Crypto Industry Warns Congress Against New DeFi Broker Rules

Table of Contents

Introduction

The US Internal Revenue Service (IRS) has recently disclosed new regulations classifying several decentralized finance (DeFi) protocols as brokers. This move has sparked immediate backlash within the crypto industry, with calls for the incoming Congress to overturn the new rules.

What are the New Regulations?

According to the IRS, the new regulations treat front-end protocols facilitating digital asset transactions as brokers, requiring Know Your Customer (KYC) disclosures of transactions. The agency claims that these regulations will affect up to 875 DeFi brokers.

Industry Reaction: A Widespread Backlash

The new rules have sparked a widespread backlash on social media, with many legal experts suggesting that the IRS may be overstepping its authority and infringing constitutional rights. Jake Chervinsky, chief legal officer at venture capital firm Variant, stated:

‘This unlawful rule is the dying gasp of the anti-crypto army on its way out of power. It must be struck down, either by the courts or the incoming administration.’

A Call to Action: The Incoming Congress

Alexander Grieve, vice-president of government affairs at venture firm Paradigm, echoed Chervinsky’s sentiments:

‘The new pro-crypto Congress can, and should, roll these back via the CRA process next year,’ he said on X.

The Congressional Review Act (CRA) allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS.

What Does This Mean for DeFi Protocols?

According to Miles Jennings, general counsel of a16z Crypto, the rule represents ‘a fantastical expansion of the words "effectuate transactions" to enable the IRS to ban DeFi.’

Miles Fuller, director of government solutions at TaxBit, explained that the definition covers any provider that knows ‘or is in a position to know whether the nature of the transaction involved gives rise to reportable gross proceeds from the sale of digital assets.’ However, two specific groups are specifically excluded from the definition:

Validation services
Wallet software providers

Blockchain Association: "A Final Attempt" to Drive the US Crypto Industry Offshore

Advocacy group Blockchain Association has called the rule ‘a final attempt’ to send the US crypto industry offshore. A statement by the group’s CEO, Kristin Smith, said:

‘On behalf of the industry, we’re prepared to take aggressive action to fight back. We also look forward to working with the new pro-crypto Congress and Administration to roll back this and other anti-innovation rules.’

Expected Impact: 2.6 Million Taxpayers Affected

According to the IRS, the new regulations are expected to affect as many as 2.6 million taxpayers.

Conclusion

The DeFi broker definition encompasses platforms performing intermediary functions in facilitating transactions, including a group of persons facilitating transactions ‘whether or not the group operates through a legal entity.’

As the crypto industry grapples with this new development, it remains to be seen how the incoming Congress will respond to calls for overturning these regulations.