IRS Rule Inflames Blockchain Advocates
The Blockchain Association, along with the Texas Blockchain Council, has filed a lawsuit against the IRS to block new crypto broker regulations the agency enacted. The new rules, finalized on Dec. 27, 2023, require brokers to report digital asset transactions, including gross proceeds and taxpayer details. The regulations are due to go into effect in 2027, although data collection is set to begin in 2026.
The lawsuit, announced by Blockchain Association CEO Kristin Smith, argues the IRS overstepped its authority and ran afoul of the Administrative Procedure Act. “We stand with our nation’s innovators and will continue working to ensure the future of crypto-and DeFi-is here in the United States”, Smith said.
Impact on DeFi Platforms
The new rules indicate that DeFi platforms could be viewed as brokers under the new rules if, through smart contracts, they exercise control or influence over a particular asset exchange. This categorization presents major compliance challenges to the developers of decentralized trading systems.
This represents not only a privacy invasion for those using decentralized technology, but would push this entire, burgeoning technology offshore”, said Marisa Coppel, the Blockchain Association’s Head of Legal.
It was a serious burden for the developers who could be building the front-end infrastructures for trading-innovations in blockchain technology in large part.
Historical Background and Wider Implications
The controversy echoes the case of Alex Pertsev, a developer of the Tornado Cash, who was convicted on money laundering charges for abuse of his software. Blockchain proponents fear that the IRS regulations create a slippery slope of holding developers liable for actions of users with their applications.
The potential flight of blockchain innovation from the U.S. is a critical concern, in that the current stringent regulation may drive the developers to jurisdictions that can offer better environments for new technologies to flourish.
Privacy Concerns and Industry Impact
Legal experts have cited this as a potential invasion of privacy. By expanding the definition of a broker to include the DeFi trading platforms, the rules could reach an estimated 875 brokers and up to 2.6 million taxpayers in the United States. Critics say these regulations run afoul of the core principles of decentralized systems and put user privacy at great risk.
As the case develops, the Blockchain Association is trying to protect the future of DeFi and blockchain technology in the United States. The lawsuit represents a critical juncture in the ongoing struggle to balance innovation, privacy, and regulatory oversight within the crypto industry.
