WHY U.S. BUSINESSES MAY STOP ACCEPTING CRYPTOCURRENCY BY 2024

[Abridged version also published in Law360]

It may be time to sound the death knell for U.S. businesses accepting bitcoin and the rest of the 8,000 or so cryptocurrencies that currently circulate.?

Two startling yet barely noticed recent regulatory developments, one enacted into law last month and the other likely imminent, are on course to dramatically curtail the number of U.S. businesses who will accept cryptocurrency.?

In case you missed it, President Biden has commenced a cybercrime crackdown with an innovative and ground-breaking twist. In an unprecedented maneuver to combat the growing menace of cyber-related crimes, the Biden Administration is targeting not only the criminals themselves but also their?Achilles Heel?– cryptocurrency, especially bitcoin.?

As part of this crypto-crackdown, the U.S. government has quarterbacked two extraordinary regulatory initiatives – one requiring the reporting of cryptocurrency?transactions?to the U.S. Internal Revenue Service (IRS) (in IRS, Forms 8300 and 1099-B) and the other requiring the reporting of cryptocurrency?holdings?to the Financial Crimes Enforcement Network of the U.S. Treasury Department (FinCEN) (in FinCEN, Form 114, known as FBAR).

Specifically, on November 15, 2021, President Biden signed the?Infrastructure Investment and Jobs Act?(the “Infrastructure Act”), which, in addition to launching a myriad of infrastructure related projects, also quietly created mammoth and unprecedented reporting obligations for U.S. persons and businesses transacting in cryptocurrency. These requirements are now on the books, and?will apply to any IRS filings?made after December 31, 2023.?

Along the same lines,?pursuant to FinCEN Notice 2020-2, FinCEN intends to propose to amend the Bank Secrecy Act (BSA) regulations to include virtual currency as a type of reportable account, similarly expanding cryptocurrency reporting requirements.

These two unprecedented IRS and FinCEN cryptocurrency reporting requirements are game-changers, and for those businesses that accept, or are contemplating accepting, cryptocurrency, the choice may suddenly become clear --?don’t do it.?

This article explains why the number of U.S. businesses accepting cryptocurrency may soon begin to decline, perhaps almost disappearing altogether by January 2024.?

Some Background

Before cryptocurrency, criminals had to use traditional financial mechanisms to collect and move large sums of money, leaving a resplendent and inculpatory audit trail for law enforcement to trace, analyze and ultimately freeze if necessary. Now with the emergence of cryptocurrency, especially bitcoin, a simple digital wallet provides criminals with the means to pseudo-anonymously, conveniently, expeditiously and securely collect money on demand from anywhere on the planet -- with little risk of ever getting caught.

Meanwhile,?as businesses have begun marketing their willingness to accept bitcoin, perhaps in an effort to showcase their technological prowess and pioneering blockchain embrace, the crypto-crime wave has soared. This is not a coincidence.?

The sad reality is that criminals, not law abiding U.S. citizens, have emerged as the constituency that has most successfully capitalized on cryptocurrency.?Hence,?other than being used as “a piece of computer code that can do absolutely nothing?except to the extent?that someone else can be induced to pay you money for it, bitcoin’s most notorious uses are?for criminal purposes, including?money-laundering,?terrorism,?illicit drugs,?sex-trafficking,?child pornography buying and selling, ?ransomware extortion?and other major and minor crimes.?

Name the crime – and cryptocurrency makes it easier, faster and simpler to carry out.?

Reporting Cryptocurrency?Transfers?to the IRS

Currently,?all IRS filers must report cryptocurrency trading gains to the IRS. Also, on the new 1040?Schedule 1, every taxpayer must declare whether they have or have not used cryptocurrency in?one?way or another. This reporting requirement?is often compared?to the “do you have a foreign bank account” question that appears on Schedule B to tax returns, a question that has led to many criminal convictions for the IRS, and large civil penalties.

The Infrastructure Act heightens IRS reporting requirements relating to cryptocurrency by expanding two of its traditional reporting forms – Form 8300 and Form 1099-B. Specifically, the Infrastructure Act includes an information reporting requirement for certain persons who accept large payments in cryptocurrency in such person’s trade or business on an IRS Form 8300, and an information reporting requirement for cryptocurrency asset exchanges and custodians on an IRS Form 1099.

Form 8300.?Section 6050I?implemented mandatory financial transaction reporting obligations on the IRS Form 8300, a joint IRS and FinCEN form. According to Nancy Dollar, an expert on the new IRS crypto-law,?Section 6050I was originally designed?“to allow greater government surveillance of large cash transactions to curb illicit activities and help law enforcement combat money laundering, tax evasion, drug dealing, terrorist financing and other criminal activities." But this reporting was typically reserved only for physical, in person, payments in cash exceeding $10,000.

Fast forward to 2022, and the Infrastructure Act now redefines "cash" to include "any digital representation of value" involving distributed ledger technology, such as blockchain, completely transforming the reporting triggers. Thus,?beginning January 1, 2024, any "person" (including an individual, company, corporation, partnership, association, trust or estate) who receives digital assets in the course of a trade or business with a value exceeding $10,000 must collect, verify, and report on Form 8300 transaction-related information within 15 days or else face fines or even criminal liability.?

Specifically, the information required by Form 8300 includes: the identifying information of the individual from whom the cash was received, including such individuals name, address, occupation, and taxpayer identification number; the identifying information of the person on whose behalf the transaction was conducted; and a description of the transaction and method of payment. Receipts must be aggregated if they are related in a series of connected transactions, rendering any receipt of digital assets potentially reportable, regardless of dollar value.?

A taxpayer?is presumably?in receipt of digital assets whenever they become held in an account or at digital storage location in the taxpayer's control, for instance, through possession of private keys. Receipt occurs regardless of how long the assets are retained and whether they are subject to a custodial arrangement. The applicable definition of "digital assets" is broad enough to cover various forms of value that exist on distributed ledger technologies, including familiar cryptocurrency like bitcoin as well as non-fungible tokens (NFTs). Notably,?any exchange of digital assets for other digital assets?(e.g., a purchase of NFTs with cryptocurrency) would qualify as a receipt, requiring each party to report the other.

Given its purpose, 8300 filing failures trigger harsher penalties than other reporting violations under the IRS Code, including felony charges punishable by up to five years of imprisonment and no financial penalty ceiling.

Form 1099-B. Historically, Form 1099-B is the form brokers have used to report the sale of securities to the IRS. Now, as of January 1, 2024, pursuant to the Infrastructure Act, digital assets are henceforth specified securities that are subject to reporting on IRS Form 1099-B.

This means that brokerages must now report every transaction that the brokerage has enabled between the cryptocurrency buyer and the seller. The Infrastructure Act also expands the definition of "broker" to target cryptocurrency exchanges, which now includes “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Digital assets?are defined?as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” as specified by the Secretary of the Treasury.

In comparison to failing to file a Form 8300, the penalties for failing to file a form 1099-B are not as severe. However, the fines can still add up and intentional failures can result in misdemeanor charges punishable by up to one year of imprisonment.

One of the First Cryptocurrency U.S. Statutes

Interestingly, the Infrastructure Act’s cryptocurrency mandates are one of the first regulatory statutes specifically targeting cryptocurrency trading platforms, which are otherwise arguably lacking in specific U.S. federal regulation. This means that when a customer has a problem with a cryptocurrency transaction, the customer is not afforded the myriad of protections and safeguards afforded by federal registration. For instance, with respect to?U.S. federal regulation?of crypto-trading platforms, there exists:

• No team of SEC, Federal Reserve, OCC, FINRA or other federal auditors and compliance experts not only inspecting and scrutinizing the fairness, execution and transparency of transactions and but also policing for fraud, manipulation and chicanery;?
• No liquidity, net capital or other depository or financial federal requirements;?
• No record-keeping and archiving requirements with respect to operations, communications, trading or any other aspect of business;?
• No requirements regarding the pricing or order flow of crypto transactions or the use internal platforms and payment systems by employees;?
• No adherence to federal statutes and rules prohibiting manipulation, insider trading, and other fraudulent behavior by customers or employees;?
• No mandated cybersecurity requirements or standards to combat hackers and protect customer privacy;?
• No mandated training or code of conduct requirements;?
• No mandated internal compliance, customer service or whistleblower teams to address and archive customer complaints;?
• No anti-fraud guarantee from a U.S. registered financial institution and, if any dispute or problem arises, no reversing of charges (typical cryptocurrency transactions are by definition irreversible);?
• No mandated process for customer complaint handling (and even if there was a formal complaint filing structure, the pseudo-anonymous nature of virtual currencies, ease of cross-border and interstate transport, and the lack of a formal banking edifice creates enormous challenges for law enforcement to investigate and apprehend any individuals who use cryptocurrencies for illegal activities); and
• None of the vigorous U.S. federal safeguards historically rooted in the DNA of U.S. financial institution registration and regulation. These sacrosanct standards and practices are not only the hallmark of U.S. financial institutions such as banks, investment companies, brokerages and other financial firms but have also rendered U.S. capital markets the most transparent, efficient, reliable, safe, trustworthy -- and most sought after in the world.

Reporting Cryptocurrency?Holdings?to FinCEN

Currently,?U.S. federal law requires?financial institutions to report cash transactions over $10,000 conducted by, or on behalf of, one person, as well as multiple currency transactions that aggregate to be over $10,000 in a single day. These transactions are reported on?Currency Transaction Reports?(CTRs) to FinCEN. The federal law requiring these reports?was passed to safeguard?the financial industry from threats posed by money laundering and other financial crimes. To comply with this law, financial institutions must obtain personal identification information about the individual conducting the transaction such as a Social Security number as well as a driver’s license or other government issued document. This requirement applies whether the individual conducting the transaction has an account relationship with the institution or not.

Similarly, on FinCEN Forms 114, so-called?Reports of Foreign Financial Accounts?(FBAR), U.S. taxpayers who own offshore accounts with an aggregate value of $10,000 or more in any tax year?must disclose?their offshore accounts. Failing to do so can lead to?steep penalties. For instance, “knowingly and willfully” filing a false FBAR can carry criminal penalties of up to five years of incarceration.

Currently, FBAR regulations?do not define?a foreign account holding virtual currency as a type of reportable account.?For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it holds reportable assets besides virtual currency).?

Though not yet promulgated, FinCEN now intends to propose to amend the regulations implementing the BSA?regarding FBAR reports?to include virtual currency as a type of reportable account.?

Mandating the reporting of cryptocurrency transactions could have a dramatic impact on cryptocurrencies worldwide, shining additional sunlight upon the secretive and unregulated digital wallets of tech-savvy criminals. U.S. persons would now have to consider their cryptocurrency assets when deciding whether to file FBARs for accounts containing both cryptocurrency and non-cryptocurrency assets. In addition, U.S. persons would have to determine whether their cryptocurrency digital wallets independently trigger FBAR filing requirements as well.

To date, FinCEN’s plan to propose amendments to BSA regulations has yet to come to fruition. However, given the federal government’s other efforts to crack down on cryptocurrency-related tax fraud, money laundering, and other crimes,?it seems likely?that FinCEN to follow through with its proposal in the coming months.

As an aside, mandating the reporting of crypto-holdings to FinCEN is not that far off from what may already be required by the Foreign Account Tax Compliance Act (FATCA), which also establishes reporting requirements -- and its requirements are not specific to “foreign financial accounts.” FATCA applies to all “foreign financial assets” that exceed the statute’s?reporting thresholds. FATCA reporting requirements apply to Individuals residing in the U.S. who own??more than $50,000 in foreign financial assets at any point during the tax year, while this threshold increases to $200,000 for individual U.S. taxpayers living abroad.

While the FBAR filing requirement does not currently apply to cryptocurrency investors (unless their foreign accounts also hold reportable assets), the FATCA filing requirement arguably does.?Like the Bank Secrecy Act, FATCA imposes substantial penalties -- including criminal penalties for willful and intentional violations.?Thus, establishing reporting requirements of crypto-holdings to FinCEN would arguably only require what is already mandated by FATCA, only with a lower reporting threshold.?

The Impact of IRS and FinCEN Expanded Crypto-Reporting Obligations

For businesses that accept cryptocurrency or are planning to do so, these new IRS and FinCEN cryptocurrency reporting requirements create enormous challenges and exponential risks; impose all sorts of technological and logistical burdens; and generate significant additional costs and management drag.?

In stark contrast, for businesses who opt out of accepting cryptocurrency there will be little if any impact on their profits while avoiding the warehousing, volatility and many other financial risks associated with using cryptocurrency. This comes as no surprise.

After all, the use of cryptocurrency solves no U.S. problem or predicament. There already exist dozens of ways to tender payments virtually, which are cheaper, safer, easier, faster, simpler, more effective, more efficient, more workable and clearly superior to using cryptocurrency. It’s no wonder that, in the U.S., most people use cryptocurrency to bet on movements in the cryptocurrency market, not to purchase items, especially since cryptocurrency transactions are much more?expensive, cumbersome and risky than just about any other form of payment.

In fact, it remains a challenge to conjure up a single U.S. societal benefit (social, economic or otherwise) of cryptocurrency and the untraceable financial transactions it’s use?facilitates, and in the U.S., there exists not a single task or process that cryptocurrency improves. Moreover, using cryptocurrency does not create greater security or safety for one’s finances and is not convenient or free.

In addition, using cryptocurrency does not actually disintermediate any process, an oft touted claim by crypto-enthusiasts that ?is neither accurate nor realistic. Indeed, using cryptocurrency to tender payments?requires a range of critical intermediaries, including self-hosted wallets (where investors store their crypto), exchanges (where investors exchange sovereign currencies and crypto) and miners (who charge fees to validate crypto transactions -- and?can profit from their power to decide which transactions to approve and in what order).

Businesses accepting cryptocurrency are already enduring cryptocurrency’s liquidity risk, price volatility, cybersecurity vulnerabilities, commission fees, use in money laundering, ethical problems, tax issues and more, create a situation that could become unmanageable or even intolerable for a business’s shareholders, partners, affiliates and other fiduciaries.

Moreover, for the most part, the entire cryptocurrency system resides?amid an unregulated, mysterious and often sinister environment?— a patently poor choice of virtual venue, alleged by some to be replete with manipulation.?In fact, cryptocurrency valuations?remain so volatile?that its functionally as a currency carries such risk of devaluation that it is hard to envision why individuals would desire to use it as a currency other than to seek anonymity.

Given so many existing challenges associated with transacting in cryptocurrency, why should any business take on the added risk of cryptocurrency reporting failures; the astronomical costs inherent in building a cryptocurrency reporting system/regime; and the immense overhead associated with compliance?

Cryptocurrency Investors, Promoters and Lobbyists

The now omnipresent legion of cryptocurrency zealots will undoubtedly open their cognitive dissonance playbook and attempt: 1) To amend or repeal the new Form 8300 and 1099-B reporting requirements; and 2) To vigorously oppose the anticipated FinCEN FBAR cryptocurrency reporting rules. Their arguments typically revolve around three basic notions:

The Right to Pseudo-Anonymity. Cryptocurrency users will argue that expanding cryptocurrency reporting requirements eliminates the benefits of the pseudo-anonymity of crypto-payments. This appeals to fundamental democratic and libertarian cravings for privacy of financial transactions. But this argument sorely misses the point.?

In the U.S., individuals do not have a right to keep their financial transactions secret from the government; in fact, there exists a slew of critical and historically significant regulations that prove this point.?

For instance,?the BSA establishes?program, record-keeping and reporting requirements for national banks, federal savings associations, federal branches and agencies of foreign banks. The BSA was amended to incorporate the provisions of the?USA PATRIOT ACT, which requires every bank to adopt a customer identification program as part of its BSA compliance program.

Further, U.S. law generally prohibits making payments to those who are enemies of the U.S, such as terrorist organizations, so in the U.S., a person must also know the identity of anyone to whom they make payments. The U.S. Treasury Department’s Office of Foreign Asset Controls (OFAC) supervises the enforcement of these sanctions laws, such as the?Trading with the Enemy Act?and the?International Emergency Economic Powers Act.

There are also a mass of?broad and sweeping U.S. federal reporting requirements?to FinCEN the IRS and other government regulators and law enforcement institutions relating to financial transactions by?banks,?broker-dealers,?money service businesses?and a litany of other financial firms.?

The New Requirements are Orwellian. Cryptocurrency libertarians will also argue that new IRS and FinCEN cryptocurrency reporting requirements go too far and that Congress should prohibit U.S. law enforcement from using its investigatory authority to audit, trace and surveil the private and personal financial transactions of U.S. citizens.?

However, this is a failed policy argument and not a legal argument. Though anonymity of financial transactions may appeal to certain libertarians, Congress has determined that affording anonymity in large financial transactions is not worth the cost of the global spread of terrorism, crime and economic chaos that anonymous transactions can cause.?

The New Requirement’s Curtail Technological Growth. Cryptocurrency lobbyists will tag the IRS and FinCEN requirements as hindering technological progress while clinging to an antiquated, flawed and wholly undemocratic financial ecosystem.?

Bitcoin promoters in particular can spend hours pontificating about how cryptocurrencies will benefit U.S. citizens, such as: transforming the way U.S. businesses conduct financial transactions; rendering U.S. use of energy, water and any other raw material more efficient, more transparent, more reliable and less costly; instantaneously verifying transactions, eliminating significant costs, uncertainty and fraud; and will in general, dramatically improve the way all U.S. citizens carry out our daily lives. These promoters have got it all wrong, as our currently existing financial instruments provide all of those same benefits.

Though some experts?seriously doubt it?and some engineers?specifically refute it or negate it, perhaps blockchain technology will somehow become the most exciting, disruptive, transformative and efficiency enhancing breakthrough since sliced bread. But this is all beside the point.

Bitcoin and other cryptocurrencies are merely one application of blockchain technology, and the philosophies are too often mistakenly (and sometimes even maliciously) conflated. It is like arguing that banning asbestos means banning building construction,?when in reality, just as asbestos asphyxiates and contaminates the lawful construction of buildings, cryptocurrency pollutes and suppresses the legitimate growth of blockchain innovation.?

In other words,?attacking cryptocurrency is not the same as attacking blockchain. Moreover, cryptocurrency is not a benign facilitator of blockchain – it is a menacing cancer malignancy growing within it.?

Finally, restraining the flow of cryptocurrency is not stifling innovation; in fact, curtailing the flow of bitcoin accomplishes precisely the opposite. Like clearing out organized crime in a big city, cryptocurrency’s regulation and transparency clears the way for blockchain innovation and development, rendering it free from abuse and criminal exploitation and unlocking whatever benevolent potential it may have.?

Looking Ahead

The growing number of businesses who gleefully market their acceptance of bitcoin and other cryptocurrencies may as well be boasting about transacting in blood diamonds.?

Ironically, such hi-tech crypto-braggadocio is not an example of innovation and vision but is instead, a compelling illustration of noxious crypto-crime enabling,?and a glaring exemplar of commercial ignorance, opportunistic corporate pandering and plain old-fashioned irresponsibility and avarice.

The increased cryptocurrency regulatory sunlight provided by 8300’s, 1099-B’s and FBAR’s will help:?

• Curtail the madness of crypto-mania;?
• Illuminate the treacherous hustle of the fanatical cadre of fast-talking, self-interested crypto-promoters; and?
• Address the irresponsible recklessness of businesses who, by accepting bitcoin and other cryptocurrencies, are not only imposing unnecessary risk upon their shareholders, but are also facilitating the growth of a dangerous and growing global cyber-criminal pandemic.

Oh and one more thing, the new crypto-reporting requirements of Forms 8300’s, 1099-B’s and FBAR’s may also severely disincentivize businesses from accepting cryptocurrency. Not a bad result on any day of the week.

*John Reed Stark?is president of?John?Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last?11 of which?as Chief of its Office of Internet Enforcement. He currently teaches a?cyber-law course?as a Senior Lecturing Fellow at Duke University Law School.?Mr. Stark also worked?for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of "The Cybersecurity Due Diligence Handbook."