In a landmark decision for the crypto industry, the U.S. Senate voted 70–27 on March 4 to overturn an IRS rule that would have forced decentralized finance (DeFi) platforms to comply with traditional financial reporting standards. The bipartisan vote signals growing recognition of the need to regulate crypto on its own terms — not through frameworks built for banks.
While the resolution still awaits a vote in the House and President Trump’s final approval, the early support from his administration — including crypto czar David Sacks — suggests it’s on a fast track to becoming law. But even with this regulatory victory, DeFi’s future remains in a gray zone.
What the IRS Rule Would Have Meant for DeFi
The repealed IRS proposal sought to classify DeFi protocols as “brokers,” requiring them to report user transaction data and gross proceeds. But as many in the industry have argued, such reporting is fundamentally incompatible with DeFi’s architecture.
1inch Labs: A Flawed Approach from the Start
Speaking to crypto.news, Hedi Navazan, Chief Compliance Officer at 1inch Labs, criticized the proposal as a misunderstanding of how decentralized systems work.
“The IRS attempted to impose a centralized compliance model on protocols that don’t even hold user funds,” Navazan explained. “DeFi isn’t built like a bank. Forcing these platforms into broker-like roles would’ve been technically and operationally impossible.”
The Treasury estimated this regulation could recover nearly $4 billion over the next decade to address an estimated $50 billion crypto tax gap. But Navazan and others argue the cost to innovation and financial privacy would have been far higher.
Why DeFi Can’t Comply Like a Bank
Unlike centralized exchanges, DeFi protocols rely on open-source code and smart contracts to execute transactions — there’s no intermediary, no account management, and no custody of user assets. As a result, developers and platform maintainers often lack access to the data regulators want them to report.
This regulatory mismatch would have required developers to redesign protocols to collect and store personal data — potentially introducing security risks and violating user expectations of privacy.
Regulation Should Focus on Security, Not Taxation
Navazan argued that policy efforts should shift toward pressing DeFi vulnerabilities — particularly around protocol security. In 2023, DeFi lost more than $1.8 billion to hacks, including attacks on Curve Finance and Atomic Wallet.
- Security lapses continue to outpace policy efforts
- DAO governance remains legally undefined
- Token scams proliferate in the absence of oversight
“Regulators are obsessing over tax data,” Navazan noted, “but users are losing billions in hacks and exploits. That’s where the focus should be.”
Heavy-Handed Regulation Risks Driving Innovation Away
One growing concern in the industry is that unclear or overreaching regulation will push developers and projects offshore. This trend has already played out with centralized exchanges like Coinbase and Gemini exploring relocation, and it may soon extend to DeFi teams.
Privacy Tools and Offshore DeFi on the Rise
Following the U.S. Treasury’s sanctions on Tornado Cash, anonymous DeFi platforms didn’t disappear — they multiplied. Developers responded by creating new privacy-focused tools beyond the reach of U.S. regulators.
“When the rules become impossible to follow, people don’t comply — they leave,” said Navazan. “And that includes institutions who want legal clarity before engaging in the space.”
What Effective Regulation Could Look Like
With the IRS rule repealed, attention now turns to crafting a framework that works for DeFi’s decentralized architecture. Navazan suggests a more balanced approach — one that uses blockchain-native tools instead of retrofitting outdated banking regulations.
Blockchain-Based Compliance Is the Way Forward
Tools like Chainalysis and Elliptic already allow regulators to monitor on-chain activity without compromising decentralization. Platforms like 1inch are also taking initiative — implementing tools like the 1inch Shield API, which offers wallet screening and malicious token filtering.
- On-chain analytics can detect suspicious activity in real time
- Permissioned DeFi pools may offer compliance without centralization
- Self-regulatory tools show the industry’s willingness to collaborate
Tiered Regulation Could Be the Compromise
Rather than applying a one-size-fits-all model, Navazan supports a regulatory system that distinguishes between permissionless protocols and those that interface with institutional capital.
“Let fully decentralized systems operate freely, while offering clearer compliance paths for those engaging with real-world finance,” she said.
The Bigger Problem: America’s Policy Whiplash
While the IRS rule rollback offers relief, it also highlights a larger issue — the instability of U.S. crypto policy. As each administration rewrites the rules, long-term planning becomes nearly impossible for businesses and developers.
Europe Offers a Stark Contrast
Unlike the fragmented regulatory landscape in the U.S., Europe has already passed its Markets in Crypto-Assets (MiCA) framework, giving firms a unified set of standards across all EU member states. That stability is attracting companies that may otherwise have planted roots in the U.S.
“Without consistency, institutional adoption will stall,” Navazan warned. “The U.S. risks falling behind as other jurisdictions build regulatory clarity and attract global talent.”
All Eyes on the White House Crypto Summit
The upcoming Crypto Summit on March 7 could be a pivotal moment. With major players like Michael Saylor and Coinbase CEO Brian Armstrong expected to attend, the event may shape the future of crypto regulation in the U.S.
Whether it leads to substantive policy direction or becomes another political performance remains to be seen. But for DeFi, the message is clear: the old rulebook won’t work — and forcing it to fit could break the system entirely.
