The Deep Impact of New US DeFi Tax Regulations and Industry Responses

The U.S. Treasury Department and the IRS recently issued an important new regulation that includes DeFi front-end service providers in the definition of "broker". This regulation requires platforms, including front-end interfaces of decentralized exchanges, to start collecting user transaction data from 2026 and to submit information to the IRS via Form 1099 starting in 2027, including total user earnings, transaction details, and taxpayer identification information.

Although there is still some time before the regulation takes effect and the definition of "broker" is controversial and may face amendments or overturning, we still need to delve into the historical background of its introduction and the industry's response strategies.

The Evolution from Traditional Colonialism to Financial Colonialism

traditional colonial model

The traditional colonial era primarily achieved resource plunder through military power and territorial possession. The British control of cotton and tea in India, and the Spanish plundering of gold from Latin America, are typical cases of wealth transfer realized through direct possession of resources.

Modern Financial Colonialism

Modern colonialism is centered around economic rules, achieving wealth transfer through capital flows and tax controls. The U.S. Foreign Account Tax Compliance Act (FATCA) requires global financial institutions to disclose asset information of U.S. citizens, forcing other countries to participate in U.S. tax governance. The new DeFi tax regulations are a continuation of this model in the digital asset space, aiming to leverage technology and rules to enforce global capital transparency, increase U.S. tax revenue, and strengthen control over the global economy.

America's New Financial Colonial Tools

Tax Rules

From FATCA to new DeFi regulations, the U.S. continues to expand the scope of its tax rules. The new DeFi tax regulations require platforms to collect and report user transaction data, further extending U.S. control over the digital economy and helping to obtain more accurate global capital flow data.

dominance of stablecoins

In the 200 billion dollar stablecoin market, USD stablecoins account for over 95%, with the main anchoring assets being U.S. Treasury bonds and dollar reserves. This not only consolidates the global position of the dollar but also locks more international capital into the U.S. financial system, becoming a new form of dollar hegemony in the digital economy era.

Financial Product Appeal

The Bitcoin ETF and trust products launched by Wall Street giants attract a large influx of international capital into the US market through legalization and institutionalization. These products not only provide greater enforcement space for US tax rules but also further incorporate global investors into the US economic ecosystem. The current market size has reached $100 billion.

Real Asset Tokenization (RWA)

The tokenization of real assets has become an important trend in the field of Decentralized Finance. The scale of U.S. Treasury bond tokenization has reached $4 billion. This model enhances the liquidity of traditional assets through blockchain technology while creating new dominance for the U.S. in the global capital markets, promoting the globalization of Treasury bond circulation.

Economy and Finance: Deficit Pressure and Tax Equity

US deficit crisis and tax loopholes

In the fiscal year 2023, the U.S. federal deficit is approaching $1.7 trillion, while the global market value of cryptocurrencies once surpassed $3 trillion, most of which is outside the tax system. This is unacceptable for modern nations that rely on tax revenue. The U.S. has historically sought to expand the tax base under deficit pressure, such as the hedge fund regulatory reforms in the 1980s that broadened the capital gains tax coverage, and now cryptocurrencies have become the new target.

Defense of Financial Sovereignty and the US Dollar

The rise of DeFi and stablecoins challenges the dominant position of the dollar in the global payment system. Although stablecoins are an extension of the dollar, they create a "private currency" system that bypasses the control of the Federal Reserve and traditional banks. The U.S. government recognizes that this form of decentralized currency could pose a long-term threat to its financial sovereignty and intends to re-establish control over capital flows through tax regulation to defend the dollar's hegemonic status.

Industry Perspective: Choices and Trade-offs for Practitioners

Importance Assessment of the US Market

Practitioners in DeFi projects must first rationally assess the strategic value of the U.S. market to their business. If the majority of trading volume and user base comes from the U.S., a withdrawal could result in significant losses. Conversely, if the U.S. market share is not high, a complete exit becomes a viable option.

Three Major Response Strategies

1. Partial compliance: Compromise path

   • Establish a subsidiary in the United States to focus on meeting the compliance needs of American users.
   • Separate the protocol from the frontend, reducing legal risks through community management.
   • Introduce KYC mechanism, reporting necessary information only for US users

2. Complete Exit: Focus on Global Markets

   • Implement geographic blocking to restrict access for users in the United States
   • Concentrate resources on markets that are more friendly to cryptocurrencies

3. Completely Decentralized: Adhering to Technology and Philosophy

   • Abandon front-end services and shift towards protocol autonomy
   • Develop trustless compliance tools that technically circumvent regulation

Deeper Thoughts: The Future Game of Regulation and Freedom

Bill evolution and long-term trends

In the short term, the industry may delay the implementation of rules through litigation. In the long run, the trend towards compliance is difficult to reverse. Regulation will drive the DeFi industry to polarize: large platforms that are fully compliant and small decentralized projects that choose to operate in secrecy. The United States may also adjust its policies under global competitive pressure; if other countries adopt more lenient regulations, the U.S. may relax certain restrictions to attract innovators.

A Philosophical Reflection on Freedom and Control

The core of DeFi is freedom, while the core of government is control. This game has no endpoint. In the future, the crypto industry may exist in the form of "compliant decentralization": where technological innovation coexists with regulatory compromise, and privacy protection and transparency advance alternately.

Conclusion

This bill is an inevitable result of the development of political, economic, and cultural logic in the United States. For the DeFi industry, this is both a challenge and an opportunity for transformation. At this historical juncture, how to balance compliance with innovation, protect freedom while bearing responsibility, is a question that every practitioner must face. The future of the cryptocurrency industry depends not only on technological advancements but also on how it finds a balance between freedom and rules.