The Blockchain Association, alongside the DeFi Education Fund and Texas Blockchain Council, has launched a legal challenge against the Internal Revenue Service (IRS) over new regulations affecting decentralized finance (DeFi) platforms.
The IRS recently finalized rules that classify certain DeFi protocols as brokers, requiring them to report cryptocurrency transactions and collect Know Your Customer (KYC) information starting in 2027. The agency estimates these regulations could impact up to 875 DeFi brokers.
The lawsuit contends that the IRS has exceeded its authority by expanding the definition of "broker" to include DeFi trading platforms and front-end interfaces. The crypto advocacy groups argue this expansion violates both the Administrative Procedure Act and constitutional rights.
"The IRS and Treasury have overstepped by including providers of DeFi trading front-ends in their broker definition, even though these entities don't directly handle transactions," said Marisa Coppel, Head of Legal at the Blockchain Association.
Industry leaders have criticized the timing and scope of the regulations. Bill Hughes, a Consensys lawyer, questioned the rule's release during the holiday season, suggesting it was timed to minimize industry opposition. Miles Jennings of a16z Crypto characterized the move as an aggressive attempt to restrict DeFi operations.
The controversy has drawn attention from Congress, with Representatives French Hill and Patrick McHenry expressing opposition to the IRS action. The rules face particular scrutiny as they mandate compliance requirements that many in the industry view as technically unfeasible for decentralized platforms.
The legal battle highlights growing tensions between regulatory authorities and the cryptocurrency industry as both sides grapple with defining appropriate oversight for emerging financial technologies.