The House of Representatives has successfully passed a resolution aimed at overturning regulations that mandated reporting obligations for front-end service providers engaged directly with users in digital asset transactions, commonly referred to as DeFi brokers. The resolution saw a decisive vote of 292-132 and followed closely on the heels of the Senate’s approval of a similar bill, which passed with a vote of 70-27.
### Understanding DeFi and Its Operational Differences
Decentralized finance (DeFi) operates fundamentally differently from traditional financial systems, as it eliminates intermediaries like banks and instead relies on peer-to-peer transactions facilitated by smart contracts. These smart contracts are automated scripts that enforce agreements between parties and are securely recorded on a blockchain, which serves as a public ledger. The previous administration had raised concerns that the DeFi landscape could be exploited by criminal elements for money laundering through various methods. These include utilizing cross-chain bridges to move cryptocurrencies across different blockchains, employing asset mixers that blend illicit funds with legitimate money, and leveraging liquidity pools that generate fee income. The Treasury specifically noted that ransomware groups have increasingly turned to DeFi networks for laundering their illicit gains.
### Impact of Reporting Requirements on DeFi Brokers
The regulations in question required decentralized finance platforms to provide comprehensive customer information to the IRS, with implementation set to begin in the tax year 2027. This rule would effectively align DeFi brokers with traditional securities brokers and custodial digital asset trading platforms by obligating them to file Form 1099 and adhere to similar reporting standards. The intention behind this regulation was to enhance tax compliance and ensure equitable treatment between centralized and decentralized crypto exchanges. However, critics argued that the significant differences between DeFi brokers and traditional securities brokers rendered the rule impractical. DeFi platforms are not centralized, lack the necessary data to fulfill these reporting requirements, and do not function as genuine intermediaries like their traditional counterparts. Opponents of the rule cautioned that it could have detrimental effects on the burgeoning crypto industry.
### Regulatory Changes and Political Backlash
On December 27, 2024, the Treasury and the IRS finalized regulations concerning the sale and exchange of digital assets through a new reporting form, the Form 1099-DA, tailored for decentralized finance brokers. These obligations for DeFi firms will take effect on or after January 1, 2027, which is two years later than the rules set for centralized exchanges. Many lawmakers, particularly from the Republican party, expressed strong disapproval not only of the regulation itself but also of its last-minute introduction. House Ways and Means Committee chairman Jason Smith, R-Missouri, criticized the Biden administration for allegedly prioritizing a politically driven mandate over the legislative intent of Congress. He remarked that the IRS had weaponized its authority to finalize the rule at a critical juncture, which could undermine the digital asset sector and stifle American innovation in an industry where approximately one in four Americans are involved. Smith contended that this regulation imposes a significant burden on everyday individuals and could deter their participation in the digital asset arena.
### Repeal of the Reporting Rule and Future Implications
The joint resolution effectively nullifies the Treasury’s rule regarding “Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales,” thereby allowing the current administration the flexibility to implement its own regulatory framework. This legislative development coincides with another significant announcement in the cryptocurrency domain: the creation of a Strategic Bitcoin Reserve and a U.S. Digital Asset Stockpile. The new reserve will classify Bitcoin, the leading cryptocurrency, as a reserve asset and will be funded by tokens forfeited to the Department of Treasury through criminal or civil asset forfeiture processes. The U.S. Digital Asset Stockpile will encompass various digital assets, excluding Bitcoin, which have also been acquired through similar forfeiture proceedings.
