technology.

The FSB posed fifteen specific questions. Read the Chamber’s entire 22 page response here.

State Leadership Refuses to Learn About the Benefits Blockchain Technology Brings to the State’s Climate Goals

Washington, D.C. – November 26, 2022 – On Friday, Governor Hochul vetoed legislation, A. 9275 (Vanel), S.8343 (Sanders, Jr.), that would establish the New York State Cryptocurrency and Blockchain Study Taskforce, and examine the cryptocurrency and blockchain industries and their financial and environmental impacts. The veto message, which applied to 38 other industry-specific study and/or taskforce-related bills, stated that the “enactment of this package of legislation would collectively cost the state approximately $40 million,” and so, the “proposals would be more appropriately considered in the context of the State budget process.”

This comes on the heels of Governor Hochul approving legislation earlier this week, A.7389-C (Kelles), S.6486-D (Parker), that places a two-year moratorium on digital asset mining operations that use proof-of-work (PoW), behind-the-meter, authentication methods to validate blockchain transactions.

“Governor Hochul’s veto is irresponsible and astoundingly short-sighted,” said Perianne Boring, founder and CEO of the Chamber of Digital Commerce. “In shunning the digital asset community not once, but twice in a week, New York has set a dangerous precedent in determining which industries or businesses may or may not use energy resources. It made this power play by neither fully understanding the role an emerging industry can play in the economic vitality of the state, nor the role it can play in responsible environmental stewardship and energy innovation.”

Although the cryptomining moratorium law requires completion of a standard environmental impact statement by the New York State Department of Environmental Conservation (DEC) within a year of the moratorium’s two-year timeline, it fails to study the implications of blockchain technology, its impact on innovation, competition, regulation, and the state economy, which was the objective of the New York State Cryptocurrency and Blockchain Study Taskforce legislation. 

The Taskforce bill, on the other hand, greatly expanded the environmental impact examination of digital asset mining, including requiring that state DEC officials and representatives from a state or national organization promoting environmental conservation be appointed to the Taskforce. The Taskforce was required to provide data on the energy consumption necessary for digital asset mining operations and other policy considerations related to energy consumption, as well as the environmental impact of digital asset mining operations.

“Though we are incredibly disappointed with the actions taken against the digital asset industry this week, we applaud the sponsors of the New York State Cryptocurrency and Blockchain Study Taskforce, Assemblyman Clyde Vanel and Senator James Sanders, Jr., and thank them for their engagement with mining organizations, and their focus on better understanding our industry, and working to better educate their colleagues and the public,” continued Boring. 

In the weeks ahead, as the Legislative Session approaches, the Chamber urges lawmakers and regulators to work with the industry to learn the benefits of PoW mining, which has spurred economic growth, job creation, and inclusion for historically underrepresented populations in New York and across the globe, while also creating financial incentives for the buildout of renewable energy infrastructure.

The Chamber of Digital Commerce stands ready to educate and work with the state Legislature, the Governor, and regulators to ensure the digital asset community is well-represented and understood for its benefits to the public, the state, and the environment.

“The details regarding the detainment and prosecution of software developer Alexey Pertsev in the Netherlands is deeply troubling. Pertsev has been detained for three months now for authoring software code on Tornado Cash that sought to provide a general purpose privacy application to cryptocurrency. 

“Although Pertsev’s detainment occurred outside U.S. jurisdiction, freedom of speech is now considered a global right. It is imperative for industry leaders and policymakers to speak out against this infringement of free speech. 

“Cryptocurrency and blockchain applications are code and I believe code is protected speech. There is precedent for this in the U.S.; in Bernstein v. United States the Supreme Court ruled that any government regulations preventing the publication of source code is unconstitutional under the First Amendment.

“Pertsev’s arrest and detainment sends a chilling message to the global  technology community that our rights to free speech are in jeopardy. We will continue to fight for this fundamental right and must call out injustices of free speech whenever possible. Privacy rights, free speech, and national security should not be mutually exclusive. 

“Again, I call on all industry leaders and global policymakers to join me in calling for fairness for Alexey and echoing the necessity of protecting free speech.” 

On October 10, 2022, the Organisation for Economic Co-operation and Development (OECD) released a new tax reporting framework for crypto. The Crypto-Asset Reporting Framework (CARF) was created at the direction of the G20 because the “current scope of assets, as well as the scope of obliged entities, covered by the Common Reporting Standard (CRS) do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in, or hold, relevant crypto assets.” 

Therefore, the CARF won’t mandate countries change how they tax crypto-assets. Instead, it’s aimed at boosting information sharing between government’s on user’s assets and transaction activity.  

In April, the OECD released a draft version of the CARF for public consultation. In the Chamber’s response, we provided five recommendations to improve the CARF and provide parity for crypto entities to those traditional entities under the CRS. Please see below for an update on our recommendations and if, or not, they were incorporated by the final version of the CARF. 

1. We recommend aligning the CARF’s reporting for digital assets with existing reporting requirements under the CRS. As currently drafted, the CARF would create an unlevel playing field between digital assets and traditional financial assets by requiring additional reporting for digital assets beyond the current CRS requirements, and beyond what is necessary to achieve tax transparency goals.
   
   • We also recommend limiting the scope of Relevant Crypto-Assets to more closely align with traditional financial assets that are covered by the CRS and eliminate assets that are difficult to value or have no investment value. We believe the easiest way to achieve this would be to limit the scope of Relevant Crypto-Assets to digital assets that are fungible and actively traded on an established market.
   • We recommend that the CARF limit the collection of on-chain wallet addresses. The CARF’s reporting of wallet addresses creates legitimate privacy concerns and is unnecessary since a wallet address is not the functional equivalent of a bank account. 
   • To the extent additional information is deemed necessary for digital assets, we recommend that digital assets that could otherwise fall within the definition of Financial Assets for CRS purposes (e.g., securities tokens, stablecoins, and derivatives) be reportable solely under CRS.
   • Similarly, we recommend that the anti-duplication rule proposed in the CRS amendments (i.e., where the disposal of Financial Assets is reported under CARF, no reporting is necessary under CRS) be reversed, so that reporting under CRS obviates the need to report under CARF.
   • We recommend the OECD further study nonfungible tokens (“NFTs”) before applying the CARF’s reporting requirements to them. NFTs are quickly evolving into use cases that go well beyond traditional financial or investment assets.

Unfortunately, the CARF does little to reduce the burden of reporting.  Financial institutions are still subject to both regimes, and the information required by the CARF is still much greater than the CRS.

However, the CARF adds two significant limitations for Reporting Crypto-Asset Service providers (RCASP) reporting of retail payment transactions consistent with the Chamber’s recommendations: (1) reporting on the customer is required only if the RCASP is required to verify the customer under domestic anti-money laundering laws; and (2) there is a substantial de minimis threshold of $50,000.

Moreover, the CARF eliminated the requirement to report wallet addresses consistent with our recommendations, replacing it with aggregate value and aggregate number of units transferred to non-RCASP wallets.

On NFTs, the CARF explicitly states that NFTs may be considered an investment and payment tool and are thus subject to the CARF. 

2. We recommend adopting an effective date that is at least 4 years after the approval of the relevant legislation to allow crypto-asset service providers (CASPs) sufficient time to implement the CARF. Most new reporting regimes have taken that long to implement, even for mature industries. 
   
   • The OECD should also consider phasing in the CARF for all intermediaries, along the lines of our recommendation for small businesses.

An effective date has not been agreed upon ahead of the G20 presentation and there was no mention of a phased-in approach.

3. We recommend establishing a simplified reporting regime for small businesses (i.e., businesses that are less than $10 million in gross receipts). For example, small businesses could begin by reporting their AML/KYC information to tax authorities in the first year and phase in the same information required by CRS.
   
   • Penalties should not be imposed for good faith compliance for at least the first five years of reporting. 

The Chamber’s recommendation for a simplified, “sandbox” reporting regime for smaller businesses or start-ups was not adopted.

4. We recommend that the OECD further study the potential application of the CARF to decentralized trading platforms prior to the publication of any special rules for such platforms, particularly as this area of technological innovation is in its nascent stages. Decentralized exchanges make up a small percentage of the overall cryptocurrency market and we do not believe that excluding decentralized exchanges from the scope of the CARF at this stage would lead to reduced tax transparency because the vast majority of known transactions take place with the involvement of a centralized exchange.

The CARF states that a “trading platform” includes any software program or application that allows users to effectuate (either partially or in their entirety) exchange transactions.” According to CARF, decentralized platforms will still be considered RCASPs if they exercise “control or sufficient influence.” The definition of “control or sufficient influence” is to be assessed in a manner consistent with the 2019 FATF recommendations  (Pg. 27, Paragraph 67). 

5. We recommend that the OECD encourage governments and tax authorities to consider a voluntary disclosure regime in order to reduce potential adverse consequences that may arise from the additional light that the CARF may shed on prior tax reporting practices

The OECD did not accept the Chamber’s recommendation for a voluntary disclosure regime. 

What’s next?  If approved by the G20, the CARF will facilitate tax information sharing on crypto transactions between the OECD’s 38 member countries, including the U.S.  However, it may be awhile before the new framework is put to action. G-20 countries may have additional suggestions to the OECD and it typically takes several years for implementation across jurisdictions to come to fruition. 

In the meantime, the Chamber of Digital Commerce will continue to offer support and resources to the OECD and the U.S. as they work through the CARF. Additionally, we will continue to offer suggestions to improve standards to ensure they offer parity and consistency for the crypto industry.

For decades, California has served as the beachhead for innovators, and in May, Governor Gavin Newsom sought to support innovation in the digital asset space with his Executive Order N-9-22 (EO), to “create a transparent regulatory and business environment for web3 companies, harmonize federal and the state regulations, protect consumers, and to engender equity, inclusivity, and environmental protection.”

Given such clear direction, then, it was surprising to see the California Assembly introduce and pass A.B. 2269, the “Digital Financial Assets Law” earlier this year. This legislation failed to address any of the worthy goals set forth in the governor’s order.  The Chamber of Digital Commerce, submitted a comment letter to Governor Newsom’s office, outlining the counterproductive policies A.B. 2269 would put in place. You can read the full letter here.

Late Friday, Governor Newsom vetoed A.B. 2269 and returned it to the Assembly without his signature, stating it was premature and a more flexible regulatory approach is needed to keep pace with the industry’s rapidly evolving technology and use cases.  

We commend Governor Newsom for his action and share in his commitment to a California that encourages growth and has a clear, flexible regulatory environment that balances innovation and consumer protection.