IRS sued in class after DeFi user data collection regulation

At the end of 2024, the US Internal Revenue Service (IRS) issued a controversial new regulation in the field of decentralized finance (DeFi). Accordingly, DeFi interfaces (DeFi front-ends) will have to collect and report users' personal information and transaction history to the IRS starting in 2027.

The regulation is based on the Infrastructure Investment and Jobs Act of 2021 and aims to “close the digital asset-related information gap” to enhance tax compliance.

However, the regulation has met with fierce opposition from the DeFi community, led by the Blockchain Association, the DeFi Education Foundation, and the Texas Blockchain Council. These organizations have officially filed a lawsuit against the IRS, arguing that the regulation is beyond legal authority and could have serious consequences for the development of DeFi in the US.

Noteworthy points in the lawsuit:

• The essence of DeFi:The plaintiffs argued that DeFi operates on the principle of decentralization, without intermediaries such as brokers. Users manage digital assets themselves and trade directly with each other through the software. Therefore, the application of reporting regulation similar to traditional finance is inappropriate and not feasible.
• Burdens for DeFi protocols: The collection, storage and protection of sensitive personal information of users will create a significant burden on DeFi protocols, especially when it is not yet clear which entity will be responsible for performing these functions.
• Violation of privacy:The regulation is said to violate the privacy of DeFi users who wish to take advantage of decentralized and anonymous technology.
• Risk of “gray matter bleeding”: Many experts fear that the regulation will cause DeFi projects and talent to move out of the US, undermining the country's leadership in blockchain technology.

Despite the backlash, the IRS defended its position, arguing that the regulation is necessary to ensure tax compliance in the rapidly growing digital asset sector. According to IRS estimates, the regulation will affect about 650-875 DeFi brokers and about 2 million taxpayers in the US.

The lawsuit marks an important turning point in the legal battle between the DeFi community and the regulator. The outcome of the lawsuit will have a significant impact on the future of DeFi in the US.

If the IRS wins the lawsuit, DeFi protocols will face challenges in complying with the new regulation, which could also cause a slowdown in the development of the industry. On the contrary, if the DeFi community wins the lawsuit, this will set an important precedent for the protection of innovation and privacy in the field of blockchain technology.

Not only large organizations, the DeFi community as a whole also expressed discontent with the new IRS regulation. On forums and social networks, many have argued that the regulation is “out of line” and “threatens to stifle innovation” in the DeFi sector.

They argue that requiring DeFi interfaces to report user information is not feasible and goes against the decentralized nature of DeFi. Many users are also concerned about their privacy as personal data may be collected and stored by third parties.

The support for the class-action lawsuit against the IRS is huge. The DeFi community hopes that this lawsuit will succeed in blocking new regulation and protecting the future of DeFi in the US.

Before that, On December 27, 2024, the Ministry of Finance officially announced the regulations applicable to DeFi, focusing on intermediary trading services that help individual investors interact with DeFi protocols.