Blockchain Organization Files Lawsuit Against IRS Regarding Recent Cryptocurrency Regulations

The Blockchain Affiliation, in partnership with the Texas Blockchain Council, has initiated legal action against the U.S. Internal Revenue Service (IRS) regarding its recent cryptocurrency regulations.

This legal challenge, filed on Dec. 28, contests the IRS’s new requirements mandating brokers to report digital asset transactions, which are scheduled to take effect in 2027.

According to these final regulations, brokers will be required to report gross proceeds from cryptocurrency and digital asset sales, along with information about the taxpayers involved in these transactions.

New IRS Regulations Expand Definition of Broker

The regulations expand the definition of a “broker” to encompass decentralized exchanges (DEXs) and front-end platforms that facilitate digital asset transactions.

Kristin Smith, CEO of the Blockchain Affiliation, noted in a social media post that the lawsuit contends the IRS’s rulemaking contravenes the Administrative Procedure Act and violates constitutional rights.

“We support our nation’s innovators and will continue to work to ensure the future of crypto — and DeFi — remains in the U.S.”

Today we are taking action, filing a lawsuit that argues today’s broker rulemaking violates the Administrative Procedure Act and is unconstitutional.
We support our nation’s innovators and will continue to work to ensure the future of crypto – and DeFi – remains in the United… https://t.co/CwZWzjwT5O

— Kristin Smith (@KMSmithDC) December 28, 2024

The new regulations have raised concerns among blockchain developers and decentralized finance (DeFi) proponents.

Platforms utilizing smart contracts to facilitate transactions may now be classified as brokers, imposing significant compliance obligations on developers of DeFi front-ends.

The Blockchain Affiliation has criticized the IRS for imposing “unlawful compliance burdens” on software developers, cautioning that this could hinder innovation within the U.S.

The broader crypto community is apprehensive that these regulations may push DeFi innovation overseas.

Marisa Coppel, Head of Legal at the Blockchain Affiliation, characterized the rules as a violation of privacy, asserting that requiring DeFi platforms to report user data would compromise the fundamental principles of decentralization.

Legal experts have drawn comparisons to the case of Tornado Cash developer Alex Pertsev, who received a sentence of over five years in prison for enabling illicit transactions through non-custodial software.

This precedent adds weight to concerns regarding the potential criminalization of developers under these regulations.

The IRS estimates that between 650 and 875 DeFi brokers, including up to 2.6 million U.S. taxpayers, will be affected by the regulations.

Brokers will need to begin collecting transaction data in 2026 for reporting obligations commencing in 2027.

Industry Analysts Outline Possible Paths Forward

Industry analysts have proposed possible paths forward for DeFi platforms if the regulations are not rescinded.

Alex Thorn, head of research at Galaxy Digital, suggested that platforms could either comply with the broker designation, block U.S. users, or operate as decentralized applications with minimal user interaction and no transaction fees to avoid broker classification.

“There are numerous ways to challenge this, and it absolutely needs to be contested,” Uniswap Chief Legal Officer (CLO) Katherine Minarik stated in a December 27 post on X.

She questioned the IRS’s reasoning, arguing that the ruling inaccurately categorizes DeFi platforms as brokers, despite their role being merely a part of transaction processes.

Uniswap CEO Hayden Adams expressed similar concerns, indicating that he hopes the ruling will be overturned through the Congressional Review Act (CRA) or legal challenges.

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