The IRS and U.S. Treasury have finalized a controversial new rule requiring DeFi platforms to implement KYC procedures and report user transactions, treating them as traditional brokers. Effective by 2027, these regulations have sparked backlash for potentially overreaching legal authority, threatening privacy, and risking innovation in the decentralized finance space.
The U.S. Department of the Treasury and the Internal Revenue Service (the IRS) have finalized new regulations targeting DeFi brokers, compelling them to adopt Know Your Customer (KYC) procedures and report on user trading activities. These rules, effective from January 1, 2027, apply to DeFi protocols that directly interact with customers, classifying them as brokers similar to traditional financial entities. This involves collecting and reporting user data, including names, addresses, and transaction details, to the IRS on Form 1099-DA.
The regulations are intended to treat DeFi brokers the same as custodial platforms for tax reporting purposes, but they have stirred controversy among the crypto community. Some critics have argued that these new rules exceed the regulatory authority of the Treasury and could drive the DeFi industry offshore due to compliance challenges and privacy concerns. Industry leaders and advocacy groups like the Blockchain Association and DeFi Education Fund challenged the regulations legally, citing issues with privacy and the decentralized nature of DeFi platforms which traditionally do not handle user identification.
The IRS’s latest move is seen by some as a significant shift in how DeFi platforms operate, potentially requiring them to centralize aspects of their service to comply with these new reporting mandates. This could include tracking user identities and transactions across all digital assets, including NFTs and stablecoins. The backlash includes concerns over the feasibility of compliance for truly decentralized entities and fears that the rules might stifle innovation in the U.S. crypto space.
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