The decentralized finance (DeFi) industry scored a major victory as Congress repealed the IRS broker rule, relaxing reporting obligations that crypto lobby groups considered overly burdensome. On March 12, the House of Representatives voted to nullify the rule, which required DeFi protocols to report gross proceeds from crypto sales and provide taxpayer information to the Internal Revenue Service (IRS).
Originally issued in December 2024, the rule was scheduled to take effect in 2027. However, industry advocates argued that the IRS lacked the authority to impose such requirements on decentralized platforms.
With the White House signaling support, President Donald Trump is expected to sign the bill into law, cementing the rollback. While this is a win for DeFi privacy advocates, concerns remain about how lawmakers will regulate the sector moving forward.
Privacy Concerns Over IRS DeFi Rule
The crypto industry welcomed the House vote, with experts emphasizing the need to protect user privacy.
Marta Belcher, president of the Filecoin Foundation, stressed that preventing the rule from taking effect is crucial for maintaining financial anonymity:
“It is critical to protect people’s ability to transact directly with each other via open-source code (like smart contracts and decentralized exchanges) while remaining anonymous, in the same way that people can transact directly with each other using cash.”
Privacy was a key issue in industry objections to the rule. Critics argued that it was not practical for DeFi platforms, as they would be required to track all user transactions—including those of non-U.S. persons.
Bill Hughes, senior counsel at Consensys, warned that the rule would have forced DeFi front-end providers to track and report on user activity across every digital asset, including NFTs and stablecoins.
The Blockchain Association, a leading crypto advocacy group, called the rule “an infringement on privacy rights” that would have forced DeFi innovation offshore.
However, the lack of established privacy frameworks remains a challenge.
Vivek Raman, CEO of Etherealize, emphasized the need for clear blockchain-based privacy guidelines while maintaining compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations:
“There needs to be clear frameworks for blockchain-based privacy while maintaining KYC/AML requirements. Some transactions and customer data will need to remain private, and we need guidance on what privacy can look like.”
Can DeFi Be Regulated?
The question of how to regulate DeFi remains unresolved. The crypto space has long grappled with the balance between user privacy and regulatory compliance.
A fundamental challenge lies in DeFi’s decentralized nature. Unlike centralized exchanges, DeFi platforms are often not controlled by a single entity, making it difficult for governments to enforce traditional financial regulations.
Raman pointed out that DeFi protocols cannot easily comply with broker-dealer responsibilities:
“It’s hard for a decentralized protocol that is controlled by nobody to issue 1099s or fulfill broker-dealer responsibilities! Companies can certainly be [broker-dealers], but software has not been designed for [broker-dealer] rules.”
Still, some DeFi developers have worked proactively with regulators. For example, after the $285 million KuCoin hack, certain DeFi protocols froze stolen funds, demonstrating the industry’s willingness to engage in security measures.
The Future of DeFi Regulation
Regulators may attempt to apply pressure to key access points in the DeFi ecosystem, such as front-end developers, liquidity providers, or hosting services. Adam Cochran, partner at Cinneamhain Ventures, noted that every DeFi protocol has regulatory pressure points, even if they lack a central authority.
While the repeal of the IRS broker rule is a victory for DeFi privacy, the industry must now navigate an uncertain regulatory landscape. The next step will be crafting policies that balance innovation, financial privacy, and compliance—without pushing the sector out of U.S. markets.
