The crypto industry is strongly opposing new regulations from the US Internal Revenue Service (IRS) that classify certain decentralized finance (DeFi) protocols as brokers.
These regulations require front-end protocols that facilitate digital asset transactions to comply with Know Your Customer (KYC) requirements. This move is expected to impact up to 875 DeFi brokers and has sparked criticism from industry stakeholders who argue that the IRS is overstepping its authority and infringing on constitutional rights.
Legal experts and industry leaders have expressed their concerns on social media, with some calling the regulations an unlawful attempt to stifle the crypto sector. They are urging for the regulations to be struck down either through judicial means or by the incoming administration.
There is optimism that the new pro-crypto Congress could use the Congressional Review Act (CRA) to roll back these regulations in the coming year. The broad definition of a DeFi broker by the IRS has raised concerns among industry advocates, who fear excessive regulation and a hindrance to innovation.
The definition could potentially encompass any provider that is aware of or has the capacity to know whether a transaction generates reportable gross proceeds from the sale of digital assets. However, validation services and wallet software providers are explicitly excluded from the definition.
The advocacy group Blockchain Association has characterized the regulations as a final attempt to push the US crypto industry offshore and has expressed a willingness to take aggressive action to combat them. The industry is hopeful for collaboration with the new pro-crypto Congress and Administration to roll back what they see as anti-innovation regulations.
The crypto industry's backlash highlights the growing tension between regulatory bodies and the rapidly evolving landscape of digital finance. The incoming Congress is now being looked to for decisive action against what is perceived as regulatory overreach that could have long-term implications for DeFi and the broader crypto ecosystem.