Congress repealed the IRS broker rule, but can it regulate DeFi?
The decentralized finance (DeFi) industry is breathing a sigh of relief as Congress relaxes reporting obligations, but questions remain about how lawmakers will regulate DeFi.
On March 12, the House of Representatives voted to nullify a rule that required DeFi protocols to report gross proceeds from crypto sales, as well as info on taxpayers involved, to the Internal Revenue Service (IRS).
The rule, which the IRS issued in December 2024 and wasn’t set to take effect until 2027, was regarded by major industry lobby groups as burdensome and beyond the agency’s authority.
The White House has already signaled its support for the bill. President Donald Trump is ready to sign when it reaches his desk. But DeFi observers note that the industry has yet to strike a balance between privacy and regulation.
Bipartisan vote on repealing the rule. Source: DeFi Education Fund
Privacy concerns over IRS DeFi rule
The crypto industry was quick to laud the vote in the House. Marta Belcher, president of the Filecoin Foundation, said that blocking the rule was particularly important for user privacy.
She told Cointelegraph it is “critical to protect people’s ability to transact directly with each other via open-source code (like smart contracts and decentralized exchanges) while remaining anonymous, in the same way that people can transact directly with each other using cash.”
Privacy concerns were central to the crypto industry’s objections to the rule, with industry observers claiming that it was not fit for purpose and infringed on user privacy.
Bill Hughes, senior counsel and director of global regulatory matters for Consensys Software wrote in December 2024, “Trading front ends would have to track and report on user activity — both US persons and non-US persons […] And it applies to the sale of every single digital asset — including NFTs and even stablecoins.”
The Blockchain Association, a major crypto industry lobby group, stated that the rule was “an infringement on the privacy rights of individuals using decentralized technology” that would push DeFi offshore.
While the rule has been stopped for now, there still aren’t fixed privacy guidelines in place — something Etherealize CEO Vivek Raman said the industry needs to move forward.
“There needs to be clear frameworks for blockchain-based privacy while maintaining [Know Your Customer/Anti-Money Laundering] requirements,” he told Cointelegraph.
Raman stated that some transactions and customer data will need to remain private, “and we need guidance on what privacy can look like.”
How do you regulate DeFi?
The crypto space has long juggled user privacy demands and regulators’ Anti-Money Laundering and Know Your Customer concerns.
One problem lies in the technology itself — if a network is created by many and controlled by no single entity, who can the government contact?
Per Raman, “It’s hard for a decentralized protocol that is controlled by nobody to issue 1099s or fulfill broker-dealer responsibilities! Companies can certainly be [broker-dealers], but software has not been designed for [broker-dealer] rules.”
DeFi developers can and have been proactive in working with regulators, Chainalysis suggested, as was the case with certain protocols freezing funds after the disastrous $285 million KuCoin hack.
Related: Timeline: How Bybit’s lost Ethereum went through North Korea’s washing machine
Cinneamhain Ventures partner and consultant Adam Cochran claimed that every protocol has certain pressure points regulators could press on if a protocol were used to commit a crime:
Source: Adam Cochran
However, these specific instances do not make a comprehensive regulatory framework that both the industry and investor protection agencies can point to.
In that regard, crypto analytics firm Chainalysis stated in 2020 that regulators may need to craft regulations for the DeFi space with decentralized reporting limitations in mind.
Raman suggested that one possible solution could be zero-knowledge proofs, which allow users to confirm certain data without revealing it.
He is optimistic about regulators’ ability to find a way to regulate the space while still maintaining user privacy: “I think we’ll see a positive sum environment where DeFi and compliance will coexist.”
The long-awaited crypto regulatory framework
Trump has already made a number of pro-crypto measures through executive orders and appointing pro-crypto individuals to head parts of his administration — the most recent being the establishment of a strategic Bitcoin reserve.
Related: US Rep. Byron Donalds to introduce bill codifying Trump’s Bitcoin reserve
The pro-crypto tenure of important financial regulators like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) has dropped a number of high-profile enforcement cases against crypto firms.
While notable, the big fish that the crypto industry is waiting for is the crypto regulatory framework and stablecoin bills circulating in Congress, which would give the industry the guardrails it claims it needs to thrive.
On March 13, the Senate Banking Committee approved the GENIUS Act, the stablecoin bill, putting it one step closer to a vote on the Senate floor.
The crypto framework bill, FIT 21, was first introduced in the 2024 legislative session, ultimately failing in the Senate. However, in February, House Financial Services Committee Chair French Hill said that he anticipated the bill could pass in this session with “modest changes.”
But even if FIT 21 were passed soon, regulations for DeFi could be far off. The bill would exclude DeFi from SEC and CFTC oversight, but it would also establish a working group to research 12 key areas related to DeFi.
This study will seek to understand the risks and benefits of DeFi and will ultimately make regulatory recommendations.
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Rachel Reeves has told Sky News she is looking at both tax rises and spending cuts in the budget, in her first interview since being briefed on the scale of the fiscal black hole she faces.
“Of course, we’re looking at tax and spending as well,” the chancellor said when asked how she would deal with the country’s economic challenges in her 26 November statement.
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Ms Reeves was shown the first draft of the Office for Budget Responsibility’s (OBR) report, revealing the size of the black hole she must fill next month, on Friday 3 October.
She has never previously publicly confirmed tax rises are on the cards in the budget, going out of her way to avoid mentioning tax in interviews two weeks ago.
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Chancellor pledges not to raise VAT
Cabinet ministers had previously indicated they did not expect future spending cuts would be used to ensure the chancellor met her fiscal rules.
Ms Reeves also responded to questions about whether the economy was in a “doom loop” of annual tax rises to fill annual black holes. She appeared to concede she is trapped in such a loop.
Asked if she could promise she won’t allow the economy to get stuck in a doom loop cycle, Ms Reeves replied: “Nobody wants that cycle to end more than I do.”
She said that is why she is trying to grow the economy, and only when pushed a third time did she suggest she “would not use those (doom loop) words” because the UK had the strongest growing economy in the G7 in the first half of this year.
What’s facing Reeves?
Ms Reeves is expected to have to find up to £30bn at the budget to balance the books, after a U-turn on winter fuel and welfare reforms and a big productivity downgrade by the OBR, which means Britain is expected to earn less in future than previously predicted.
Yesterday, the IMF upgraded UK growth projections by 0.1 percentage points to 1.3% of GDP this year – but also trimmed its forecast by 0.1% next year, also putting it at 1.3%.
The UK growth prospects are 0.4 percentage points worse off than the IMF’s projects last autumn. The 1.3% GDP growth would be the second-fastest in the G7, behind the US.
Last night, the chancellor arrived in Washington for the annual IMF and World Bank conference.
Read more:
Jobs market continues to slow
Banks step up lobbying over threat of tax hikes
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The big issues facing the UK economy
‘I won’t duck challenges’
In her Sky News interview, Ms Reeves said multiple challenges meant there was a fresh need to balance the books.
“I was really clear during the general election campaign – and we discussed this many times – that I would always make sure the numbers add up,” she said.
“Challenges are being thrown our way – whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade. And now this (OBR) review is looking at how productive our economy has been in the past and then projecting that forward.”
She was clear that relaxing the fiscal rules (the main one being that from 2029-30, the government’s day-to-day spending needs to rely on taxation alone, not borrowing) was not an option, making tax rises all but inevitable.
“I won’t duck those challenges,” she said.
“Of course, we’re looking at tax and spending as well, but the numbers will always add up with me as chancellor because we saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances: inflation and interest rates went through the roof.”
Pic: PA
Blame it on the B word?
Ms Reeves also lay responsibility for the scale of the black hole she’s facing at Brexit, along with austerity and the mini-budget.
This could risk a confrontation with the party’s own voters – one in five (19%) Leave voters backed Labour at the last election, playing a big role in assuring the party’s landslide victory.
The chancellor said: “Austerity, Brexit, and the ongoing impact of Liz Truss’s mini-budget, all of those things have weighed heavily on the UK economy.
“Already, people thought that the UK economy would be 4% smaller because of Brexit.
“Now, of course, we are undoing some of that damage by the deal that we did with the EU earlier this year on food and farming, goods moving between us and the continent, on energy and electricity trading, on an ambitious youth mobility scheme, but there is no doubting that the impact of Brexit is severe and long-lasting.”
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