‘Congress Is Aligned with Innovation,’ Says Sei Labs General Counsel

Hifi Tech India

Last week, an IRS rule that threatened to upend decentralized finance (DeFi) was officially repealed.

The bipartisan disapproval resolution, led by Rep. Mike Carey (R-Ohio), was signed by President Donald Trump on April 10, per the official committee press release.

Introduced in the final days of the Biden administration, the so-called DeFi broker rule — formally titled “Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales” — was a new reporting rule from the IRS and the Treasury Department.

The rule was met with strong pushback from DeFi and broader crypto industry participants and trade groups, especially in the U.S., given what was seen as innovation-stifling and even logistically impossible requirements for some of the potentially affected entities.

Namely, per the rule, the definition of a digital assets “broker” was broad, potentially including decentralized players, such as decentralized exchanges (DEXs), self-custodial wallet providers and even software developers.

The rule required all digital asset brokers to collect and report taxpayer information and the gross proceeds of “clients” — anyone using these products or services — in order to file Form 1099-DA, Digital Asset Proceeds From Broker Transactions.

‘Congress is aligned’ with crypto
Gerald Gallagher — general counsel of DEX-focused Sei blockchain developer Sei Labs and co-host of the Crypto In America podcast — met with Rep. Carey and other legislators on the day the joint resolution was being marked up in Washington.

Commenting on what the repeal of this rule means for the industry, Gallagher told The Defiant in an email, “The repeal of this rule does not open a free-for-all on tax reporting, as some are interpreting. Repealing this onerous rule does not change any obligations for everyday Americans.”

He also commented on the broader sentiment among U.S. lawmakers that he says the decision represents:

“If a U.S. citizen were considering starting a company or working on a decentralized project in the crypto space, the knowledge that Congress is aligned with innovation and common-sense regulation should be very comforting.”
Gerald Gallagher
Reactions to the rule
In the official release last week announcing that the rule had been overturned, former IRS Commissioner Charles Rettig, a first-term appointee of President Trump, stated that the new regulations would “overwhelm the agency and have little or no value to effective and efficient tax administration.”

Rep. Carey, who introduced the resolution to overturn the rule, said in a statement in the release:

“The DeFi Broker Rule needlessly hindered American innovation, infringed on the privacy of everyday Americans, and was set to overwhelm the IRS with an overflow of new filings that it doesn’t have the infrastructure to handle during tax season.”
Rep. Mike Carey
That’s to say nothing of the reality that DeFi projects like self-custodial wallet makers or software developers would likely have had no way to collect this information, which would include not just financial information, but Know-Your-Customer (KYC) personal information as well.

The regulation was created in late 2024, at the tail end of President Biden’s term, leading the DeFi Education Fund and others to refer to it as “midnight rulemaking.”

“The IRS’ midnight rulemaking provided an overly broad redefinition of ‘broker’ that was designed to create brokers where there weren’t any,” said Gavin Zavatone, a policy analyst for the DeFi Education Fund, in an email to The Defiant:

“In doing so, developers of DeFi front-ends would have been required to collect unreasonable amounts of sensitive user information solely because the IRS perceived them to facilitate digital asset sales like a broker.”
Gavin Zavatone
In February, a coalition of major crypto firms and organizations led by the Blockchain Association called the rule “DeFi killing.” In December of last year, the Association, alongside the DeFi Education Fund and the Texas Blockchain Council, filed a lawsuit in an attempt to stop the rule from being implemented.

The strange definition of a broker
The rule’s goal was to require tax reporting by digital asset brokers. The IRS and the Treasury Department said in the final text of the rule, published on Dec. 30, that they had received over 44,000 comments in response to the proposed regulations.

Based on the comments, the agencies said that they did adjust the definition of a digital assets broker, but the final definition still included providers of “front-end services” for DeFi transactions. As stated above, many in the industry still considered the definition too broad, and overstep and damaging to the industry.

Despite the fact that the terms "DEX," "self-custodial wallet providers" and even some software developers were not explicitly included in the definition of a "broker" in the final text of the rule, the DeFi Education Fund told The Defiant: "Those terms were [...] captured by the broadness of the text."

The rule for digital asset brokers attempted to require tax reporting for DeFi platforms “by forcing website developers or anyone ‘assisting customers in initiating’ a transaction to be treated as a ‘broker,’ undermining the disintermediated nature of the technology,” the DeFi Education Fund said in a release last week.

Commenting further on the sentiment shift in Washington from Biden to Trump administrations, Gallagher told the Defiant: “We found that legislators not only understand the last administration's unreasonable approach but are additionally aligned with making it possible for the industry to flourish and innovate in the U.S.”

He added, “We have allies who understand the technology and the issues.”