The DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council have filed a lawsuit against the Internal Revenue Service (IRS) and the U.S. Treasury Department. 

The lawsuit, submitted to the U.S. District Court for the Northern District of Texas, contests the agencies' finalized "broker" rule, claiming it exceeds their statutory authority, violates the Administrative Procedure Act (APA), and is unconstitutional.

The dispute centers on the expanded definition of a "broker," which now includes software developers of decentralized finance (DeFi) trading front-end services. According to the plaintiffs, the rule imposes undue compliance burdens that could stifle innovation in the digital asset industry.‍

Concerns Voiced During Public Comment Period

During the rule's public comment phase, critics warned the IRS and Treasury that moving forward with the proposal could harm the nascent digital asset sector. Despite these objections, the agencies finalized the rule, which could push developers offshore and limit U.S. competitiveness in blockchain technology, the lawsuit argues.

"The IRS and Treasury have gone beyond their statutory authority in expanding the definition of 'broker' to include providers of DeFi trading front-ends even though they do not effectuate transactions," said Marisa Coppel, Head of Legal at the Blockchain Association, in a press release. "This infringes on the privacy rights of individuals using decentralized technology and threatens to drive innovation offshore."‍

Industry Reactions

Miller Whitehouse-Levine, CEO of the DeFi Education Fund, criticized the rule as a "misguided and unfairly sweeping" regulation finalized at the end of the year. "Decentralized finance promises to make financial services more accessible and efficient. This unfortunate rulemaking threatens that promise, and we will fight it using every tool available to us," he stated.

Lee Bratcher, President of the Texas Blockchain Council, echoed these concerns, emphasizing that the rule imposes "unrealistic expectations" on the decentralized digital asset ecosystem. "This regulatory overreach risks driving critical development overseas, threatening U.S. competitiveness in the digital economy," Bratcher said.‍

Broader Implications for DeFi

The finalized rule comes amid heightened regulatory scrutiny of the cryptocurrency industry. The IRS issued its final digital asset reporting requirements for brokers in December, despite criticism from industry advocates. Critics argue the rule fails to account for the decentralized nature of blockchain technology, where intermediaries often lack the information demanded by regulators.

The Blockchain Association, DeFi Education Fund, and Texas Blockchain Council argue that compliance with these new requirements could cripple the industry, forcing developers to abandon decentralized technologies or relocate to jurisdictions with more favorable regulations.