DeFi Reporting Repeal A Win For Innovation, But At What Cost?

Alright, so the digital asset reporting requirements for DeFi brokers got a reprieve. Repealed. Poof. President Trump signed off on it. Bipartisan support, they say. Innovation freed from the shackles of regulation! Sounds great, right? Less regulatory burdens, room for innovation, the Old West of Finance can officially exhale. And I get that too — there is a part of me that’s really happy about that. We need innovation. But let’s hit pause on the champagne popping.

Innovation At Whose Expense?

Let's be brutally honest. Who really benefits from this? The small-time developer in their basement, trying to create the next innovative standard? Maybe. Maybe. Wealthy individuals and corporations are again far more likely to take advantage of the absence of oversight. They’re already in a pretty great position to do so. During disruptive change, industry typically has the resources and expertise necessary to chart the course forward. Let’s face it, they usually have the lawyers as well, especially now that the landscape is void of pesky whistleblowers.

Section 80603 of the Infrastructure Investment and Jobs Act (IIJA) could have made the DeFi space more transparent. Form 1099-DA, Know Your Customer… nobody likes that jazz. Those things serve as a disincentive. They increase the difficulty of hiding income and avoiding paying taxes. When a few can’t be bothered to pay their fair share, take a wild guess as to who makes up the difference. You do. I do. We all do. It’s the proverbial leaky faucet in your bathroom—at first glance, it seems pretty harmless, but if you let it, over time it can bleed you dry.

How is that a win for innovation, if it’s all built on a shaky foundation of tax avoidance? Aren’t you excited to be finding ways as a state to avoid paying for the society that encourages all this innovation? This glaring irony is an opportunity worth taking a closer look at.

Social Programs On The Chopping Block?

Here's where the "unexpected connection" comes in. We’re having discussions about DeFi, blockchain technology, digital assets. Sounds futuristic, right? The impacts of this repeal are not hypothetical or vague. They have very real world implications for something as important as our schools, hospitals and infrastructure. You heard us right! The streets you walk and the children you drop-off at school may depend on it. The loss of tax revenue from this repeal will only further destroy the healthcare system that you count on to stay healthy.

For the sake of argument, let’s assume that this repeal will cause a massive surge in tax evasion using DeFi apps. Where does that money come from? It doesn't just disappear. It comes from the public coffers. When the public coffers run dry, what then? Funding for social programs gets cut. Education suffers. Healthcare access diminishes. Bridges crumble.

I'm not saying this will happen. But it's a very real possibility. And that's what scares me. We're so focused on the potential benefits of DeFi – the decentralization, the democratization of finance – that we're overlooking the potential downsides, the unintended consequences that could disproportionately harm the most vulnerable members of our society.

A Middle Ground Exists

I’m not here to argue that DeFi should be suffocated with excessive regulation. The justification for the repeal – that the original rules were unrealistic and hampered innovation – is true. Surely there is a middle ground. A smart approach to encourage innovation while preventing a new, expansive tax-dodging loophole.

What about tiered reporting requirements? Platforms that have low transaction volumes or narrow focused use cases may receive an exemption. Larger and more sophisticated platforms would be held to much stricter standards. Why not start from a place of improving developer tools for tracking and analyzing on-chain data instead? It’s past time to go beyond reactive and punitive public reporting.

The IRS's unchanged position on "universal wallets" is a start, but it's not enough. We require creative, carefully tailored solutions that meet the specific challenges posed by DeFi, without undermining tax fairness and social equity.

This is not about crushing innovation, it’s about fostering responsible innovation. It’s about making sure the promise of DeFi doesn’t just benefit the people who would have already profited in existing finance.

Incentivize Voluntary Reporting: Offer tax breaks or other incentives for DeFi platforms that voluntarily comply with reporting standards.
Develop AI-Powered Auditing Tools: Invest in the development of artificial intelligence tools that can analyze blockchain transactions and identify potential tax evasion.
Foster International Cooperation: Work with other countries to establish global standards for DeFi regulation and tax compliance.

As a result, their repeal may provide a more favorable environment for innovation. Let’s be clear though, this hard fought victory comes with a very real threat. A threat to our nation’s caregiving economy, to our public infrastructure, and to the very bonds of our society. We must continue to pressure our policymakers to understand these perils. They need to come up with new solutions that drive innovation and promote social equity. Don't let them get away with this! Raise your voices, raise the alarm on this discussion, and help push for a more thoughtful, responsible, accountable approach to regulating decentralized finance. The future of our democracy, our society, may well depend on it.

Before the unintended consequences of this good intention set in, the time to act is now.

Don't just stand by: