The finalized broker rules for digital asset service providers released by the US Department of the Treasury and the IRS have sparked criticism from industry experts. The new provisions mandate DeFi protocols to conduct KYC procedures, a move that has been deemed excessive and beyond the scope of the Treasury’s regulatory authority.
Under the new regulations, brokers handling digital assets on behalf of customers, including DeFi front-ends, are required to report sales, exchanges, and track user activity. This means that DeFi front-ends must now implement KYC processes to comply with the reporting requirements. While digital asset brokers are expected to adhere to the rules by January 1, 2025, DeFi brokers have until January 1, 2027 to meet the obligations due to infrastructure limitations.
The IRS has also indicated that future regulations will address reporting rules for these entities. Consensys senior counsel Bill Hughes highlighted that DeFi front-ends will need to report activity from both US and non-US persons. Additionally, the reporting requirements encompass all digital assets traded, including NFTs and stablecoins, despite calls from the crypto industry for more specific definitions.
The rules offer relief to brokers making good faith efforts to comply with reporting penalties and backup withholding for transactions in 2025, with limited relief available for certain transactions in 2026. Reporting of gross proceeds will be required for transactions from January 1, 2025, while cost-based reporting obligations will kick in from January 1, 2026. Real estate professionals using digital assets for closings will also face additional reporting requirements from January 1, 2026.
Certain transactions like wrapping and unwrapping, liquidity provider activities, staking, and lending-related transactions are excluded from immediate reporting requirements. However, the IRS plans to issue guidance on these and other complex aspects of the DeFi ecosystem in the future.
The community backlash against these rules has been strong, with many experts deeming them unlawful and beyond the authority of the Treasury. Jake Chervinsky, chief legal officer at Variant Fund, called the rules the “dying gasp” of the anti-crypto army on its way out of power. He believes that the rules will likely face legal challenges and potential review by the incoming administration or Congress.
Alex Thorn, head of research at Galaxy Digital, echoed these sentiments, labeling the broker rule as extremely burdensome and predicting that it may come under review by the Congressional Review Act. The future of these regulations remains uncertain as the crypto industry and regulatory bodies continue to navigate the evolving landscape of digital assets.