Research Summary
The US Treasury Department and the Internal Revenue Service (IRS) have proposed a rulemaking that redefines the term “broker” to include DeFi protocols and frontends. This would require them to report users’ personal identifying information. Meanwhile, Grayscale won a case against the Securities and Exchange Commission (SEC), with the court ruling that the SEC’s denial of Grayscale’s Bitcoin exchange traded product (ETP) was unlawful.
Key Takeaways
Proposed Broker Rulemaking by Treasury and IRS
- Expansion of “Broker” Definition: The proposed rulemaking by the US Treasury Department and IRS seeks to redefine “broker” to include any person or entity that provides services effectuating transfers of digital assets on behalf of another person. This includes DeFi protocols and frontends.
- Implications for DeFi Protocols and Frontends: If the proposal is accepted, these entities would be required to report personal identifying information of their users to the IRS, including names, addresses, and taxpayer identification numbers.
- Concerns Over Overbroad Definition: Critics argue that the proposed definition is overbroad and attempts to create brokers where there aren’t any. They contend that the definition cannot be stretched to include persons not engaged in broker activity and who merely provide facilitative services.
Grayscale’s Victory Over SEC
- Grayscale’s Legal Challenge: Grayscale challenged the SEC’s denial of their Bitcoin ETP, arguing that the SEC failed to treat like cases alike. The SEC had previously approved Bitcoin futures ETPs.
- Court Ruling: The US Court of Appeals ruled in favor of Grayscale, finding the SEC’s actions to be arbitrary and capricious. The court highlighted the “materially similar” nature of Grayscale’s proposed Bitcoin ETP and the approved Bitcoin futures ETPs.
- Implications for SEC: The ruling puts the ball in the SEC’s court, with further clarity on the implications of the opinion expected in the coming weeks.
Actionable Insights
- Monitor Regulatory Developments: Stakeholders in the DeFi space should closely monitor the proposed broker rulemaking by the Treasury and IRS, as it could have significant implications for their operations.
- Engage in Regulatory Dialogue: Entities potentially affected by the proposed rulemaking should consider engaging in dialogue with regulators, expressing their concerns and providing input on the proposal.
- Assess Legal Precedents: The Grayscale ruling sets a precedent that could impact future SEC decisions regarding Bitcoin ETPs. Stakeholders should assess the implications of this ruling for their own operations and strategies.
