The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have finalized new broker rules that will impact digital asset service providers, particularly decentralized finance (DeFi) protocols.
These regulations require DeFi platforms to implement Know-Your-Customer (KYC) procedures, which has been met with backlash from the crypto community. Experts argue that these rules are unlawful and extend beyond the Treasury's regulatory authority, raising concerns about the future of DeFi in the U.S. regulatory framework.
Under the new regulations, brokers who handle digital assets on behalf of customers, including DeFi front-ends, will need to report sales and exchanges while tracking user activity. This places a compliance burden on DeFi platforms that operate without centralized oversight. The rules state that digital asset brokers must comply by January 1, 2025, while DeFi brokers have until January 1, 2027, to meet these obligations.
The new broker rules require DeFi front-ends to report user activity for both U.S. and non-U.S. persons, including all digital assets traded. This broad scope has drawn criticism from crypto industry advocates who argue for more narrowly defined reporting requirements. The IRS plans to provide further guidance on reporting rules for these entities in future regulations.
To ease the transition, the rules offer some relief for brokers making good faith efforts to comply. Brokers will be exempt from reporting penalties and backup withholding for transactions occurring in 2025, with limited relief available for certain transactions in 2026. Starting January 1, 2025, brokers will be required to report gross proceeds from transactions, with cost-based reporting obligations starting on January 1, 2026. Certain transactions, such as wrapping and unwrapping, liquidity provision, staking, and lending-related activities, are excluded from immediate reporting requirements, but the IRS plans to address these complexities in future guidance.
The introduction of these broker rules has faced criticism from the crypto community, with experts predicting potential legal challenges. Critics argue that the rule exceeds the Treasury's authority and violates the Administrative Procedure Act, potentially leading to a review by Congress.
As the regulatory landscape for digital assets continues to evolve, the implications of these new broker rules will be closely monitored. The requirement for KYC procedures in DeFi could fundamentally change the operational dynamics of these platforms, raising questions about privacy, compliance, and the future of decentralized finance in the United States. The ongoing dialogue between regulators and the crypto community will be crucial in shaping the future of digital asset regulation.