As a seasoned analyst with over two decades of experience in financial regulation and technology, I find myself deeply concerned about the recent IRS regulations classifying DeFi protocols as brokers. With my background in both law and tech, I can’t help but see this as a significant misstep that risks stifling innovation in the rapidly growing crypto industry.
The recent guidelines labeling numerous DeFi platforms as broker entities have ignited strong criticism across the cryptocurrency sector, prompting demands for the upcoming Congress to reverse these newly implemented regulations.
On December 27, the United States Internal Revenue Service announced new regulations that classify front-end protocols handling digital asset transactions as broker entities. These entities are now required to perform Know Your Customer (KYC) checks on all transactions. The IRS estimates that approximately 875 DeFi brokers will be impacted by these regulations.
A broad criticism against the new regulations is sweeping across social media platforms, as numerous lawyers are expressing concerns that the Internal Revenue Service could potentially exceed its powers and violate constitutional freedoms.
Jake Chervinsky, legal officer at Variant Venture Capital, stated that this rule against cryptocurrency, a desperate last move from those in power who are anti-crypto, should be overturned. This can happen either by the courts or the new administration taking office,” (paraphrased)
For Alexander Grieve, vice-president of government affairs at venture firm Paradigm, “the new pro-crypto Congress can, and should, roll these back via the CRA process next year,” he said on X.
Under the Congressional Review Act (CRA), Congress has the ability to scrutinize and potentially overturn rules enacted by entities such as the Internal Revenue Service (IRS).
A DeFi broker’s role is to act as an intermediary in executing transactions, which could involve individuals or groups, whether they operate through a formal organization or not.
Miles Jennings, legal advisor for a16z Crypto, stated that this rule extends the meaning of “conducting transactions” in a way that allows the Internal Revenue Service (IRS) to potentially prohibit Decentralized Finance (DeFi).
As per Miles Fuller, who heads the government solutions department at TaxBit, this term encompasses anyone who has knowledge or the ability to gain knowledge about whether a transaction’s nature generates reportable proceeds from the selling of digital assets.
Fuller explained that two specific groups are specifically excluded from the definition: validation services and wallet software providers.
The Blockchain Association, an advocacy group, labeled this rule as a “last-ditch effort” to drive the U.S. cryptocurrency sector overseas. According to comments made by its CEO, Kristin Smith, this was her interpretation of the situation.
“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.”
According to the IRS, the new regulations are expected to affect as many as 2.6 million taxpayers.
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2024-12-27 23:59