In a “final charge on its way out of power,” the U.S. government agency finalized the rule, which mandates identification for DeFi front ends.
The Internal Revenue Service (IRS), the tax and revenue enforcement agency of the United States government, has finalized its broker rule, which will mandate know-your-customer (KYC) for DeFi front-ends by 2027, with only four days remaining in 2024.
According to the document, which is scheduled for publication on December 30, trading front-end service providers are required to collect identification information from users, report crypto and NFT positions to the IRS, and deny services to users who fail to comply.
In this instance, a “trading front-end service” refers to any service that “receives a person’s order to sell and processes that order for execution with respect to a sale of digital assets.”
The purpose of this action is to guarantee that the United States maintains accurate and comprehensive tax reporting. Although tax reporting laws mandate that participants disclose their transactions to the IRS, it is probable that forced KYC procedures will reduce the number of active decentralized finance (DeFi) users and drain money from the ecosystem.
This document serves as the second installment of its regulations regarding crypto merchant reporting. Centralized exchanges and asset custodians were the primary focus of Part One, which was published on June 28.
The reporting rules, which are expected to be finalized before 2025, commenced to propagate at the beginning of 2024. Some individuals have claimed that these regulations will result in the demise of DeFi.
The term “trading front-end services” is wide-ranging and may encompass marketplaces, as well as indexing or RPC node providers, according to the current definition. Validators, miners, and infrastructure providers that do not facilitate transactions are the sole recipients of definitive exclusions.
DeFi protocols are constructed on public blockchains and can be accessed without permission through non-custodial wallets. Users have the option to engage in direct trading through smart contracts or through front-ends such as websites and applications that simplify the process. The entire sector would be disrupted if KYC procedures were mandated for front-ends to access DeFi, as it is intentionally designed to not gather and retain user data.
If nodes and services are compelled to close down, ecosystems can become significantly more centralized. Liquidity will be strained as volumes and contributions decrease due to an outflux of non-compliant users.
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