Congress Can Prevent the IRS from Pulling the Plug on DeFi Innovation

The tides are shifting for the crypto industry in Washington, D.C. The combination of favorable court decisions, and personnel changes have sparked widespread optimism about digital assets' regulatory future in the United States. While optimism is warranted, a shadow looms large: Treasury and IRS’s broker rulemaking.?

On December 27, 2024, while most of the country was celebrating the holidays, Treasury and the IRS quietly finalized a midnight rulemaking that strikes at the heart of DeFi and crypto’s innovation and potential: disintermediation.?

While the specific rule focuses on tax obligations for those using DeFi protocols, it surfaces a broader question: should the government have the power to limit Americans' freedom to choose how they transact? As it stands, the Treasury and IRS rulemaking effectively coerces Americans into using intermediaries that are subject to government oversight and surveillance.?

Let’s be clear. No one disputes that users of DeFi protocols should pay their fair share of taxes. But, this rulemaking goes far beyond that. In a dangerously broad definition, the rule classifies virtually any service “assisting customers in initiating” a transaction as a “broker,” and subjects them to unnecessary/unreasonable reporting requirements.

So, what is a broker now? It is unclear. For example, Verizon or AT&T can now be deemed a "broker" because they provide Internet access to individuals transacting in digital assets, or Google Chrome or Apple Safari could now be considered brokers for enabling users to access the internet where they can buy or sell digital assets.?

Broadness is a weakness. Thoughtful rulemaking requires a nuanced understanding to protect Americans while simultaneously enabling technology to flourish.?

Importantly, Congress saw the potential harms that broadness could lead to. In late 2021, the Infrastructure Investment and Jobs Act became law and amended the definition of a “broker” under Section 6045 to add “any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Lawmakers from both sides of the aisle made clear—consistent with longstanding interpretations of prior law—that certain parties were intended to be carved out of the definition of “broker.” They understood that the amended definition itself was meant to clarify who in the digital asset space were, and are supposed to be, brokers – not to create new brokers by expanding the concept of what a broker is.

Thankfully, actions are underway at the Congressional level to roll back the IRS’ rulemaking overreach. Congress can, and should, claw back its original intent via the Congressional Review Act (CRA).?

First successfully used in 2001, the CRA grants Congress the authority to review and overturn new federal regulations issued by government agencies. If both the House and Senate approve the resolution and the President signs it, the rule is invalidated and cannot be reissued in a similar form.

Successfully deploying the CRA here is a strong possibility. We have arguably the most pro-innovation, pro-crypto Congress in history—one that transcends partisan politics. Additionally, the incoming administration has signaled a willingness and eagerness to promote policies welcoming decentralized financial infrastructure and crypto. We also all share a common cause: promoting American entrepreneurship, economic strength, and technological leadership. Decentralization in finance stands to benefit Americans by modernizing outdated financial systems, and breaking down barriers to access that persist in traditional finance — all while fostering greater transparency in financial services.?

If Congress is committed to advancing policies that empower Americans to take control of their financial futures and bolster the nation's economic leadership, it must utilize the Congressional Review Act to safeguard American innovation.