• The final regulations introduced by the US IRS are facing massive protests.
  • Galaxy Digital’s chief researcher, Alex Thron, discussed his summer report 2023 amid the protest.
  • He pointed out three options for decentralized finance if the rules are implemented.

The US IRS recently issued regulations designating decentralized finance (DeFi) front-ends as brokers. These new rules are estimated to affect 875 DeFi protocols. 

These measures, set to take effect from January 1, 2027, created a ruckus in the crypto industry. Many industry titans expressed their anger. 

They made several comments about the Internal Revenue Service. Crypto aficionados criticized the move as overstepping and misusing the power. They went as far as to label it “unconstitutional”. 

Galaxy Digital’s chief of research, Alex Thorn, also remarked on the regulations. He proposed three possibilities for decentralized finance if these IRS regulations are not reversed.

Summer Report 2023

Reacting to the finalized IRS rules for decentralized finance, Thorn made an X post on December 24. He started his post by referencing his summer report 2023 and asked people to look into it to know how disastrous these regulations are. 

Last year, Alex posted a report on Galaxy Digital concerning the proposal of these laws. In that report, he was very critical of these regulations. 

He argued that the Internal Revenue Service’s broker rule proposal puts DeFi in a tough spot. Per Thron, the decentralized parts of the ecosystem might suffer significantly due to forthcoming regulations. 

He stated, “DeFi applications are the most directly affected, as most front-end websites will need to comply or block U.S. users.”

He added that these regulations’ practical effects could result in decentralized finance moving entirely outside the US. Throne also discussed the kind of DeFi applications that could be exempt from these rules in the report ahead. 

He wrote, “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” under the proposal.”

3 Options for Decentralized Finance

He outlined 3 options for decentralized finance to consider in relation to the proposed reporting rules. The first option he highlighted was to accept a broker designation and comply. 

As per this possibility, DeFi protocols should accept being classified as brokers. Web front-ends will need account registration to do this. This allows them to correctly prepare Forms 1099-DA, which they may provide to the IRS and users. 

The 2nd option that decentralized finance can adhere to is an attempt to block US users. DeFi platforms can prevent US users from using the services that provide access.

This can be accomplished for website front-ends by prohibiting US IP addresses from being used. It is probably not feasible at the smart contract level without implementing complete address blocking. 

The 3rd option Thron talked about is to abandon upgradeability, front-ends, and fees entirely. DeFi applications can choose to eliminate upgradeable contracts, public fronts-ends, and fees. This way, they may be able to avoid a broker designation entirely. 

He emphasized, “It may be possible for developers to publicly release code for a web front-end that can be run locally by users. This approach harkens back to the most cypherpunk visions of the cryptocurrency movement.”