Senate to review ‘Bitcoin tax’ bill
The federal government has introduced in parliament Amendment of the Treasury Act (2022 measure no. 4) Bill 2022 aimed at, among other things, clarifying the tax treatment of digital currencies and CBDC.
This latest step follows Australian Treasurer Jim Chalmers’ announcement in June that the Labor government planned to introduce new tax legislation in Parliament in response to El Salvador’s decision to recognize Bitcoin as legal tender.
Following a brief hearing held in September, the government has now introduced the legislation incorporating the proposed changes and the bill has been referred to the Senate Economic Legislation Committee for review. It appears that the bill itself is largely unchanged from the version that went to consultation in September.
The proposed changes are intended to ensure that Bitcoin, which has been recognized as legal tender in El Salvador, continues to be treated as a digital currency (and not a foreign currency) under tax law. This means that taxpayers will not be able to benefit from any foreign currency tax election in relation to Bitcoin. Interestingly, the explanation of the bill claims the need for such a change in circumstances where Bitcoin can now be considered a form of money.
A less well publicized aspect of the bill is the government’s decision to exclude CBDCs from the definition of digital currencies. As a consequence of this change, CBDCs issued by foreign governments will be considered a form of foreign currency, while private digital currencies and stablecoins will not be.
The stated intention of the new bill is to preserve the existing tax treatment of Bitcoin for fiscal year 2022 given a potential risk to government revenue. This is emphasized by the bill’s retrospective nature.
The government’s decision to press ahead with the “Bitcoin tax” bill is perhaps abrupt in circumstances where the Inland Revenue’s wider review of the tax treatment of digital assets and transactions remains pending. The government’s narrow policy objectives reflect a perception that digital currencies are still a form of speculative investment. It is perhaps a missed opportunity to consider the new use and promotion of digital currencies, including stablecoins, as a means of payment in the digital economy.
Tornado Cash charges are dropped
The prosecution of Alexey Pertsev, a blockchain developer allegedly involved in the development of the infamous crypto mixer Tornado Cash, began last week with a hearing in the Netherlands.
The trial follows Pertsev’s arrest in the Netherlands in August, days after the US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in connection with alleged laundering of illicit funds by North Korean hackers.
The sanctioning of Tornado Cash has been highly controversial, sparking debate about whether Tornado Cash itself was a form of technology or an entity that could rightly be subject to US sanctions. Coin Centre, a US-based industry group, launched proceedings in the US alleging that OFAC had overstepped its authority by sanctioning Tornado Cash and flagging digital privacy concerns.
In November, OFAC doubled down on its decision by redesignating Tornado Cash as a person or entity subject to US sanctions and clarifying its previous guidance on how to comply with the sanctions.
The Pertsev hearing provided for the first time a clear understanding of the charges against the developer. Prosecutors allege that Tornado Cash was used to place nearly 75% of all crime-related cryptocurrency on the Ethereum blockchain, thus violating Dutch law that makes it illegal to hide or conceal the origin and movement of funds.
Prosecutors further claim that records of internal conversations show that Pertsev and two co-developers ran Tornado Cash as a business, discussing management and operational decisions, and that they were able to outvote other holders of the protocol’s TORN tokens. Prosecutors admitted, however, that they are still trying to decipher how Tornado Cash’s governance works and to prove that Pertsev benefited from funds that passed through the protocol. Prosecutors claim to have found large sums of money and cryptocurrency in Pertsev’s name in various locations around the world, and have also alleged that Pertsev could not “afford his rental house and expensive Porsche” based on income from his employment at a cyber security firm. alone.
Pertsev has denied the charges against him, and his lawyers appear to be positioning his defense on the basis that Pertsev himself was only a developer and not a party to the concealment of any funds:
It is clear to us that these judges are not as familiar with the subject [of how crypto works] as they should be.
The main focus of last week’s hearing was whether and how long Pertsev should be remanded in custody with the Dutch court ordering that he remain in custody at least until February. The substantive merits of the criminal charges and defenses remain to be considered.
The Pertsev prosecution will continue to attract attention from the DeFi community given that the outcome of the case could have important implications for the liability of developers involved in the development of DeFi applications.
SEC sues Wyoming-registered DAO
On November 18, the US SEC announced that it has initiated administrative proceedings against American CryptoFed DAO LLC (CryptoFed), a Wyoming-based decentralized autonomous organization. The case will determine whether to issue a stop order to suspend the registration of the offer and sale of two crypto assets, the Ducat token and the Locke token.
David Hirsch, head of the Enforcement Division’s Crypto Assets and Cyber Unit, said that:
An issuer wishing to register offers and sales of cryptoassets as securities transactions must provide the required disclosure information to the SEC.
The SEC alleges that on September 17, 2021, CryptoFed filed a Form S-1 registration statement that did not contain necessary information about its business, management and financial condition, such as audited financial statements.
David Hirsch, noted that:
American CryptoFed not only failed to comply with the disclosure requirements of the federal securities laws, but it also claimed that the securities transactions it seeks to record are not actually securities transactions at all.
The SEC alleges that the Form S-1 registration statement contained materially misleading statements and omissions, including inconsistent statements about whether the tokens are actually securities under US law. The SEC further alleges that when questioned about its registration statement, CryptoFed failed to cooperate.
COO of CryptoFed, Xiaomeng Zhou, said he rejected the SEC’s allegations, claiming that:
Section 8(b) of the Securities Act of 1933 only allows the SEC to issue a denial order to provide additional clear direction for the American CryptoFed DAO to complete its Form S-1 registration (not a stop order)… As a result, the SEC abused the Securities Act of 1933 to unlawfully delay, stop and obstruct American CryptoFed DAO’s legitimate disclosure through the Form S-1 Registration Statement.
In July 2021, CryptoFed claimed to be the first ever DAO to be characterized as a legal entity in the United States. In September of this year, the Commodity Futures Trading Commission (CFTC) sued OoKi DAO for allegedly offering margined and leveraged trading products without first registering as a futures commission dealer or having adequate KYC processes. The CFTC had previously settled with bZeroX, DAO’s predecessor, and the company’s directors.
These proceedings against CryptoFed are the first ever action by a regulator against a registered decentralized autonomous organization registered in Wyoming under their world-leading DAO laws.
Block files for Chapter 11
Embattled cryptocurrency lender BlockFi and eight of its affiliates have filed for Chapter 11 bankruptcy protection under the United States Bankruptcy Code. An announcement earlier this week detailed the lender’s struggles and confirmed its focus is on restructuring to deliver value for customers and stakeholders.
The news comes as the crypto winter deepens, with extremely volatile market conditions and major companies such as FTX, Celsius and Three Arrows all facing collapse in 2022.
BlockFi is now focusing on collecting all obligations it owes, including from FTX, which brokered a deal with an option to buy BlockFi for USD240 million in July this year. Away from any potential deal, BlockFi now expects any recovery from FTX to be delayed.
In the press release, posted by Businesswire, BlockFi said:
Due to the recent collapse of FTX and its subsequent bankruptcy process, which is still ongoing, the company has [BlockFi] expects recovery from FTX to be delayed.
According to a lawsuit, BlockFi has over 100,000 creditors with assets and liabilities worth between $1 and $10 billion each. The SEC is listed on the bankruptcy filing as BlockFi’s fourth-largest creditor, with $30 million owed to the agency relative to a $100 million settlement BlockFi reached with the regulator last year over its yield offers.
While platform activities remain on hold at the time of writing, BlockFi has USD 256.9 million in cash reserves that are expected to provide liquidity to support operations during the restructuring.
There has been no mention of how BlockFi plans to pay its creditors, or how the restructuring of the business will take shape, but the company is submitting a series of common proposals to continue operating the business, pay employee salaries and continue employee benefits. without interference.
BlockFi International Ltd, a company incorporated in Bermuda, has petitioned the Supreme Court of Bermuda for the appointment of joint provisional liquidators. The customers’ claims will be processed through the Chapter 11 process.
