The fight over how the government should regulate crypto, specifically the wild west of decentralized finance (DeFi), just took another turn in the legal arena. Three industry groups—the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council—are continuing their legal challenge against the IRS over new reporting requirements. And like most things in the crypto world right now, it’s complicated.
At the heart of this is the Infrastructure Investment and Jobs Act—remember that? Buried in that massive bill were provisions aimed at bringing some order to crypto taxes. The IRS, predictably, is trying to use those provisions to “close the information gap with respect to digital assets.” What that actually means is they want a clearer picture of who’s making money in DeFi and how much they’re making, so they can, you know, collect taxes.
The IRS’s strategy is to classify certain DeFi players—specifically what are called “trading front-ends”—as “brokers.” Now, a “trading front-end” is basically the interface you use to interact with a DeFi protocol. Think of it like the website or app you use to swap tokens or participate in a liquidity pool. These front-ends provide access, but they don’t actually handle the transactions themselves; those happen on the blockchain.
This is where the lawsuit gets interesting. The crypto groups argue that calling these front-ends “brokers” is a massive stretch. They’re not holding customer funds, they’re not executing trades in a traditional sense, and they certainly don’t have the same centralized control as a brokerage firm like Fidelity or Schwab. As the lawsuit bluntly puts it: “there is simply no broker-like entity involved in a decentralized transaction.” And that’s the key here: decentralized.
This isn’t just some technicality. This is about the fundamental nature of DeFi. If there’s no central authority, no single entity controlling the platform, how do you enforce reporting requirements? How do you even define who’s responsible for reporting? It’s a genuinely difficult question, and the IRS’s attempt to shoehorn DeFi into existing regulatory frameworks is raising some serious red flags.
This lawsuit isn’t likely to be resolved quickly, and it’s one of many legal battles playing out right now that will ultimately shape the future of crypto regulation in the US. It’s a fight about definitions, about jurisdiction, and ultimately, about whether existing financial laws can even apply to a technology that was specifically designed to circumvent them. And that’s a conversation we’re going to be having for a long, long time.