The Bipartisan Bill to Rewrite Crypto Tax Law

The biggest crypto news and ideas of the day

Feb. 4, 2022

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Welcome to The Node.

In today's newsletter: A bipartisan bill to change tax reporting for crypto payments of less than $200. Myanmar's military junta looks to CBDCs. And meme coin project Baby Doge signed advertising deal with one of Germany's oldest soccer clubs, founded 122 years ago in 1899.

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–Daniel Kuhn

Today's must-reads

Top Shelf

TAXATION MADE EASY: A bipartisan group of U.S. House members has reintroduced a bill that would exempt consumers from paying taxes on crypto payments of less than $200. The "Virtual Currency Tax Fairness Act," shepherded by Reps. Suzan DelBene (D-Wash.), David Schweikert (R-Ariz.), Darren Soto (D-Fla.) and Tom Emmer (R-Minn.), would simplify tax reporting and potentially pave the way to easier retail use cases. Separately, Coinbase users can now receive their tax refunds in crypto, deposited into their accounts through TurboTax. Finally, experts predict that India's coming 30% tax on crypto will curb excessive speculation.

NEW MONEY: Myanmar's military government is planning to launch its own digital currency, a few months after the country's democratically elected leaders, overthrown in a coup but operating as a "shadow" government, started accepting tether (USDT) as its official currency. The CBDC would support domestic payments and boost the country's struggling economy, which took a hit after the military junta took power last year. Separately, in what's a first for Japan but maybe not the rest of the world, Japanese trading house Mitsui & Co. will launch a cryptocurrency linked to the price of gold in yen (one coin worth one gram of gold) as early as this month. Dubbed ZipangCoin (ZPG), the private-blockchain backed token will be sold to retail investors, used on Mitsui's exchange and will be guaranteed by Sumitomo Mitsui Banking Corporation.

META WORST: Metaverse-related tokens took a hit in the past two days as Meta, formerly known as Facebook, reported a $10 billion loss on its augmented and virtual reality division in an earnings release earlier this week. Tokens of blockchain-based games Axie Infinity, The Sandbox and Gala all took double digit hits. Meanwhile, the play-to-earn poker platform from Decentral Games is seeing moderate success with 6,000 unique players each day, comprising more than 30% of Decentraland's daily users, according to the latest figures. In the past three months, the poker game has generated more than $7.5 million in revenue through its various income streams. Users are required to to purchase one of the games NFT wearables before being able to win either of the casino's two tokens – ICE and DG.

THOSE BANKERS: Russian Minister of Finance Anton Siluanov suggested legalizing cryptocurrency trading through banks and reiterated the ministry's stance to not ban crypto, as the central bank has put forward. However, both the finance ministry and Bank of Russia agree that cryptocurrencies cannot be "legal tender" in Russia. Meanwhile, Michael Cembalest, JPMorgan Asset & Wealth Management's chairman of market and investment strategy, penned a 30-page opus, "The Maltese Falcoin: On cryptocurrencies and blockchains," which takes swings at bitcoin, DeFi and the greater crypto economy. If you remember "The Maltese Falcon," the book or the 1941 film about a priceless (though fake) artifact that comes to symbolize greed, you might be amused.

SPONSORSHIPS MEAN BUSINESS: Meme coin project Baby Doge will be promoted across Bundesliga football club TSG Hoffenheim, one of Germany's oldest soccer clubs, founded 122 years ago in 1899. What is going on? There are NFTs, of course, as well as LED advertising around the pitch at all home games among other branding opportunities. "TSG Hoffenheim is happy to be working together with such an innovative and leading brand like Baby Doge," Denni Strich, TSG's CEO, in a press statement, discussing the meme token project (there are 420 quadrillions BABYDOGE) from 2021's "dog token" era led by dogecoin. Baby Doge's team said further "strategic partnerships'' are being planned to increase the project's brand value. In other news, blockchain platform Tezos is set to secure a multiyear deal to sponsor soccer team Manchester United.

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Overheard on CoinDesk TV...

Sound Bites

"How are they including culture? How are they including people of color? How are they including women? Who's on the cap table? Those are the questions that we're asking."

–Former NBA All-Star Baron Davis, discussing a recent NFT project, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

Can You Own a Color? A New NFT Marketplace Is Trying To Find Out (Vice)
Web3 Social Landscape (Mirror)
You Can Get Crypto Right and Still Play It Wrong (WSJ)
Ray Dalio warns easy-money era is over, crypto craze is overblown (Markets Insider)
Crypto investment firm Arca raises $50 million for fund that will buy individual NFTs (The Block)
Nike Sues StockX for Selling Unauthorized Sneaker Pics as NFTs (Decrypt)
Tickets to This Year's Super Bowl Will Come With Souvenir NFTs (Decrypt)
MIT and Boston Fed Conclude First Phase of CBDC Research Project (Blockworks)
Decoupling of NFTs and Crypto Spurs Debate About Future of New Asset Class (The Defiant)
How Friends With Benefits Uses Utopia to Manage Contributor Payroll (The Defiant)

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Putting the news in perspective

The Takeaway

Does the Wormhole Hack Mean the Multi-Blockchain Dream Is Dead?

This week's $326 million hack of the Wormhole blockchain tool may feel bizarrely routine. It's a massive theft by any sane standard – if it had been an old-fashioned bank robbery, it would have been the second largest of all time. But in crypto, it's only the fourth-largest hack in a single brief decade. Some argue these recurring hacks are part of a learning process on the way to better security, though at this point it's starting to feel more like an inevitable risk, just the cost of doing crypto business.

But the Wormhole hack has much more specific implications for how the crypto-financial system will evolve. Wormhole is what's known as a "bridge," essentially a way to move control of digital assets from one blockchain to another. Moving assets between chains is a uniquely complex and strange task, even for the crypto world. Ethereum co-founder Vitalik Buterin presciently warned in early January of the "fundamental security limits of bridges." Hart Lambur, co-founder of the oracle protocol UMA, warned on a Jan. 13 "Bankless" podcast episode that a poorly designed bridge "exposes users to a lot of risk that they don't know they're taking."

At least on its face, the Wormhole attack certainly seems to support these grim assessments, with massive implications for investors and developers. That's because the potential for secure inter-chain transfers will determine one of the most fundamental questions about the future of crypto: Will every blockchain be an isolated, independent ecosystem, or will they be able to talk to each other securely?

(There are entirely different concerns about Wormhole tied to the news that Jump Trading will simply refill the stolen ETH and make Wormhole users whole. That raises questions of moral hazard similar to those in fiat bailouts, but we'll save those for another day.)

The utility of inter-blockchain communication is clear. Wormhole, for instance, allows "wrapped ETH," a synthetic asset intended to be collateralized by actual ETH, to be traded on the Solana blockchain. That opens up a lot of interesting arbitrage opportunities for traders, as well as healthier diversification in things like liquidity pools.

More fundamentally, inter-blockchain communication is key to addressing scaling challenges. Ethereum, notoriously, has been experiencing extremely high fees in recent years because of congestion on the layer 1, or base, chain, which can be relieved by layer 2 companion systems built on top of it, but also by offloading some demand to independent chains. For instance, it's not unreasonable to argue that more non-fungible tokens (NFT) can and should be minted on purpose-built blockchains.

But all of this starts to fall apart if separate chains can't be made securely interoperable. In a world without trusted interchain communications, each layer 1 blockchain (Bitcoin, Ethereum, Avalanche, Tron, etc.) would have to rely entirely on capital, applications and users native to it. All things being equal, that would probably be a huge edge for Ethereum, simply because it has had such a head start in the smart contracts world. It would also be rather pessimistic for blockchain tech as a whole because it would make each blockchain more of a Web 2-style "walled garden," reducing synergies and user choice.

The challenge of building secure bridges is a matter of visibility and trust. Very broadly, things like "wrapped ETH" on Solana can only be trusted if the bridge can truly assure that ETH collateral really exists on the Ethereum blockchain. But that introduces an inherently large number of opportunities for falsification because Solana (in this case) simply doesn't have full access to the data and verifications that make native ETH trustworthy.

A compelling illustration of this challenge was offered this week by the YouTube channel Thinklair, which compared interchain bridges to a medieval goldsmith using a promissory note from London to collect a gold payment in Paris. Just like those once-distant cities, communicating between blockchains involves a lot more uncertainty and, in some cases, a lot more trust of specific actors than transacting on a single blockchain and its "local" ecosystem. The Wormhole attacker was apparently able to spoof a signature on a promissory note, much as a traveling medieval con man might have.

The good news is that even if bridges like Wormhole turn out to be inherently risky, there are other approaches to representing assets across chains. Cosmos and Polkadot in particular are major projects from reputable teams building inter-blockchain connections that may be more secure than bridges like Wormhole. Cosmos' system includes a standard called Inter-Blockchain Communication protocol, or IBC. Polkadot focuses instead on connecting "parachains" to its coordinating "relay chain."

The computer-science nuances of those systems are beyond the scope of this column. But serious blockchain investors should spend some time trying to get a grip on the various inter-chain proposals. Which ones succeed and which ones fail will have major implications for the entire industry.

–David Z. Morris