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On Monday (Nov 28) we submitted a response to the Department of Energy Request for Information to improve energy generation in rural or remote communities across the country believe that digital asset mining provides an unprecedented opportunity to facilitate the transition to more sustainable energy futures for the often-overlooked regions of the U.S. It would be prudent of the Biden Administration to include digital asset mining considerations in all energy development policy discussions moving forward.  We will continue to work with DOE and others to make sure the U.S. remains a leader in digital asset mining and energy development. 

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 behalf of the Chamber of Digital Commerce and its membership, which includes many digital asset mining companies, we are severely disappointed in Governor Hochul’s decision to approve a 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)). To date, no other industry in the state has been sidelined like this for its energy usage. This is a dangerous precedent to set in determining who may or may not use power.

The PoW mining industry has been spurring economic growth, job creation, and inclusion for historically underrepresented populations in New York, while also creating financial incentives for the buildout of renewable energy infrastructure. With this legislation becoming law, we expect the mining companies, or those considering business in the state, to leave and head to more friendly regulatory jurisdictions in the U.S. – a trend far too many industries in New York State are realizing daily.

Additionally, the state’s argument that the mining industry’s energy use is exponentially beyond other industries is blatantly false. The Climate Leadership and Community Protection Act requires statewide greenhouse gas emissions be reduced 85% by 2050 and achieve net zero emissions in all sectors of the economy by that time. PoW mining is a catalyst to achieve this goal. The Bitcoin Mining Council has estimated that the global mining industry’s sustainable electricity mix is 58.5% and growing. 

Moreover, on the rare occasions when customer energy demand spikes, PoW miners can work cooperatively with utilities to cut off their power demands for the benefit of the grid in mere minutes with no adverse effects, unlike data centers, cloud service providers, and manufacturing facilities. This conversation has fallen on deaf ears with New York State lawmakers and unfortunately, industry growth will be hindered by implementing this arbitrary moratorium.

We welcome the opportunity to work together in the future to develop common sense legislation that will work to benefit the state, the digital asset industry, and of course, the environment. Unfortunately, this effort does not meet the mark.

The Chamber of Digital Commerce submitted a response to the U.S. Department of the Treasury’s Request For Comment (RFC) on illicit finance and national security risks of digital assets pursuant to Executive Order 14067 – “Ensuring Responsible Development of Digital Assets,” and the U.S. Treasury’s Illicit Finance Action Plan.

• The Chamber’s response focuses primarily on opportunities to efficiently address digital-asset-related security risks, specifically in non-fungible tokens (NFTs) and decentralized finance (DeFi), and emphasizes the need for increased public-private collaboration and information sharing.
  
• This request follows Treasury’s July 2022 RFC on risks and opportunities facing digital assets, which the Chamber also provided feedback, and is part of a broader policy initiative by the Biden Administration to set forth a regulatory framework on digital assets.
  
• Read the entire response here.

The Chamber’s comments emphasize several themes that bear repeating and are consistent with previous responses to the government. They include:

1. Risk vs. Opportunity – The discussion of risks in digital assets should not be considered in a silo but in comparison to legacy systems that struggle with the same risks.
   
2. Principles vs. Rules – Legacy systems and digital asset systems need to adhere to similar principles with respect to illicit finance and anti-money laundering rules, but not through identical rules.
   
3. Information Sharing – In addressing illicit finance risks, there needs to be me more sharing between the public and private sectors.
   
4. Regulator Cooperation rather than Competition – We support efforts to root out illicit actors by regulators but it appears multiple regulators are competing for primary roles.

Digital asset companies, acting in good faith, don’t have clear regulatory expectations. The rules to the road need to be better defined and the threat of enforcement without clear rules is problematic.

The Chambers response addresses illicit financial risks from a wide range of topics such as technological innovations to non-fungible tokens (NFTs) to decentralized finance and peer-to-peer payment technologies. It also touches upon aspects of anti-money laundering and countering the financing of terrorism controls.

What’s next: It doesn’t appear the Congress, having introduced over 74 digital asset-related pieces of legislation this session, will pass any legislation this year. So, any regulatory developments or guidance in the near-term – if any – is likely to come from the executive branch.

A thank you to Jamal El Hindi, MJ Shin, and Weisiyu Jiang from Clifford Chance LLP for leading our response to the Treasury Request on Illicit Finance, National Security Risks of Digital Assets

The definition of a commodity is imperfect and ambiguous – there is no bright line test. Generally, commodities are basic goods that can be bought and sold at prices that are heavily influenced by supply and demand. In commerce, commodities are interchangeable with other goods of the same type. For example, a piece of corn is interchangeable with another piece of corn in the market with no regard to who produced the corn.

Commodities can be anything. They are generally natural resources, but recent innovation has expanded the classification of commodities to include new developments that represent the same characteristics, such as computer memory and more recently, bitcoin. 

Pursuant to the U.S. Commodity Exchange Act (CEA), a commodity is defined broadly by a list of enumerated products. For example, a commodity is defined as being wheat, cotton, rice, or corn but not onions or motion picture box office receipts – it can get confusing. The CEA does not include bitcoin or other virtual currencies in its enumerated definition of commodity. So, why is bitcoin classified as a commodity?

In 2015, the U.S. Commodities Trading Future Commission (CFTC) defined bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act. The CFTC’s definitional decision came to light in a settlement order, which stated, “[T]he definition of a “commodity” is broad […] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.” 

As stated, determining if something is a commodity does not require an elemental test or clear-cut definition as used by the Securities and Exchange Commission (SEC) for securities determination (i.e., the Howey Test). Moreover, securities are commodities but not all commodities are securities. In a separate enforcement action, a U.S. federal court found that the CEA’s text supports the CFTC’s position that virtual currencies are commodities, as the CEA defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.” 

Therefore, the CFTC defined bitcoin as a commodity because it looks and acts like a commodity. It’s an illustrative example of functional regulation. Never mind the colloquial reference to “digital gold” (gold being a commodity), bitcoin and other cryptocurrencies behave like commodities. Bitcoin is interchangeable, meaning each coin is identical. Bitcoin’s price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity. 

Whether other virtual currencies are to be considered commodities is to be determined. To date, the CFTC has made a declarative judgment that bitcoin and ether are commodities and Congress is working to solidify that declaration through statute (see the S. 4760, Digital Commodities Consumer Protection Act). 

Likely, many other virtual currencies should be classified as commodities, while others will inevitably meet the SEC’s test and be deemed securities. It will be up to the regulators to provide that judgment and clarity. Stay tuned!

On September 9, the White House Office of Science and Technology policy (OSTP) released a Report titled “Climate and Energy Implications of Crypto-Assets in the United States.” Climate is one of the key pillars of the Biden administration and the Chamber of Digital Commerce shares the administration’s goals of promoting clean, renewable energies. It is why we advocate so hard for digital asset mining and the Proof-of-Work consensus mechanism, as can be seen in our response to OSTP’s Request For Information on this subject from May.  

After reading the Report, it was clear what federal agencies will play a crucial role in the maturation of this industry. The Report’s recommendations are directed at the Environmental Protection Agency (EPA), Department of Energy (DOE), and Federal Energy Regulatory Commission (FERC). Let’s take a look at those recommendations:

1. Recommendation: The Environmental Protection Agency (EPA), the Department of Energy (DOE), and other federal agencies should provide technical assistance and initiate a collaborative process with states, communities, the crypto-asset industry, and others to develop effective, evidence-based environmental performance standards for the responsible design, development, and use of environmentally responsible crypto-asset technologies.
   
2. For improved analytical capabilities that can enhance the accuracy of electricity usage estimates and sustainability, the National Science Foundation, DOE, EPA and other relevant agencies could promote and support research and development priorities that improve the environmental sustainability of digital assets, including crypto-asset impact modeling, assessment of environmental justice impacts, and understanding beneficial uses for grid management and environmental mitigation. 
   
3. DOE, in coordination with FERC, the North American Electric Reliability Corporation and its regional entities, should conduct reliability assessments of current and projected crypto-asset mining operations on electricity system reliability and adequacy.
   
4. For improved analytical capabilities that can enhance the accuracy of electricity usage estimates and sustainability, the National Science Foundation, DOE, EPA and other relevant agencies could promote and support research and development priorities that improve the environmental sustainability of digital assets, including crypto-asset impact modeling, assessment of environmental justice impacts, and understanding beneficial uses for grid management and environmental mitigation. 
   

In 2022, the Chamber of Digital Commerce has engaged each one of these agencies and is committed to working even closer with them as they dissect these policy recommendations from the White House. We look forward to continued dialogue and collaborating as the rules and regulations are developed for the digital asset mining industry. 

As these issues move forward, we look forward to having continued dialogue with these agencies and collaborating as the rules and regulations are developed for digital asset mining industry. 

Statement by Perianne Boring, Founder and CEO of the Chamber of Digital Commerce on the tentative decision by the Financial Accounting Standards Board (FASB) requiring companies to use fair-value accounting for measuring bitcoin and other crypto assets:

“FASB made the right decision to require U.S. entities to measure their crypto asset holdings at fair value. This is a critical component needed to enable adoption of crypto assets. 

“After years of requests and direct advocacy on this issue, U.S. businesses will finally be allowed to recognize increases and decreases of crypto assets immediately and treat certain costs, such as commissions, as an expense. This will bring much-needed parity to the market. The current practice of requiring companies to measure assets at their lowest price during a reporting period has discouraged a number of companies from buying and holding crypto assets. 

“We commend the board for this substantial step. The Chamber and its members will continue to engage FASB during their broader project to review the accounting for and disclosures of crypto assets.”

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.