US Treasury Unveils Final Broker Rules for Digital Assets, Including DeFi Protocols
The US Department of the Treasury and the Internal Revenue Service (IRS) have released the final version of its broker rules, which includes provisions requiring DeFi protocols to conduct Know-Your-Customer (KYC) procedures, sparking criticism from industry experts.
New Regulations for Digital Asset Brokers
The regulations require brokers who take possession of digital assets on behalf of customers, including DeFi front-ends, to report sales and exchanges and track and report user activity. This includes reporting user tax, which necessitates DeFi front-ends to perform KYC processes. The rules apply to all digital assets traded, including non-fungible tokens (NFTs) and stablecoins.
Implementation Timeline and Exclusions
Digital asset brokers must comply with the new rules by January 1, 2025, while DeFi brokers have until January 1, 2027. The IRS has offered relief from reporting penalties and backup withholding for transactions occurring in 2025 and limited relief for certain transactions in 2026. Certain types of transactions, such as wrapping and unwrapping, liquidity provider, staking, and lending-related transactions, are excluded from immediate reporting requirements.
Industry Backlash
Industry experts have criticized the new provision, with Consensys senior counsel Bill Hughes stating that the rule is “unlawful” and “beyond the authority of Treasury.” Jake Chervinsky, chief legal officer at Variant Fund, called the rule the “dying gasp” of the anti-crypto army, while Alex Thorn, head of research at Galaxy Digital, described it as “extremely burdensome.” A lawsuit is expected to be filed, and the rules may be reviewed by Congress.
Future Guidance
The IRS plans to issue future guidance to address complex aspects of the DeFi ecosystem, including reporting rules for DeFi entities.
Source: Cryptoslate.com