The DeFi sector has achieved a victory in the United States: Congress has decided to overturn the regulation that required DeFi platforms to report to the Internal Revenue Service (IRS) the proceeds from crypto sales and the data of the taxpayers involved.
Despite this step forward, the issue of DeFi regulation remains open.
Regulation News: Congress Blocks IRS Rule on DeFi
On March 12, 2024, the House of Representatives voted to repeal a rule issued by the IRS in December 2024, which would have come into effect in 2027.
The regulation would have required DeFi protocols to track and report all sales of digital assets, including NFTs and stablecoin.
The measure has been criticized by various crypto industry lobbying groups, who have deemed it onerous and beyond the competence of the tax agency.
After approval in the House, the White House expressed its support for the measure, with Donald Trump ready to sign the bill once it reaches his desk.
However, although this regulation has been halted, DeFi still needs to find the right balance between privacy and regulation.
The crypto community welcomed the vote in the Chamber. Marta Belcher, president of the Filecoin Foundation, emphasized the importance of protecting user privacy in transactions on decentralized protocols.
Belcher highlighted the need to allow people to exchange digital assets anonymously, just like with cash.
According to the supporters of DeFi, the IRS regulation would have undermined this principle, forcing decentralized platforms to collect and share sensitive personal information.
The Blockchain Association, one of the main industry lobbying groups, also described the regulation as an unjustified violation of privacy, arguing that such an imposition would have pushed the industry to move offshore to avoid regulatory restrictions in the United States.
Although the repeal of the regulation represents a temporary relief, the sector still needs clear guidelines on privacy in blockchain transactions.
Vivek Raman, CEO of Etherealize, emphasized the need to create solid regulatory frameworks that balance user privacy with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.
The dilemma of regulation in decentralized finance
One of the most complex problems of DeFi regulation concerns its very nature: who is considered responsible in a decentralized system?
Unlike banks or centralized exchanges, DeFi protocols operate autonomously thanks to smart contracts on blockchain, without a central entity that can be easily regulated.
Vivek Raman explained that, not being controlled by a specific company or authority, these protocols cannot fulfill tax obligations such as the issuance of 1099 forms to report taxable earnings.
Some experts believe that, to meet regulatory requirements, DeFi protocols may voluntarily collaborate with governments.
An example is what happened after the $285 million attack on KuCoin, in which some protocols froze the stolen funds to prevent their laundering.
One of the possible solutions suggested to reconcile privacy and regulation is the integration of zero-knowledge proofs (ZKP), a cryptographic technology that allows proving information without fully revealing it.
This method could allow users to verify their identities without exposing sensitive data, thus addressing many of the privacy concerns.
Despite the difficulties, Raman is optimistic: in the future, there will be a configuration of an integration between compliance and DeFi, where it will be possible to regulate the sector without sacrificing decentralization and user privacy.
The regulatory framework on crypto in the United States
The Trump administration has shown a favorable openness towards the crypto sector, adopting several measures in support of blockchain enterprises.
Among these, the creation of a strategic reserve of Bitcoin for the United States represents a clear signal of support for the growth of the sector.
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have also reduced legal actions against crypto companies. Consequently easing regulatory pressure.
However, the crypto community is still awaiting a clear regulatory framework, capable of providing guidelines for companies and investors. Two key proposals are currently under discussion in Congress:
- – The GENIUS Act, a bill on stablecoins, approved on March 13, 2024 by the Senate Banking Committee.
- – The FIT 21, a broader regulation on the crypto sector, previously rejected but which could be approved with some modifications.
If approved, the FIT 21 would exclude the DeFi from the direct supervision of SEC and CFTC. Instead, it would entrust a research group with the task of studying the implications of decentralized finance.
This approach could lead to more targeted legislative recommendations, based on a deep understanding of the sector.
The abolition of the IRS regulation represents a crucial victory for DeFi and for the protection of user privacy.
However, the debate on the regulation of the sector remains open. The United States Congress is working on various bills to define a clear regulatory framework for the crypto world.
The challenge will be to find the right balance between security, transparency, and financial freedom. While still ensuring at the same time the protection of users and the innovation of the blockchain sector.
The adoption of technologies such as zero-knowledge proofs could offer a concrete solution, allowing DeFi to exist without compromising global regulatory requirements.
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