Casey Wagner

This is a segment from the Forward Guidance newsletter. To read full editions, <a href="https://blockworks.co/newsletter/forwardguidance">subscribe</a>.



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Congressional Republicans are working to reverse new IRS guidelines that require so-called “custodial brokers” to report transactions.&nbsp;



Rep. Mike Carey and Sen. Ted Cruz this week introduced corresponding resolutions seeking to “roll back the <a href="https://x.com/RepMikeCarey/status/1882110957700448414">disastrous IRS broker rule</a>.”&nbsp;



The legislation comes weeks after a group of crypto lobbying firms sued the IRS over the rule. They claim the requirement “exceeds the agencies’ statutory authority, violates the Administrative Procedure Act (“APA”) and is unconstitutional.”&nbsp;



As it currently stands, starting in 2025, custodial brokers are required to <a href="https://blockworks.co/news/irs-new-form-crypto-accountants">report gross proceeds</a>. In 2026, they will have to report cost basis for certain transactions.&nbsp;



The final version of the 1099-DA form was published at the end of last year. While earlier drafts had included a section where brokers had to identify their “type” of business, the final form nixed this box. It’s a small change, but by cutting this section the IRS more or less punted the issue of DeFi actors.&nbsp;



Even so, those opposed to the rule claim that the rule still imposes unfair reporting obligations on intermediaries and other actors in the crypto space.&nbsp;



The resolutions have some co-sponsors (Sens. Cynthia Lummis and Tim Sheehy, to name a few), but neither have been scheduled for a markup or vote just yet. This is a hot-button issue in the crypto space though, so we’d expect companies to be directing a significant amount of their lobbying efforts here.



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Republicans seek to overturn IRS crypto broker rule

The US Treasury Department has released its highly-anticipated proposed regulations for cryptocurrency brokers. Notably, it has chosen to exempt individual validators and miners.&nbsp;



The Treasury alongside the Internal Revenue Service introduced the proposed regulations on Friday as stipulated by the 2021 Infrastructure Investment and Jobs Act. The agencies suggest defining digital asset “brokers” as “trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person.”&nbsp;



Individuals who only engage in distributed ledger validation, including miners and stakers, are exempt from broker requirements, Treasury officials told members of the press.&nbsp;



Under the proposed rules, crypto brokers will have to adhere to the same rules as securities brokers, including filing information returns and furnishing payee statements for all customers and traders.&nbsp;



The Treasury is also calling for brokers to provide a new Form 1099-DA, a special form for reporting non-employment income from digital assets, to all customers and clients, in an effort to help taxpayers manage their tax obligations.&nbsp;



The Treasury stated that the proposed changes aim to curb crypto tax evasion and prevent crypto investors and businesses from gaining an unfair advantage. <a href="https://blockworks.co/news/biden-tax-tweet-puzzles-industry">The Biden Administration has said there is as much as $18 billion</a> left on the table from crypto investors taking advantage of “loopholes” in the tax code.&nbsp;



The proposed rules come about four months before the agency’s Dec. 31, 2023 deadline to submit, as mandated by Congress.&nbsp;



Earlier this month, <a href="https://blockworks.co/news/democrat-senators-crypto-tax-policy-update">a group of Democratic senators urged the two agencies</a> to pick up the pace, arguing that the Treasury and IRS&nbsp; “are at risk of failing to meet their congressionally-mandated deadlines for implementation of a final rule,” per the <a href="https://www.taxnotes.com/research/federal/legislative-documents/congressional-tax-correspondence/senators-urge-treasury%2C-irs-to-implement-crypto-rules/7h1f8">letter</a> signed by Sen. Elizabeth Warren, D-Mass., and others.&nbsp;



The rules, if passed, would go into effect in 2026, for the 2025 tax year.&nbsp;



The public comment period for the proposed rules is open until Oct. 30, 2023. A public hearing has been scheduled for Nov. 7, 2023, and if needed will extend to Nov. 8 to accommodate additional requests to speak. The deadline to request to speak at the hearing is Oct. 30.



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IRS spares crypto miners and validators in new broker reporting requirements

Shalini Nagarajan

Pension funds are reportedly backing a crypto broker that enables larger hedge fund bets on cryptocurrencies.



US aerospace and defense firm Lockheed Martin’s retirement plans are among supporters of the brokerage Hidden Road, the Financial Times reported on Wednesday, citing people familiar with the matter.



Established in 2018 by Marc Asch, who previously worked at Steve Cohen’s SAC Capital and Point72 Asset Management, Hidden Road initially concentrated on foreign-exchange offerings before venturing into the realm of digital assets.



The London-based firm is said to take its name from the Massachusetts street where Asch spent his formative years.



To manage risk, the firm uses a real-time system that sets trading limits and demands upfront collateral.



The FT <a href="https://www.ft.com/content/04090303-2b67-4567-82fc-cde5126bb85e">reported</a> that Hidden Road sees itself as more of a private equity outfit that raises external capital, rather than a traditional bank prime broker.



One investor reportedly characterized the firm as “prime brokering on steroids” and pointed out the risks associated with depending on external capital.



Hidden Road <a href="https://www.prnewswire.com/news-releases/hidden-road-raises-50-million-in-series-a-led-by-castle-island-ventures-301581877.html">secured $50 million</a> in funding in July last year from backers such as Citadel Securities and the investment units of FTX and Coinbase.&nbsp;



By the end of August, the broker was negotiating with leading global banks and hedge funds to assist with its crypto risk management.



Blockworks learned last year that Hidden Road faced trouble due to its involvement with FTX. Subsequently, all content was removed from its <a href="https://twitter.com/HiddenRoadHQ">X/ Twitter page</a>.



Hidden Road and Lockheed Martin didn’t return Blockworks’ request for comment by press time.



A crypto prime brokerage helps traders in the cryptocurrency market by providing them with leverage, similar to what traditional prime brokers do in stock markets. These brokerages extend credit to various clients like hedge funds to amplify their trading bets.&nbsp;



If a client incurs heavy losses, the prime brokerage or its investors may have to cover the losses.



The interest from Lockheed Martin&#8217;s retirement plan, along with others, signifies the most recent indirect foray into cryptocurrencies by pension funds looking to enhance their returns.



Nonetheless, some pension funds&#8217; foray into crypto has not exactly been smooth. Last year, two Canadian pension funds, Ontario Teachers&#8217; Pension Plan and CDPQ, <a href="https://blockworks.co/news/ontario-teachers-fund-sank-95m-in-failed-ftx-empire">experienced losses</a> in their investments with FTX and Celsius.



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Crypto broker Hidden Road finds financial allies in pension funds: report

<div id="highlights-block_626c4233f57cd" class="highlights">
 <ul>
 <li>Genesis reported $44.3 billion in originated loans during the first three months of 2022</li>
 <li>Institutional investors are becoming less interested in bitcoin, the report noted</li>
 </ul>
 
</div>



Institutional investor cryptocurrency brokerage Genesis reported $44.3 billion in originated digital asset-backed loans during the first quarter, a decline from the previous quarter’s $50 billion.&nbsp;



The decline is due to a large sell-off across all cryptoassets, Genesis wrote in a first quarter <a href="https://info.genesistrading.com/hubfs/quarterly-reports/2022/Genesis-Q1-Report-2022.pdf" target="_blank" rel="noreferrer noopener">earnings report</a> Friday. Valuations across the space are nearly half of what they were in November, the report added. 



Genesis’ lending business focuses on lending to crypto funds and other institutions for hedging investments or shorting digital assets. The brokerage has issued $195 billion in loans since the launch of the lending platform in 2018.&nbsp;



Despite recent volatility, new institutions entering the market have shown strong demand for cash loans this past quarter, Genesis said.&nbsp;



“Institutions continue to develop their crypto strategies and strengthen their understanding of this industry, even amid the market uncertainty that has marked the start to this year,” CEO Michael Moro said in a statement. “As we continue to deepen engagement with our clients across Genesis’ wide range of products, we are committed to further expanding our market share and delivering innovative strategies for clients to access this growing asset class.”



Genesis’ trading desk grew during the first quarter of the year. The notional derivatives volume — including negotiated block- and exchange-traded futures — traded reached $27.8 billion during the quarter, up 33% from the fourth quarter of 2021.&nbsp;



Investors are becoming less interested in single-asset portfolios, especially when it comes to bitcoin, Genesis said in the report.&nbsp;



“Since the middle of last year, we noted a macro trend occurring in which BTC was gradually becoming a smaller proportion of our portfolio mix,” the report said. “Many clients are also focused on [decentralized finance] funding opportunities in these native layer-1 blockchains, sometimes offering more attractive rates than in typical ETH blockchain protocols.”&nbsp;



A possible explanation: There is little opportunity in bitcoin cash and carry basis trades, as the three-month trailing and three-month basis compressed in the first quarter, the report said. The same trend can be observed in ethereum basis trades, which used to trade at a slight premium to bitcoin.



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