The State of Crypto Regulation | Jake Chervinsky (SotN 8/17)

Primer: The Infrastructure Bill was recently passed by the Senate. It includes some provisions that would negatively affect the crypto industry. Join Jake Chervinsky as he shares his firsthand experience with crypto regulation in this episode of the Bankless Podcast.


  • General Counsel at Compound Finance

  • Before that, he serves as Defense Counsel in U.S. government criminal investigation’s Kobre & Kim

  • Started legal career at Baker McKenzie LLP, focusing on commercial litigation, white-collar criminal defence and internal investigations related to allegations of fraud and corruption

  • Strategic Advisor to Variant Fund

  • DeFi Chair at the Blockchain Association

Is Crypto Winning In Washington?

  • Fighting a war on multiple fronts

  • Gaining more influence in DC and getting through to a lot of elected officials

  • Problem is in the Executive Branch and the Treasury, where there is a tough fight ahead of us

  • Sort of winning and also struggling a little bit as well

The Infrastructure Bill

How Did The Infrastructure Bill Come To His Attention

  • Those working on the policy gets a heads-up in advance when a major legislation related to crypto is about to be released

  • They work behind the scenes to influence the legislation before it becomes public

  • However, this time round, he and the Blockchain Association were blindsided by the Infrastructure Bill. Only knew about it 9 days before release

Was It Snuck In Maliciously?

  • Possible explanation, but he always tries not to assume malice

  • A charitable view would be the negotiation over the Infrastructure Bill was very tense and the senators could not come to an agreement

  • Major piece of legislation. Proposes $1.2 trillion in spending. Hence, they had to raise exactly $1.2 trillion in revenue to offset the spending. Crypto just happened to be caught up in it

  • Treasury trying to expand its jurisdiction and warrantless surveillance over a P2P financial system

Why Was The Language Troubling?

  • Tax code imposes reporting requirements on types of US persons called brokers

  • "Persons" could refer to an individual, company, or an association of any kind

  • Brokers have to prepare a form 1099 that indicates the amount of taxes someone owes to the IRS

  • Infrastructure Bill expands the definition of these brokers to include every single actor in the crypto markets:

    • Miners

    • LPs in DEXes

    • DEX users

    • DeFi developers

    • DeFi aggregators

  • Could also impact NFTs and NFT markets. Content creators could end up being defined as brokers under this bill

  • Fundamentally no way for people to comply with IRS reporting requirements (e.g. miners will not be able to get the KYC information for everyone using a public blockchain)

"I was joking about this on Twitter, but it's almost like the IRS wants you to tell them every time an Axie Infinity is mating. Do you know like, that's how ridiculous this is? Right?"

- Ryan Sean Adams

Start With Overreach And Rolling Back Later

  • Will have a rulemaking process from IRS to further define who is actually captured by this new broker definition

  • Will have a notice and comment period

  • Goal in Congress is to secure as much authority as possible

  • The IRS is the one who will actually work out who does it apply to

Who Fought Against It

  • Entire crypto industry got together to fight the Infrastructure Bill

  • Starts with the policy organizations

    • Coin Center (Independent Non-profit think tank)

    • Blockchain Association (Premier trade association for the industry in DC)

    • Large, well-established crypto companies (Coinbase, Square, etc.)

"And that's something we often see in crypto when there's a real threat, we put aside all of our other disputes about which layer one is going to win the smart contract and fight and Bitcoiners versus Ethereum and all this stuff. And we just focus and get the job done. And I think that really is amazing."

- Jake Chervinsky

Treasury's Concern On DeFi

  • Treasury trying to figure out how to get jurisdiction over DeFi (who is responsible for reporting DEX transactions and capital gains to the IRS)

  • Treasury isn't that concerned about Bitcoin as people are trading it through CEXes which is already subject to their jurisdiction

  • Tried to remove the provision but it was a non-starter because the purpose of the provision was to raise new revenue to offset spending

  • Lucky to have Senators Wyden, Lummis, and Toomey to propose language that carved out exemptions for market participants that just fundamentally cannot comply with the requirements

  • Treasury worried that the industry would expand the exemption to DEX LPs, Lightning Network, etc. Hence, the competing amendment that specifically states that the exemption is only for Proof-of-Work miners

  • Tried to work out a compromise amendment that did cover validators of all kinds. However, it was not successful

Who Is Out To Get Us? What Are Their Motivations?

  • Congress's job is to write laws and Treasury to enforce it

  • Congress can consult with an agency with expertise on how the law is enforced

  • Don't actually know who is out to get us

  • Conjectured that it might be people within the Terrorism and Financial Intelligence division, FINCEN, OFAC, etc.

  • Difficult to say what their motivations are. People within the government have different interests

    • People would think FINCEN would be the ultimate enemy of crypto

    • However, there are people in FINCEN who have been very supportive of crypto

  • Some people just want people to pay their taxes

  • Others want more surveillance over DeFi because they think that it is an illicit financial risk

  • Most problematic are those who hold that crypto is bad - a financial system with no intermediaries is worse than the current financial system that we have

Anyone Lobbying Behind Closed Doors?

  • Don't think it is the bank lobby. Think this was more about making the numbers look good on the Infrastructure Bill

  • Banks would support the provision as they are not our friends. They have been making attacks on crypto as a whole

US Approach To The Digital Currency Revolution

  • Do not think that there is a strategic plan

  • During the Trump administration, there was no national strategy. Hence, we have Secretary Mnuchin going after crypto while Brian Brooks at the OCC have been very constructive about crypto

  • People hoping that the administration would get its act together regarding digital assets in the Biden administration. However, there is no evidence of this yet

  • Currently, Senator Warren is taking a hostile stance against crypto

  • Have to position themselves and start speaking from the perspective of the important US interests at stake

Perspective Of How Big The Bill Was

  • It was a big deal

  • Crypto entered the public consciousness

  • Received calls, emails, and texts from people regarding it

  • Bill was a threat but more importantly it showed that the crypto industry was able to rally and defend itself in DC

"I think a lot of people came away from this investor's thinking, man, the biggest fear I had about putting money into bitcoin or ether or what have you, was regulatory risk, because I thought if the government decided it didn't like this industry, it would just steamroll the industry. And there's nothing anyone could do to stop it. And that is obviously not true. Right?"

- Jake Chervinsky

Era Of Crypto Regulation

  • Did not manage to get the language amended in the Senate

  • The crypto industry will have another shot in the House. May be difficult to get an amendment in the House

  • Could even push new legislation through in the future

  • Friends in Congress already talking about the next bill where they can provide a fix to this overbroad provision

  • Will have guidance from Treasury explaining who this really applies to

  • Developers in DeFi could also end up engineering their way around regulatory issues

On Ryan Selkis' Tweet

  • Ryan Selkis made the following tweet:

  • Feels frustrating to have to apologize for everything that is happening in crypto

  • From the outside, people view crypto more as speculative trading of Dogecoin, memes, and illiquid JPEGs rather than DeF

  • People are also looking for evidence that DeFi lives up to its promises (e.g. financial inclusion, everyone having access to financial services)

Two Different Crypto Systems?

  • Thinks that the government views crypto as two separate systems

  • One is clean, custodial, intermediated, and permissioned while the other is a separate wild west version

"There's so many people who have dedicated their lives to this whole entire revolution, me and Ryan, are 2 examples, you as well. And we have too much at stake both our money and our savings and our jobs to care about anything else."

- David Hoffman

Most Effective Thing To Do As Individuals

  • Extremely effective is to make calls. The second is to send tweets

  • Emails are helpful but they will not be read. A staffer will check the inbox every couple of weeks and provide a report on the number of emails they got for a particular issue

  • For calls, they end up speaking with the staffer and taking up their time. This will end up getting relayed back to the senator

  • Many politicians have their phones with them. Tweeting at them will blow up the notifications on their phone

  • If politicians tweet something positive, get them some engagement. They like the dopamine hit as well

Thoughts On Senators

  • Have to consider what senators are saying and what their actual incentives are

Senator Warren

  • She is someone who could have been a huge supporter of crypto. Got almost all the way there, but turned in the wrong direction at the last minute. She agrees with the crypto industry on:

    • The problems of the traditional financial system

    • Big banks having too much power and influence

    • Financial system should not be dominated by too-big-to-fail institutions that privatize gains and socialize losses

  • Looks at the banking problem and finds that the solution is not to get rid of banks but to do a better job in regulating banks

Senator Lummis

  • Believer in decentralization

  • Her approach to how government works is consistent with having a robust private sector


  • Need better arguments. Need to marshal the evidence of cases where the technology is genuinely helping people in the world

  • Need to show financial support for candidates who support pro-crypto policy

Elaborating On His Tweet

  • Jake tweeted the following:

  • The Fourth Amendment states that the government cannot search or seize our persons, houses, papers and effects without a warrant

  • This includes financial privacy

  • There are exceptions where the government are permitted to warrantless surveillance of financial transactions

  • The Bank Secrecy Act was passed in the 1970s. Was challenged as a violation of the Fourth Amendment rights. It was left open that there could be some circumstances where rights are violated

  • Over the last few years, the Supreme Court has been strengthening the Fourth Amendment

  • 3 years ago, in the Carpenter v. United States case, the government was collecting data from cell site towers because people were sharing their location with these 3rd parties. Thus, the government is able to get your location data without a warrant. The Supreme Court said it is unconstitutional and violated our privacy

  • The same argument can be applied in the crypto context in the event that the Treasury decides to say that they have a right to surveil every transaction on the blockchain because the blockchain is public. He would argue that this is a violation of the Fourth Amendment and the Supreme Court would agree with him

Issues That Governments Will Have With Crypto

  • Illicit finance risk (e.g. money laundering, terrorist financing)

  • Monetary sovereignty (e.g. do governments maintain control over fiat currencies, can private sector participants create their own private money)

  • US government worried about US dollar instruments created by private parties that they don't control (especially stablecoins)

"They do not like the idea of DAI, a decentralized stablecoin, that can be created by any person anywhere without government permission. So with that, I think is really the final boss."

- Jake Chervinsky

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