The final regulations classifying several decentralized finance (DeFi) protocols as brokers have sparked immediate backlash within the crypto industry. The incoming Congress is being called upon to overturn the new rules, which have been disclosed by the US Internal Revenue Service (IRS).
New Regulations Treat Front-End Protocols Facilitating Digital Asset Transactions as Brokers
The new regulations treat front-end protocols facilitating digital asset transactions as brokers, requiring Know Your Customer (KYC) disclosures of transactions. According to the agency, the regulations will affect up to 875 DeFi brokers.
Widespread Backlash on Social Media
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.
"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," said Jake Chervinsky, chief legal officer at venture capital firm Variant.
Calls for Incoming Congress to Overturn New Rules
Alexander Grieve, vice-president of government affairs at venture firm Paradigm, believes that "the new pro-crypto Congress can, and should, roll these back via the Congressional Review Act (CRA) process next year."
The CRA allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS.
DeFi Broker Definition Encompasses Platforms Performing Intermediary Functions
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.’
Miles Jennings, general counsel of a16z Crypto, claimed that "the rule represents ‘a fantastical expansion of the words ‘effectuate transactions’ to enable the IRS to ban DeFi.’"
Specific Groups Excluded from Definition
According to Miles Fuller, director of government solutions at TaxBit, 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.’
Fuller explained that two specific groups are specifically excluded from the definition: validation services and wallet software providers.
Advocacy Group Blockchain Association Speaks Out
The advocacy group Blockchain Association 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."
New Regulations Expected to Affect Up to 2.6 Million Taxpayers
According to the IRS, the new regulations are expected to affect as many as 2.6 million taxpayers.
Impact on Crypto Industry
The impact of these new regulations on the crypto industry is yet to be seen. However, it’s clear that they will have a significant effect on DeFi protocols and the way they operate.
Rollback Possible via Congressional Review Act
As mentioned earlier, the CRA allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS. This means that the new rules can be rolled back via this process next year.
Conclusion
The final regulations classifying several DeFi protocols as brokers have sparked immediate backlash within the crypto industry. The incoming Congress is being called upon to overturn the new rules, which are expected to affect up to 2.6 million taxpayers.
As the crypto industry continues to evolve and grow, it’s essential that regulatory bodies keep pace with innovation. The new regulations may be seen as an overreach by some, and it will be interesting to see how this plays out in the coming months.
Recommendations for the Crypto Industry
- Continue to work with regulatory bodies to ensure that new regulations are fair and reasonable.
- Advocate for a more inclusive and forward-thinking approach to regulating the crypto industry.
- Consider implementing changes to your business operations to comply with the new regulations.
By staying informed and adapting to changing regulations, the crypto industry can continue to thrive and grow.
