The decentralized finance (DeFi) industry is breathing a sigh of relief as Congress relaxes reporting obligations, but questions remain about how lawmakers will regulate DeFi.

On March 12, the House of Representatives voted to nullify a rule that required DeFi protocols to report gross proceeds from crypto sales, as well as info on taxpayers involved, to the Internal Revenue Service (IRS). 

The rule, which the IRS issued in December 2024 and wasn’t set to take effect until 2027, was regarded by major industry lobby groups as burdensome and beyond the agency’s authority. 

The White House has already signaled its support for the bill. President Donald Trump is ready to sign when it reaches his desk. But DeFi observers note that the industry has yet to strike a balance between privacy and regulation. 

Privacy concerns over IRS DeFi rule

The crypto industry was quick to laud the vote in the House. Marta Belcher, president of the Filecoin Foundation, said that blocking the rule was particularly important for user privacy. 

She told Cointelegraph it is “critical to protect people’s ability to transact directly with each other via open-source code (like smart contracts and decentralized exchanges) while remaining anonymous, in the same way that people can transact directly with each other using cash.”

Privacy concerns were central to the crypto industry’s objections to the rule, with industry observers claiming that it was not fit for purpose and infringed on user privacy. 

Bill Hughes, senior counsel and director of global regulatory matters for Consensys Software wrote in December 2024, “Trading front ends would have to track and report on user activity — both US persons and non-US persons [...] And it applies to the sale of every single digital asset — including NFTs and even stablecoins.”

The Blockchain Association, a major crypto industry lobby group, stated that the rule was “an infringement on the privacy rights of individuals using decentralized technology” that would push DeFi offshore.

While the rule has been stopped for now, there still aren’t fixed privacy guidelines in place — something Etherealize CEO Vivek Raman said the industry needs to move forward. 

“There needs to be clear frameworks for blockchain-based privacy while maintaining [Know Your Customer/Anti-Money Laundering] requirements,” he told Cointelegraph.

Raman stated that some transactions and customer data will need to remain private, “and we need guidance on what privacy can look like.”