Decentralized finance Treasury Finalizes DeFi providers must submit additional data connected to crypto activity, according to rules finalized on December 27 by the U.S. Treasury and IRS.
The Treasury has determined that DeFi brokers, who deal directly with clients in purchasing and selling digital assets, are front-end service providers and must file Form 1099 to disclose the gross revenues of these sales.
Investment firms and platforms that store cryptocurrency in escrow already face the same regulations. The Treasury has stated that the regulations do not classify operators of digital protocols or developers of protocol software as brokers.
Blockchain Waves DeFi Innovation and Regulation
An Explanation of Waves: A Nxt Blockchain for Money and Personal Asset Management. Google Cloud and Ontology Form A New Blockchain Partnership. Nevertheless, any number of platform operators are subject to the regulations. According to Forbes, several DeFi front-end operators must adhere, including those running specific websites, browser extensions, and unhosted wallets.
Forbes further mentioned that DeFi operators need to collect information about user identities through Know-Your-Customer (KYC) methods and report proceeds for transactions that happen after January 1, 2027.
Personal cryptocurrency gains are already subject to reporting obligations, and the new regulations do not add any more. Treasury Finalizes DeFi subscribers should eventually receive Form 1099, which outlines the necessary information for their tax return.
Blockchain Groups Challenge DeFi Regulations
A coalition of business organizations, including the Blockchain Association, has launched a lawsuit challenging the rules’ constitutionality and seeking to declare them illegal. The complaint states that the regulations encompass DeFi firms that do not engage in cryptocurrency transactions themselves but merely facilitate user-to-user transactions.
The lawsuit claims that this lack of cooperation prevents Treasury Finalizes DeFi organizations from complying with the rules as they currently stand. If any attempt to comply included intermediaries, DeFi’s non-broker, direct-to-user foundation would be undermined. In addition, many businesses would have to shut down or relocate to another country because trying to comply would be too expensive.
The Blockchain Association also said that the regulations could affect end users, calling them an infringement on the privacy rights of individuals using decentralized technology.
DeFi Rules Target NFTs and Stablecoins
Consensys Senior Counsel Bill Hughes stated that the regulations may extend beyond the most widely used cryptocurrency. He claimed that the regulations cover every single asset,” even stablecoins and non-fungible tokens (NFTs), which generate “all cost and no benefit financially.
Meanwhile, Republican senator Cynthia Lummis hinted that the Trump administration might discard the rule on January 20th. However, as of late December, Trump’s staff still haven’t addressed the issue.
FAQs
How will these regulations affect DeFi businesses?
DeFi brokers, including those running websites, browser extensions, and unhosted wallets, must collect user identity data through Know-Your-Customer (KYC) methods and report transaction proceeds starting January 1, 2027. Some businesses may face high compliance costs, potentially leading to shutting down or relocating.
Are developers of digital protocols affected by these rules?
No, the regulations do not classify operators of digital protocols or protocol software developers as brokers. The rules mainly target DeFi front-end service providers.
What are the privacy concerns regarding the new regulations?
The Blockchain Association and other groups argue that these regulations infringe on users' privacy rights, especially since the rules require the collection of personal data from DeFi users.
What assets are covered by the new regulations?
The regulations apply to all digital assets, including stablecoins and non-fungible tokens (NFTs), not just the most widely used cryptocurrencies.
