Blockchain Association files lawsuit against IRS over its new DeFi regulations

The Blockchain Association has filed a lawsuit against the Internal Revenue Service (IRS) over its new regulations for the decentralized finance (DeFi) sector. The group is fighting against new IRS laws that will classify some protocols in the DeFi sector as brokers. The new regulation will mandate the protocols to give up user transaction details through the Know Your Customer (KYC) information.

According to the IRS, the new regulation could affect about 875 DeFi protocols, a move that has triggered the entire crypto community. The new law intends to treat any platform that traders buy and sell assets in the DeFi sector as a broker.

Legal experts strongly oppose the move, citing several constitutional rights violations. Investors are also wary about the security issues that the proposed KYC details may present.

Blockchain Association files lawsuit to counter the IRS

The initial IRS directive was met with market-wide dissatisfaction, with traders objecting to the regulations. In response to their dissatisfaction, the IRS said it will ensure that the right people are paying their taxes promptly.

With the controversy still in the air, the Blockchain Association announced that it has filed its lawsuit challenging the new regulation.

Today, @BlockchainAssn, @fund_defi, and @TXblockchain_ filed a lawsuit challenging the IRS’ broker rulemaking.

This rule – as the countless comment letters warned – risks crippling the U.S. digital asset sector.https://t.co/D8VsDpNJvW pic.twitter.com/8HDvpIhBHC

— Blockchain Association (@BlockchainAssn) December 28, 2024

According to its post on X (formerly Twitter), the Blockchain Association said it filed the lawsuit in collaboration with the DeFi Education Fund and the Texas Blockchain Council. The body stated that the rule could threaten the booming digital asset sector in the United States. It also mentioned that the same warnings had been communicated to the IRS through countless comment letters.

According to the legal head of the association, Marisa Coppel, the IRS went beyond its statutory authority by leveling the protocols as brokers, noting that it is an infringement on people’s rights.

“The IRS and Treasury have gone beyond their statutory in expanding the definition of ‘broker’ to include providers of DeFi trading front-ends even though they do not effectuate transactions. Not only is this an infringement on the privacy rights of individuals using decentralized technology, it would push this entire, burgeoning technology offshore.”

She noted that the Blockchain Association will continue to stand with users and fight against any form of misguided regulations.

“Blockchain Association continues to stand with innovators and users of DeFi and will continue to fight this misguided rule-making to ensure the United States remains a home for decentralized finance technology and developers alike,” she added.

The crypto community criticizes the IRS

Blockchain Association CEO Kristin Smith, some high-profile individuals in the crypto sector, and the entire community have also criticized the move, with others offering support.

Smith has urged the IRS to reverse the rules, expressing strong opposition to some aspects of it. She is also confident that the incoming Trump administration will understand the dire effects that such a move may have on innovation in the country.

Representing the legal community and showing displeasure at the regulations, Variant Chief Legal Officer Jake Chervinsky has noted that the regulation is a dying gasp from the anti-crypto army. He also urged the court to overturn the regulations, saying if the court refuses to do the needful, the new administration will do it.

General Counsel of A16z Crypto, Miles Jennings has criticized the rule, saying it is an overreach. He said the new rules give the IRS the authority to regulate, sanction, or even ban DeFi platforms.

Some users on X have also called it an intentional move by the Biden administration to sabotage the incoming pro-crypto Trump administration. The crypto community has always come together to criticize regulations that may hinder the growth of the crypto industry. With the incoming pro-crypto Trump administration, there is confidence that laws like these will be rejected outrightly.

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