Congress repealed the IRS broker rule, but can it regulate DeFi?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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Strive Asset Management, founded by entrepreneur and former presidential candidate Vivek Ramaswamy, has revealed plans to transition into a Bitcoin treasury company.
According to a May 7 announcement, Strive is going public through a reverse merger and plans to use the combined company’s stock to accumulate Bitcoin (BTC).
The deal will see Strive merging with Asset Entities — a social media marketing company listed on the Nasdaq. The combined entity will operate under the Strive brand and use its access to the public equity markets to finance Bitcoin purchases, the company said.
Once the deal closes, Strive plans to issue approximately $1 billion in equity and debt and use the proceeds to accumulate BTC. The asset manager “intends to use all available mechanisms to build a Bitcoin war chest […] and build a long-term investment approach designed to outperform Bitcoin,” it said.
Strive plans to allow “Bitcoin holders to contribute Bitcoin in exchange for public stock through a structure that is intended to be tax-free,” it said. As of May 7, the company manages approximately $2 billion in net assets across a variety of funds.
In December, Strive filed to list an exchange-traded fund (ETF) investing in convertible bonds issued by MicroStrategy and other corporate Bitcoin buyers.
Related: Trump-linked Strive files for ‘Bitcoin Bond’ ETF
Corporate Bitcoin treasuries
Corporate Bitcoin treasuries have become popular since the approval of Bitcoin exchange-traded funds (ETFs) on Wall Street. Companies pioneering the Bitcoin buyer approach, such as Strategy have seen their share prices surge by 350% in 2024.
Analysts say adding Bitcoin to corporate treasuries can “potentially be a valuable hedge against growing fiscal deficits, currency debasement, and geopolitical risks,” asset manager Fidelity Digital Assets said in a 2024 report.
Corporate Bitcoin treasuries collectively hold roughly $74 billion worth of BTC as of May 7, according to Bitcointreasuries.net.
Trump connection
Ramaswamy, an outspoken ally of President-elect Donald Trump, founded Strive in 2022. Its stated goal is to help investors “harness the power of capitalism,” according to Strive’s website.
In 2023, Ramaswamy — who largely earned his $1 billion net worth from biotechnology startup Roivant Sciences — campaigned against Trump in the Republican presidential primary. He later endorsed the president-elect.
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At least some of the top holders of Donald Trump’s memecoin who apply to attend a private dinner with the president could be based outside the United States.
According to a May 7 Bloomberg report based on an analysis of the top TRUMP tokenholders, 19 of the top 25 wallets on the leaderboard used foreign exchanges that exclude US-based customers, suggesting either foreign nationals or Americans living abroad. In addition, more than half of the top 220 holders — the group eligible to apply for a dinner with the president — also used exchanges in other countries.
As of May 7, the identities of the top tokenholders and those who might choose to apply for the May 22 Trump dinner and “special VIP tour” were unknown. However, the project stated that anyone who applied could not bring guests, had to pass a background check, and “can not be from a [Know Your Customer] watchlist country.”
The implications of having dozens or hundreds of memecoin holders potentially tied to foreign governments and interest groups have raised ethics concerns from some US lawmakers, claiming that Trump was engaging in “pay-to-play” corruption. At least one senator has called for the president’s impeachment, saying Trump was “selling access for what are effectively payments directly to him.”
Memecoin concerns are slowing crypto legislation
Democratic lawmakers in the House of Representatives and Senate have already been pushing back against considering any crypto-related legislation until Republicans address concerns around “Trump’s crypto corruption.” The Senate is expected to vote on a bill regulating stablecoins on May 8, and House Republicans recently introduced a discussion draft of a digital asset market structure bill.
Related: Trump-backed USD1 is now the seventh-largest stablecoin worldwide
Then-president-elect Trump launched the memecoin on Jan. 17 — three days before taking office — followed by the first lady introducing her own token. Two companies connected to Trump control roughly 80% of the memecoin’s supply.
The launch of the memecoin and its potential influence over the president and his agenda has already prompted some companies to get on board. On April 30, a trucking logistics management company announced a $20 million investment in the TRUMP token, suggesting influencing Trump’s trade war between the US and Mexico, where the firm conducts much of its business.
Magazine: Trump’s crypto ventures raise conflict of interest, insider trading questions
USD1, the US dollar stablecoin launched by the President Donald Trump-backed World Liberty Financial (WLFI), has become the seventh-largest stablecoin worldwide in just two months since its launch.
WLFI’s snapshot vote for a USD1 airdrop proposal is underway, and USD1’s market capitalization has continued to climb.
Launched in early March with a $3.5 million supply, USD1 has expanded into a market cap of $2.2 billion at the time of writing, leaving rival stablecoins First Digital USD (FDUSD), PayPal USD (PYUSD) and Tether Gold (XAUT) behind, according to data from CoinGecko.
Although rising fast, the USD1 market cap is still far from the market value of major stablecoins like Tether’s USDt (USDT) and USDC (USDC), whose market caps are worth $149 billion and $61 billion, respectively.
BNB Chain drives USD1 issuance
Trump-backed USD1 is almost exclusively issued on Binance-backed BNB Chain. According to data from BscScan, as much as $2.1 billion of all USD1 supply is issued on BNB Chain, accounting for more than 99% of its total circulating supply, while an Ethereum-based version accounts for just $14.5 million, according to Etherscan.
USD1’s latest market spike was sharp, jumping 1,540% from $128 million to $2.1 billion within two days in late April, according to CoinGecko.
The spike came days before Eric Trump announced that Abu Dhabi-based investment firm MGX would use the USD1 to invest $2 billion in Binance.
Justin Sun-backed HTX among the first CEXs to list USD1
As USD1’s market cap spiked, some centralized exchanges (CEXs) rushed to list the Trump-backed stablecoin.
HTX, a crypto exchange closely associated with Tron founder Justin Sun and formerly known as Huobi, announced the listing of USD1 with permanent zero-fee withdrawals on the BEP-20 network on May 6.
According to websites like CoinGecko and CoinMarketCap, HTX was one of the first CEXs to list USD1, as the token is primarily available on decentralized exchanges, including PancakeSwap and Uniswap.
Most WLFI inflows come from outside the US
While the WLFI community has been voting on the USD1 airdrop, some reports suggested that WLFI investment is mainly coming from outside the United States.
According to a poll by V1PS founder Notaz.Sol, as much as 90% of WLFI investors are likely coming from non-US jurisdictions, including Europe, Asia and Latin America.
A May 7 Bloomberg report also indicated that over half of the top holders of Trump-branded memecoins reside abroad.
The USD1 stablecoin’s growth lines up with Trump’s pro-stablecoin agenda announced in his executive order on “Strengthening American leadership in digital financial technology” in January.
While WLFI has been closely associated with Binance, both Trump and Binance have repeatedly denied and criticized reports suggesting any links or deals between the parties.
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