The Decentralized Financial Industry (DEFI) breathes a sigh of relief as Congress rests on reporting obligations, but the questions remain about how lawmakers regulate DeFI.
On March 12, the House of Representative voted to delete a rule that requires defi protocols to report a gross proceeds from crypto sales, as well as information to taxpayers involved, in the Internal Revenue Service (IRS).
The rule, released by the IRS in December 2024 and is not set to take place until 2027, is considered by major industrial lobby groups as heavy and beyond the agency’s authority.
The White House is already there Signed its support for the bill. President Donald Trump is ready to sign when he reaches his desk. But the DEFI observers note that the industry has not yet adapted a balance between privacy and regulation.
Bipartisan vote for repeating the rule. Source: Defi Education Fund
Privacy concerns about the IRS Defi Rule
The crypto industry quickly praised the home vote. Marta Belcher, president of the Filecoin Foundation, said the rule blocking the rule was particularly important for user privacy.
He told Cointelegraph that it was “critical to protect people’s ability to contact each other directly through the open-source code (such as smart contracts and decentralized exchanges) while remains anonymous, in the same way that people can contact each other directly with cash.”
Privacy concerns are central to the crypto industry objections to the rule, including industry observers that say it does not fit for the purpose and violated the user’s privacy.
Bill Hughes, Senior Counsel and Director of Global Regulatory Matters for Consensys Software write In December 2024, “the ends of trade trade need to monitor and report to the US users-people of US and non-US (…) people and this applies to the sale of every single digital owner-including NFT and even stablecoins.”
The Blockchain Association, a major lobby group of the crypto industry, Nakasa said That the rule is “a violation of privacy rights by individuals who use decentralized technology” that will push Defi to the coast.
While the rule has stopped so far, there are still no fixed privacy guidelines in the area – something Etherealize CEO Vivek Raman says the industry needs to move forward.
“It needs to be clear frameworks for blockchain-based privacy while maintaining (knowing your customers/anti-money laundering),” he told cointelegraph.
Raman said some customer transactions and data need to remain private, “and we need a guide to what privacy looks like.”
How can you fix the defi?
Crypto space has long juggled user privacy requests and anti-money laundering regulators and knows concerns with your customer.
One problem lies in the technology itself – if a network is created by many and is controlled without single creatures, who will contact the government?
Per Raman, “It is difficult for a decentralized protocol controlled by anyone to issue a 1099s or fulfill the responsibilities of the broker-dealer! Companies may be certain (broker-dealers), but the software is not designed for (Broker-Dealer) policies.”
Defi developers can and have been active in working with regulators, chainalysis suggestedAs is the case with some protocols freeing funds after a harmful $ 285 million Kucoin hack.
Related: Timeline: How Bybit’s Ethereum Lost by North Korea Washing Machine
The partner at Cinneamhain Ventures and Consultant Adam Cochran claimed That each protocol has some pressure pressure points can be hit if a protocol has been used to commit a crime:
Source: Adam Cochran
However, these specific opportunities do not create a comprehensive regulatory framework that industry protection agencies can teach.
Accordingly, the crypto analytics firm chainalysis Nakasa said In 2020 regulators may need to make regulations for the Defi space with decentralized mental reporting limits.
Raman suggested that a possible solution could be proof zero-knowledge, allowing users to confirm some data without revealing it.
He is optimistic about the regulators’ ability to find a way to adjust the space while still maintaining the user’s privacy: “I think we will find a positive sum of the environment in which the defi and compliance will come together.”
The long -awaited framework of crypto regulation
Trump has already taken a number of pro-crypto steps through executive orders and appointing individual pro-cryptos who will lead the parts of his administration-the latest establishment of a strategic bitcoin reserve.
Related: US Rep. Byron Donalds to introduce Bill Codifying Trump’s Bitcoin Reserve
Pro-Crypto tenure of important financial regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have dropped many cases of high-profile implementation against crypto companies.
Noteworthy, the big fish that the crypto industry is waiting for is the Crypto Regulatory Framework and Stablecoin Bills that are moving to Congress, which will give the guardians industry to say it needs to develop.
On March 13, the Senate Banking Committee Approved The Genius Act, the Stablecoin Bill, puts it a step closer to a vote on the Senate floor.
The Crypto Framework Bill, FIT 21, was first introduced in the 2024 legislative session, which eventually failed in the Senate. However, in February, the chairman of the French financial Committee French French Hill said he was expected The bill can pass this session with “moderate change.”
But even if FIT 21 is passed as soon as possible, regulations for the DEFI may be far away. The bill is Exclude Defi from the SEC and CFTC Oversight, but it will also establish a working group to research 12 main areas related to DeFI.
This study seeks to understand the risks and benefits of the DEFI and will eventually make regulation recommendations.
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