As a seasoned crypto investor with over a decade of experience navigating the digital asset landscape, I find myself deeply concerned about the recent IRS reporting rule targeting DeFi front-ends as brokerages. This ruling, if unchallenged, could potentially reshape the decentralized finance industry in ways that may not be entirely beneficial for its growth and innovation.
Alex Thorn’s analysis provides a sobering perspective on the potential outcomes of this rule. The compliance requirements could force many DeFi services to accept the designation as brokerages, which might compromise their core principles of decentralization. Alternatively, they may choose to block U.S. users or forgo smart contract upgrades and revenue generation – neither of which is ideal for fostering an inclusive, thriving ecosystem.
The swift response from crypto industry advocacy groups and executives highlights a growing sense of unity within the community. The litigation against the IRS, led by organizations like Texas Blockchain Council, the Blockchain Association, and DeFi Education Fund, shows that we are not willing to sit idly by while our hard-earned digital assets are subjected to what many consider government overreach.
In a lighter note, one might say that the timing of this rule change – on the last Friday of 2024, during the holiday season – was an attempt to bury the news deep beneath the festivities and prevent us from making “an absolute ruckus” about it. But alas, we are crypto investors, and we always manage to notice the important things amidst the tinsel and mistletoe!
The latest Internal Revenue Service (IRS) reporting regulation classifying decentralized finance (DeFi) interfaces as brokerages has caused a stir in the cryptocurrency sector. Alex Thorn, chief researcher at Galaxy Digital, presented three possible strategies for DeFi should the IRS rule not be reversed.
As per Thorn’s explanation, DeFi services and apps have options to adhere to IRS reporting rules, function as brokerages (which might involve restricting U.S. users), or forgo smart contract updates and income generation. This is what Thorn suggested in his writing.
“DeFi applications with no front-end website, non-upgradeable contracts, and that receive no ‘consideration’ from the disposition of digital assets —i.e., collect no fees — could be exempt from being designated ‘brokers’ under the proposal.”
In simpler terms, Thorn explained that highly decentralized apps don’t have the ability to identify or understand such requirements, making it impossible for them to fulfill broker reporting obligations.
In response to the IRS’s final reporting regulation, various cryptocurrency lobbying organizations and leaders rallied together, expressing broad disapproval that eventually led to lawsuits being filed against the IRS.
IRS reporting rule faces intense opposition
On December 27, 2024, the IRS announced a final modification concerning the classification of “Trading front-end service providers.” As per the agency, these providers will now be recognized as brokerages, which encompasses not only centralized exchanges but also decentralized ones. If approved, this change is set to take place in 2027.
Executives in the cryptocurrency sector urged Congress to prevent this rule, describing it as an excessive intervention by the government. In a social media message, Consensys lawyer Bill Hughes expressed his concerns about the timing of this regulation.
“This rule has been ready to go for a while now. They dump it on the last Friday of 2024, in the middle of a holiday stretch on purpose, obviously —as if we wouldn’t notice or make an absolute ruckus over it.”
On December 27th, a collective legal action was swiftly initiated against the Internal Revenue Service (IRS), with participation from Texas Blockchain Council, the Blockchain Association, and the DeFi Education Fund.
The lawsuit claims that the Department of the Treasury and the Internal Revenue Service have exceeded their legal limits and violated the constitution.
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2024-12-29 00:55