Biden Administration's Pending Regulations Threaten DeFi's Future as Trump Takes Office

Two regulations from the Biden administration could be finalized before Donald Trump takes office. This situation poses significant risks for decentralized finance, or DeFi, as lobbyists have pointed out.

With just a few weeks left in President Biden's term, these regulations might complicate things for DeFi enthusiasts. If approved, they could dampen the excitement that has surged in the crypto market after Trump's recent election victory.

Bitcoin has soared to nearly $90,000. This rise shows that investors believe the new administration will support cryptocurrency initiatives.

Now, let’s break down what’s at stake here.

There are two main proposals. One comes from the Securities and Exchange Commission (SEC), while the other is from the U.S. Treasury Department and the Internal Revenue Service (IRS). Though unrelated, both aim to apply existing regulations to the DeFi sector. This approach contradicts the very essence of decentralization, as noted by Miller Whitehouse-Levine, the CEO of the DeFi Education Fund. He emphasized that both proposals impose centralization where it currently doesn't exist.

The SEC’s proposal seeks to expand the definition of “exchange.” Initially proposed in 2022, it didn’t mention crypto or DeFi. However, it was later updated to include these sectors. This change is alarming for DeFi because it would force decentralized exchanges to register with the SEC. This process is time-consuming and costly, which goes against the principle of decentralization. Republican SEC Commissioner Hester Peirce has criticized the proposal, saying it would stifle innovation and push businesses offshore. On the other hand, SEC Chair Gary Gensler argues that identifying as a crypto platform doesn’t exempt anyone from securities laws.

The SEC is currently in the process of finalizing these proposals. They have already completed the legal notice and comment period. Whitehouse-Levine mentioned that there’s hope the SEC might hold off on finalizing the rule. The new Congress could potentially use the Congressional Review Act to overturn any finalized regulations. Under this act, lawmakers have a 60-day window to challenge new rules, preventing the SEC from reintroducing them in their current form.

Now, let’s look at the second set of regulations.

The U.S. Treasury and the IRS want to recover about $28 billion in unreported gains from U.S. crypto investors. To do this, they proposed rules requiring businesses to provide customers with annual tax forms detailing every sale or exchange of assets. These rules were finalized in June and mainly affect centralized exchanges like Coinbase and Kraken. These platforms already keep detailed records to help users file their taxes.

However, there’s another part of the proposal that hasn’t been finalized yet. This part would impact DeFi protocols and projects, including non-custodial wallets. If this section is approved, protocols, developers, and project supporters would need to verify users’ identities and collect personal information to create the required tax forms. The Treasury hasn’t finalized this part yet, as the DeFi industry and investors submitted over 44,000 comments. They argue that these requirements undermine the purpose of blockchain technology, which is to enable peer-to-peer transactions without middlemen.

Dragonfly Digital Management, a crypto venture capital firm, warned that these rules could destroy the essence of DeFi. They might push innovators offshore, leading to more centralization among those who remain. Despite the protests, regulators seem ready to move forward. Whitehouse-Levine noted that the IRS has consistently indicated its intention to finalize this portion of the rulemaking within the year.