DeFi Can Be Killed If This Tax Proposal Is Introduced

The U.S. Treasury and IRS have recently proposed new cryptocurrency regulations that could have a profound impact on the DeFi ecosystem. The proposal suggests that platforms commonly used in the DeFi space, such as Uniswap and MetaMask, could be classified as "brokers." This classification would necessitate the collection of customer information, a requirement that runs counter to the foundational principles of decentralization.

The proposed definition of a broker is alarmingly broad, extending even to websites that interact with blockchain wallets. This could potentially include blockchain explorers and tax software, a scope that many see as an overreach of regulatory authority. Critics argue that this demonstrates a fundamental misunderstanding of blockchain technology on the part of the regulatory bodies.

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"Operators of websites that interact with wallets"

Given that a wallet seems to be defined as the actual blockchain account rather than a software, that means that this would find *everything* including Etherscan and tax software to be "brokers"? https://t.co/wV93Gvl7Sw

— Adam Cochran (adamscochran.eth) (@adamscochran) August 25, 2023

The implications of this proposal are far-reaching. For instance, it could lead to the creation of walled gardens by traditional financial brokerages, thereby undermining the very essence of what DeFi aims to achieve. This could result in a form of regulatory capture where the decentralized system is handed back to a centralized plutocracy, negating years of progress in financial democratization.

Moreover, the proposal raises concerns about the potential for tax evasion. If platforms modify their operations to circumvent these regulations, or if users migrate to non-reporting platforms, the IRS could face challenges in tax collection.

The industry is not opposed to regulation per se; rather, it seeks reasonable and informed regulatory frameworks that understand the nuances of the technology. The current proposal, however, appears to be neither reasonable nor informed. It threatens to stifle innovation and could result in the re-centralization of financial systems, thereby defeating the purpose of DeFi.

In a nutshell, while some level of regulation is undoubtedly necessary for the maturation of the crypto space, the current proposal by the U.S. Treasury and IRS could do more harm than good.