The new Treasury regulations are shaking things up in the world of decentralized finance (DeFi). Starting in 2027, U.S. websites and crypto wallets that offer easy access to DeFi will have to perform background checks on their customers.
These rules primarily target front-end services, which help users interact with DeFi protocols. As of now, over $179 billion in crypto has been deposited across various DeFi platforms, according to DefiLlama. Most of this money comes from user-friendly websites and apps, making it easier for people with little technical knowledge to dive into DeFi.
Under the new rules, any service that allows users to swap crypto will be considered a broker. This means they’ll need to collect a lot of customer data to help prevent tax evasion and assist users in reporting their taxes to the IRS.
While some in the industry expected harsher regulations, the final rules are less severe than initially proposed. Self-custody wallets without swap features and the DeFi protocols themselves seem to be off the hook. Still, many in the industry are ready to fight back.
Kristin Smith, CEO of the Blockchain Association, expressed disappointment, saying, “Today’s broker rulemaking by the IRS and Treasury... is a disappointing, but expected, final attempt to send the American crypto industry offshore.”
Earlier this year, the Treasury Department introduced rules requiring certain crypto businesses to provide customers with annual reports detailing all sales or exchanges of their assets. This mainly affects centralized companies like Coinbase, aiming to curb tax evasion and help Americans file their taxes.
Initially, the Treasury planned to apply similar requirements to decentralized businesses. However, they delayed those rules after receiving over 44,000 comments, many criticizing the proposed regulations. The original plan would have forced DeFi protocols and their developers to verify users' real identities to generate necessary tax forms.
This sparked outrage among industry experts, who argued that such regulations undermine the core purpose of blockchain technology. Blockchain was designed to enable peer-to-peer transactions without needing middlemen to verify identities.
Jason Schwartz, a tax partner at Fried Frank, noted that the Treasury seemed to have done its homework before releasing these new regulations. However, he warned that they could still lead many U.S. front-end providers to shut down or move overseas. “It’s more limited than the extremely aggressive, over-broad rule in their first proposal,” he said.
According to the new rules, anyone or any service that “effectuates” a crypto transaction is classified as a broker. The Treasury explained that front-end services are similar to securities brokers, as they receive customer trade orders, verify them, and confirm details with customers.
However, industry advocates argue this comparison is flawed. They say front-ends don’t actually execute transactions; they simply help users do it themselves. Peter Van Valkenburgh from Coin Center pointed this out in his analysis of the rule.
While tax reporting might be manageable for large banks, it could be a serious burden for front-end service providers, which often operate on thin margins. Schwartz remains cautiously optimistic, hoping these regulations might not take effect.
There are two possible ways to challenge these new rules. First, crypto developers could sue, claiming the Treasury exceeded its authority granted by Congress. Second, a crypto-friendly Congress could repeal the regulations altogether.
Congressman French Hill, a Republican from Arkansas and the incoming chair of the House Financial Services Committee, has already criticized the regulations. He called them an overreach by the Treasury and a poorly crafted attempt to target DeFi.