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The U.S. Treasury Department and Internal Revenue Service (IRS) recently proposed a reporting rule classifying decentralized finance (DeFi) front-end platforms as brokerages, prompting over 44,000 public comments and significant backlash from the crypto industry. Alex Thorn, Head of Research at Galaxy Digital, has outlined three potential courses of action for DeFi platforms should the IRS rule remain in place.
According to Thorn, DeFi services have the following options:
- Comply with IRS Requirements: Accept the brokerage designation and adhere to the reporting requirements.
- Block U.S. Users: Restrict access for users based in the United States to avoid compliance obligations.
- Opt for Extreme Decentralization: Cease smart contract upgrades and revenue generation to ensure exemption from the brokerage classification.
Thorn explained that DeFi platforms without front-end websites, non-upgradeable smart contracts, and no revenue from digital asset transactions could qualify for exemption under the proposed rule. He noted:
“DeFi applications with no front-end website, non-upgradeable contracts, and that receive no ‘consideration’ from the disposition of digital assets — i.e., collect no fees — could be exempt from being designated ‘brokers.’”
He further clarified:
“Extremely decentralized applications are not in a position to know and thus could not comply with broker reporting requirements.”
Intense Opposition to IRS Rule
The IRS issued its final rule change on December 27, 2024, redefining “trading front-end service providers” — including decentralized exchanges — as brokerages. This change is slated to take effect in 2027.
Crypto industry leaders and advocacy groups have voiced strong opposition, labeling the rule as government overreach. Bill Hughes, an attorney at ConsenSys, criticized the timing of the announcement, stating:
“This rule has been ready to go for a while now. They dump it on the last Friday of 2024, in the middle of a holiday stretch on purpose — as if we wouldn’t notice or make an absolute ruckus over it.”
The industry response culminated in a lawsuit filed on the same day by the Texas Blockchain Council, the Blockchain Association, and the DeFi Education Fund. The lawsuit asserts that the rule constitutes “unlawful and unconstitutional overreach” by the Treasury Department and IRS.
Broader Implications for DeFi
If upheld, the IRS rule could fundamentally reshape the DeFi landscape, forcing platforms to choose between complying with stringent requirements, decentralizing further, or restricting access to U.S. users. As the crypto community mobilizes against the ruling, the outcome of this legal and regulatory battle may set a precedent for the future of decentralized finance in the United States.
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