US Could Kill DeFi Unless IRS Changes Course on Tax Rules: Blockchain Association

The proposed redefinition of a single word in a federal tax rule by the U.S. Treasury and the Internal Revenue Service (IRS) would, if adopted, permanently destroy or push offshore any decentralized finance (DeFi) project in the United States, the Blockchain Association said Monday.

In a blistering, 33-page comment submitted today regarding the proposed change, the leading crypto lobbying group laid out an elaborate case to the IRS as to why a seemingly bureaucratic change to the tax collector’s definition of the word “broker,” which the agency proposed in late August, would all but destroy the American DeFi industry.

Among other things, the rule would broaden the term “broker” to apply to any centralized crypto exchange operating in the United States, or to any crypto project that directly or indirectly facilitates the transfer of digital assets belonging to another person. This would, the group said, apply to any DeFi protocol, thus making American centralized exchanges and decentralized finance projects subject to the same reporting rules as bond and stock brokers.

The Blockchain Association says this is an impossible standard to impose on DeFi projects.

“It will drive U.S.-based decentralized projects abroad or out of existence, full stop,” Marisa Tashman Coppel, senior counsel at the Blockchain Association, wrote on Twitter.

2/ The Proposal sweeps in parties whose only means of compliance would be to abandon the decentralized technology that makes them unique.

It will drive U.S.-based decentralized projects abroad or out of existence, full stop. And would require centralization where none exists.

— Marisa Tashman Coppel (@MTCoppel) November 13, 2023

Key to the Blockchain Association’s argument, as laid out in its letter to the IRS today, is that the entire point of DeFi is to create trustless financial systems by leveraging smart contracts and automation to prevent a project’s creator from having control over, or access to, users’ finances and information.

“Any attempt to link wallet addresses to personal identities would create a serious and permanent privacy issue for those users,” the Blockchain Association wrote. “Comparable to having a lifetime of credit card transactions published online, this would mean exposing each user’s entire transaction history to the world.

”It does not take much imagination to understand that this is an unacceptable outcome,” the group concluded.

The proposed IRS rule has been open for a 74-day period of public comment that ends today. In that span, the regulation has garnered over 124,000 public comments. Earlier today, the IRS held a public hearing regarding the rule, after which it will decide on its adoption.

Coppel, who spoke at the hearing, said that IRS regulators were “engaged and asked thoughtful questions that suggest they are taking seriously the concerns regarding decentralized tech, NFTs, and stablecoins.”

“I’m cautiously optimistic,” she said of the proceedings. “Very cautiously.”

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