US encryption brokers' regulation 'bearish BTC': bitter medicine or deadly poison?

With the recent finalization of the IRS draft on broker-reporting of digital asset sales and transactions, U.S. tax regulation of encryption assets has entered an unprecedented phase of stringency. The introduction of the new regulations imposes stricter tax reporting requirements on encryption asset brokers. (Summary: The U.S. Tax Service requires DEX to KYC, a16z supports the complaint: ultra vires is unconstitutional and seriously threatens the future of the Decentralized Finance industry) (Background supplement: DEX must KYC!) With the recent finalization of the IRS draft on broker-reporting on digital asset sales and transactions, the tax regulation of encryption assets in the United States has entered an unprecedented phase of stringency. TaxDAO Brief Review Overview of the Evolution of U.S. Encryption Asset Tax Supervision and Reporting Requirements Looking back at the U.S. tax supervision of encryption assets, its evolution path is clear. In 2014, the IRS issued Notice 2014-21, which formally defined encryption currency as property rather than money and established a corresponding tax treatment framework. In 2021, the Infrastructure Investment and Jobs Act (IIJA) was signed, requiring all transactions involving encryption assets to be reported, and the introduction of Form 8300, expanding the reporting scope of encryption asset transactions to Form 1099, and raising the tax supervision of encryption asset transactions to a new level. With the recent finalization of the IRS draft on broker-reporting of digital asset sales and transactions, U.S. tax regulation of encryption assets has entered an unprecedented phase of stringency. The Gross Income Reporting Requirements for Brokers Providing Digital Asset Sales Services on a Regular Basis (the "Reporting Requirements") is an important file developed by the Internal Revenue Service (IRS) to standardize tax reporting on digital asset transactions. The Reporting Requirements detail a series of tax reporting requirements that brokers are required to follow when providing digital asset sales and trading services to their clients. It clarifies the definition of a broker, including traditional digital asset trading platforms, payment processors, custodial wallet providers, and Decentralized Finance service providers that automate transactions through software or Smart Contract. This means that even if the Decentralized Finance platform does not directly hold the client's Private Key or digital assets, it must comply with the corresponding tax reporting requirements as long as it provides core services such as transaction interface, order processing and execution. In addition, the Reporting Requirements also specify specific matters such as the content and format of reporting, the timing and frequency of reporting, etc., providing clear operational guidance for brokers, and also providing a basis for the IRS to monitor digital asset trading activities and supervise tax compliance. Form 1099-DA is an impressively comprehensive and detailed tool for the IRS to address the increasing frequency of asset transactions and difficult tax oversight of encryption. The form not only requires brokers to disclose in detail the date, type of transaction (e.g. buy, sell, exchange, etc.), but also accurately reports the transaction amount, covering the total gain and possible gain, loss and cost basis information. In particular, brokers need to provide comprehensive information about the investor, including name, address, social security number, and expand to the specific type, quantity, and fair market value of the digital asset. A must-do for good medicine? The introduction of the new regulations imposes stricter tax reporting requirements on encryption asset brokers. In order to meet strict reporting standards, brokers must fully enforce KYC (Know Your Customer) policies, which will lead to a significant increase in their operating costs, make compliance more difficult, and face new challenges for the industry as a whole. From an anti-Money Laundering perspective, the lack of transparency of encryption assets could constitute a loophole in the financial defense. Money Undering activities disrupt the normal order of financial markets and provide financial cover for various criminal activities. As an important participant in the financial market, the broker's trading data and customer information are an important data basis for anti-Money Laundering monitoring. Strict reporting requirements help detect and block the Money Laundering path in a timely manner, thereby curbing the growth and spread of financial crime. Low transparency of encryption assets can also pose problems when it comes to combating the financing of terrorism. Terrorist financing is the economic basis for the continuation and expansion of terrorist activities. As participants in financial activities, brokers have the obligation and ability to monitor and report suspicious transactions and provide key intelligence to the counter-terrorism authorities in order to cut off the sources of terrorist financing and maintain national security and social stability. Reporting requirements for encryption asset brokers are also particularly important in terms of anti-tax evasion. Tax evasion weakens the country's fiscal base and undermines tax fairness and market order. As a part of the tax collection and management system, the reporting obligation followed by brokers helps tax authorities accurately identify tax evasion, strengthen tax management, and maintain the fairness and authority of the tax system. Therefore, increasing the transparency of encryption assets, through the reporting requirements of brokers, is an important measure to deal with these potential problems. Compliance labor pain or deadly poison? The Reporting Requirements have had a significant impact on the Decentralized Finance space. Decentralized Finance, with its Decentralization and Anonymity, provides flexible and efficient financial services outside of the TradFi system. But increased regulation could seriously challenge these characteristics. On the one hand, Form 1099-DA requires brokers to disclose investors' wallet addresses and the number of transactions, and the resulting implementation of KYC policies will weaken Decentralized Finance's Anonymity, forcing investors to change trading habits, provide real identity information, and drop transaction privacy. On the other hand, in order to meet the reporting requirements, the Decentralized Finance platform needs to increase resources and energy investment to collect, collate and report user transaction data, which will undoubtedly increase operating costs, indirectly affect the autonomous operation of Smart Contract, increase the link of human intervention, and adversely affect the autonomous operation of Smart Contract and Decentralization governance. More importantly, the Reporting Requirements may have a profound impact on the Decentralized Finance ecosystem, challenging Decentralized Finance's core mission of democratizing the ease of use of money and payment methods, and promoting the globalization and decentralization of financial services. If Decentralized Finance becomes transparent and de-anonymized, its market attractiveness and development potential will be greatly reduced. The Reporting Requirements are making waves not only for Decentralized Finance, but for the entire encryption industry. The new regulations put encryption asset brokers under pressure from both compliance and operating costs, forcing them to devote more resources to regulatory compliance. This may lead to the withdrawal of small or start-up brokers due to unaffordability, and the market competition and industry reshuffle will intensify. At the same time, the new regulations have sparked disputes over privacy, data security, and constitutional rights; The new regulations also pose a potential threat to innovation and development in the encryption industry. The encryption industry urgently needs a relaxed and flexible regulatory environment to stimulate innovation. However, the compliance pressure and increased costs brought about by the new regulations may inhibit the industry's innovation momentum. In a way, the Encryption broker rules are a bitter medicine designed to increase tax transparency, combat illegal practices, and ensure tax fairness and market order. However, the urgency of its operation also raises concerns about whether it will become a deadly poison in the encryption industry. It is undeniable that the implementation of this rule has been somewhat hasty. In the context of the rapid development of the encryption industry, how to find a balance between encouraging innovation and strengthening supervision is an urgent problem to be solved. In addition, given the Trump administration's pro-Encryption asset attitude, perhaps Trump will veto the Reporting Requirement before the effective date of the rule, leaving more room for the Encryption industry. Of course, we must face up to the fact that if the rule comes into effect, it will inevitably have a certain impact on the Decentralized Finance industry. As an emerging force in the field of encryption, the core of Decentralization Finance is to go to the middle...