On December 26, 2024, the U.S. Internal Revenue Service (IRS) introduced new rules requiring DeFi platforms to comply with broker obligations, stirring turmoil in the crypto industry.
Limited Options for DeFi
Alex Thorn of Galaxy Digital outlined three potential paths for DeFi platforms under the new regulations. They could either comply and operate as brokerages, restrict access for U.S. users, or opt for extreme decentralization by avoiding upgrades and revenue generation. Thorn noted that only platforms without front-end interfaces, immutable smart contracts, and fee collection mechanisms could potentially avoid being designated as a broker.
Industry Pushback and Legal Action
The new IRS rules have met with fierce opposition from the crypto industry. Executives and advocacy groups called the rule overreach. Bill Hughes from Consensys criticized the IRS for releasing the rules during the holiday season. The same day, a coalition of crypto advocacy groups filed a lawsuit against the IRS, claiming the rules to be unconstitutional overreach.
Future of DeFi and Regulatory Challenges
Industry leaders are urging Congress to block the new rules, fearing they might stifle innovation and push DeFi platforms away from the U.S. market. If implemented, the requirements will take effect in 2027, providing platforms time to adjust or oppose. The controversy has reignited the debate over balancing regulatory compliance and innovation in the crypto space.
The situation with the new IRS rules continues to evolve. Industry players face a difficult choice between compliance, exit from the U.S. market, or decentralization.
