Blockchain Groups Sue IRS Over Privacy-Invasive DeFi Reporting Rule, Citing Threats to Innovation

The Blockchain Association and the Texas Blockchain Council have filed a lawsuit against the US Internal Revenue Service (IRS), challenging new cryptocurrency regulations finalised on December 27. 

These rules mandate brokers, including decentralised exchanges (DEXs), to report crypto transactions, sparking controversy within the blockchain industry.

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Unlawful Mandates

Kristin Smith, CEO of the Blockchain Association, announced the legal challenge on December 28, arguing that the regulations violate the Administrative Procedure Act and infringe on constitutional rights. 

She criticised the IRS for imposing what she called “unlawful compliance burdens” on developers of front-end trading infrastructure, while reinforcing their commitment to innovators in the space:

We stand with our nation’s innovators and will continue working to ensure the future of crypto – and DeFi – is here in the United States.

Kristin Smith, CEO of the Blockchain Association

The core issue lies in the IRS’s definition of a “broker”, which includes platforms that facilitate the exchange or sale of digital assets, even if transactions are executed through smart contracts. It’s all the same to them. If your platform facilitates the exchange of digital assets, you are running a broker.

The agency, however, stated that this set of rules “would benefit tax compliance by helping to close the information gap with respect to digital assets”.

The Blockchain Association argues that these rules misinterpret the role of DeFi platforms and place undue regulatory pressure on devs. 

Legal experts and blockchain advocates have expressed concerns about the regulations’ potential to infringe on the privacy of DeFi users. 

For instance, Marisa Coppel, Head of Legal at the Blockchain Association, warned that the new rules could stifle blockchain innovation and drive technological development offshore, hindering the growth of decentralised systems in the US.

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Be Careful With What You Built

The controversy is further compounded by past legal actions against software developers, such as the case of Tornado Cash developer Alex Pertsev, who was convicted of money laundering due to the misuse of his software in illicit activities. 

Unsurprisingly, critics fear the IRS regulations could create a chilling effect on developers working on decentralised products. 

All in all, it’s quite understandable that developers don’t want to go to jail over something they didn’t do, even if they build the means for malicious people to do it.

The new reporting requirements will take effect for digital asset sales in 2027, with brokers obligated to collect transaction data beginning in 2026. The IRS estimates that these regulations will affect between 650 and 875 DeFi brokers and up to 2.6 million US taxpayers.