AdLunam

Register for The Slatest to obtain the most insightful analysis, criticism and advice, delivered daily in your reception box.

Last month, in an extremely rare bipartite act, the Senate voted 70 to 28 to approve a resolution of the Chamber to repeal the “DEFI broker rule”. The rule of the decentralized financial broker, which was adopted by the Treasury last December, would have required certain facilitators of crypto-active transactions on so-called decentralized exchanges to make information reports at IRS and issue their customers 1099, just like any other financial institution.

The rule has targeted “frontal service providers” who are able to oblige customers to identify themselves, collect their information and provide this information to the IRS. No “minors” or individual “stakers” without distrust – which participate in the blockchain transactions validation process – would have been submitted to these rules.

By celebrating the repeal, the Republicans of the Channel and Meaning Committee criticized the Biden administration for introducing this “midnight” reporting rule, saying that it was done “last minute”. This language is drawn directly from the press releases issued by the Blockchain Association, a group from the blockchain industry, denouncing the rules in December. But the Defi Broker rule was not as sensational as it made it appear.

These rules have been developing since 2021, when the congress has adopted the Investment and Infrastructure Jobs. The law submitted the brokers of cryptographic assets to the tax declaration requirements similar to those applicable to any other broker of financial assets, leaving the Treasury to develop regulations on the issue. In the development of the regulation, the ministry has demonstrated a laudable level of cooperation with the affected industries: the Treasury published regulations proposed for public comments in August 2023, and extended the commentary period twice, until April 2024. This caused 44,000 responses from the public. The final regulations included a 107 -page preamble responding to these comments, even incorporating some of them into the final rules.

Above all, the law on investments and the jobs of the infrastructure and the rule of which broke under it would not have created new tax obligations. Taxpayers have always been required to report their taxable gains in Crypto-Aset transactions and pay taxes on them. The Defi Broker rule would have simply forced frontal service providers to collect information on Crypto-Aset transactions and provide it to IRS and customers. This aimed to allow customers to correctly calculate their tax liabilities correctly and so that the IRS grabs tax cheaters.

However, the cryptography industry said that the new compliance burden “would stifle innovation” and lead blockchain companies abroad. The reason, they argued, is that it would be impossible for brokers to comply with the rules, because, well, they are decentralized. This argument makes no sense. If the brokers are indeed decentralized and controlled by anyone, which company would be exactly motivated abroad? The reality is that the facilitators of most DEFI transactions are very centralized, profitable and controlled by some identifiable operators. These operators may demand that their customers provide tax information, but they specifically choose not to do so.

The argument concerning “suffocation of innovation” is also difficult to reconcile with the fact that the rest of the American financial industry is subject to the same tax declaration requirements and seems to be fine. The cryptography industry does not compete for a level playground, but for preferential treatment.

Even if we accept the argument according to which compliance with tax report requirements is too heavy (in particular for cryptographic assets), the problem does not concern the tax system: if one cannot create a profitable company without a flat -tank tax as an integral part of the business model, then the problem is with the commercial model and not the regulatory framework.

It should also be noted that the threat of “moving abroad” sounds hollow developments given elsewhere in the world. Where would these “innovative” (but decentralized!) Companies would happen?)? To the European Union, which recently adopted a directive which subjects to brokers of crypto-actors to largely similar tax reports? Or to one of the 49 countries that recently signed the “Crypo-attack reporting Framework of the Organization for Economic Cooperation and Development”, which includes a binding multinational treaty imposing similar tax reports on crypto-active brokers?

The DEFI rules have been simply adopted to ensure that taxpayers pay what they are already required to pay under the existing tax law. They would not have imposed new taxes and would not have overwhelmed cryptographic companies more importantly than they could already hang traditional financial companies. I do not see any reasonable explanation for the attempt to repeal this rule other than favoritism, which the cryptographic industry has been able to gain in lobbying. The repeal of the rule will facilitate tax cheat when negotiating cryptographic assets compared to other financial assets. It can also facilitate cheating when negotiating cryptographic assets in the United States compared to many other developed countries.

The United States is the world’s largest market for cryptographic investment. The Congress may have just transformed the United States into a destination of choice for those who seek to escape taxes and other regulatory charges on cryptographic transactions, which can transform it into one of the worst and the largest cryptographic tax havens. Crypto-sets based in the United States, can now become a financial refuge not only for fiscal cheaters, but also for others who try to secretly move their poorly acquired wealth, such as terrorists, drug lords, human traffickers and dealers in images of sexual abuse for children.

Above all, the cost of transformation of the United States into a cryptographic tax haven should not have perceptible advantages for the economy as a whole. If we believe in the cryptography industry, the industry is “decentralized”, we must therefore not expect a centralized investment advantage to accumulate in the United States of all places. If the industry is not decentralized, the new rules, as indicated, would not have changed existing tax burden. It was a question of enforcing the existing laws. The repeal of the rule offers no tax reduction which could reasonably expect to attract new businesses in the United States.

The DEFI rules were achievable. They made sense. They were directed against tax cheaters. All that the congress had to prevent the United States from going into this tax status was: nothing. Congress just needed to let the IRS do its job.

Register for the Slate evening newsletter.