The Historical Necessity of New Tax Regulations in DeFi and Industry Choices

The U.S. Department of the Treasury and the Internal Revenue Service recently released an important new regulation that expands the applicability of existing tax laws, incorporating front-end service providers of DeFi into the definition of "broker." These service providers are required to collect users' transaction data starting in 2026 and submit information to the IRS via Form 1099 starting in 2027, including users' total earnings, transaction details, and taxpayer identification information.

Although it will take one or two years for the new regulations to take effect, and there is significant controversy regarding the definition of "brokers", today we will explore the historical inevitability of the introduction of the new regulations from several dimensions, as well as how industry practitioners should make strategic choices.

The Logical Evolution from Traditional Colonialism to New Financial Colonialism

traditional colonial resource logic

The core of the traditional colonial era lies in the realization of resource plunder through military power and territorial occupation. Britain controlled cotton and tea in India through the East India Company, and Spain plundered gold from Latin America; these are typical cases of wealth transfer achieved through direct resource possession.

Modern Model of Financial Colonialism

Modern colonialism centers around economic rules, realizing wealth transfer through capital flow and tax control. The U.S. Foreign Account Tax Compliance Act (FATCA) is an important embodiment of this logic, requiring global financial institutions to disclose asset information of U.S. citizens, forcing other countries to participate in U.S. tax governance. The new DeFi tax regulations are a continuation of this model in the digital asset space, focusing on using technological means and rules to enforce global capital transparency, enabling the U.S. to obtain more tax revenue while strengthening its control over the global economy.

America's New Colonial Tools

Tax Rules: From FATCA to Decentralized Finance New Regulations

Tax rules are the foundation of the new colonial model in the United States. FATCA mandates global financial institutions to disclose asset information of U.S. citizens, setting a precedent for the weaponization of taxes. The new DeFi tax regulations further extend this logic by requiring DeFi platforms to collect and report user transaction data, thereby expanding the U.S. control over the digital economy. With the implementation of this rule, the U.S. will gain more accurate capital flow data globally, further enhancing its control over the global economy.

The combination of technology and the US dollar: the dominance of stablecoins

In the $200 billion stablecoin market, USD stablecoins account for more than 95%, with the underlying anchor assets mainly being U.S. Treasury bonds and dollar reserves. USD stablecoins represented by USDT and USDC, through their application in the global payment system, not only consolidate the global position of the dollar but also anchor more international capital within the U.S. financial system. This is a new form of dollar hegemony in the digital economy era.

The Appeal of Financial Products: Bitcoin ETF and Trust Products

The Bitcoin ETF and trust products launched by Wall Street giants have attracted a significant inflow of international capital into the U.S. market through legalization and institutionalization. These financial products not only provide greater enforcement space for U.S. tax rules but also further integrate global investors into the U.S. economic ecosystem. Currently, the market size is $100 billion.

Real Asset Tokenization (RWA)

Tokenization of real assets is becoming an important trend in the field of Decentralized Finance. The scale of tokenization of U.S. Treasury bonds has reached $4 billion. This model enhances the liquidity of traditional assets through blockchain technology, while also creating new dominance for the U.S. in global capital markets. By controlling the ecosystem of RWA, the U.S. can further promote the globalization of Treasury bonds.

Economy and Finance: Deficit Pressure and Tax Fairness

US deficit crisis and tax loopholes

The federal deficit in the United States has never been as concerning as it is now. In fiscal year 2023, the deficit approached $1.7 trillion, and the post-pandemic fiscal stimulus and infrastructure investments have further exacerbated this burden. Meanwhile, the global market value of the cryptocurrency market once surpassed $3 trillion, yet much of it remains outside the tax system. This is clearly intolerable for a modern nation that relies on tax revenue for support.

Taxation is the cornerstone of state power. Historically, the United States has always sought to expand its tax base under deficit pressure. The hedge fund regulatory reform of the 1980s is a classic example of filling the fiscal gap by broadening the coverage of capital gains tax. And now, cryptocurrencies have become the latest target.

Defense of Financial Sovereignty and the US Dollar

But this is not just a tax issue. The rise of DeFi and stablecoins challenges the dominance of the US dollar in the global payment system. Although stablecoins are an extension of the US dollar, by being pegged to the dollar, they create a parallel "private currency" system, but also bypass the control of the Federal Reserve and traditional banks. The US government realizes that this decentralized form of currency may pose a long-term threat to its financial sovereignty.

Through tax regulation, the United States not only intends to gain financial benefits but also seeks to re-establish control over capital flows and defend the hegemony of the dollar.

Industry Perspective: Choices and Trade-offs for Practitioners

Assessment of the Importance of the U.S. Market

As a practitioner in the DeFi project, the first step is to rationally assess the strategic value of the U.S. market to the business. If the platform's main trading volume and user base come from the U.S. market, then exiting the U.S. could mean significant losses. However, if the proportion of the U.S. market is not high, a complete exit becomes a viable option.

Three Major Response Strategies

Partial Compliance: A Compromise Path

• Establish a U.S. subsidiary to focus on meeting the compliance needs of U.S. users.
• Separate the protocol from the front end, reducing legal risks through DAO or other community-based management methods.
• Introduce KYC mechanism, reporting necessary information only for US users.

Complete Exit: Focus on Global Market

• Implement geographic blocking by restricting access for US users through IP.
• Concentrate resources on more cryptocurrency-friendly markets such as Asia-Pacific, the Middle East, and Europe.

Complete Decentralization: Adherence to Technology and Philosophy

• Abandon front-end services and fully transition the platform to protocol autonomy.
• Develop trustless compliance tools (such as on-chain tax reporting systems) that technically circumvent regulation.

Deeper Reflections: The Future Game of Regulation and Freedom

The evolution of the legislation and long-term trends

In the short term, the industry may delay the implementation of regulations through litigation. However, in the long term, the trend towards compliance is difficult to reverse. Regulation will drive the DeFi industry to form a polarization: on one end, there are fully compliant large platforms, and on the other end, there are small decentralized projects that choose to operate discreetly.

The United States may also adjust its policies under global competitive pressure. If other countries adopt more lenient regulations on cryptocurrencies, the U.S. may relax certain restrictions to attract innovators.

Reflection on the Philosophy of Freedom and Control

The core of DeFi is freedom, while the core of government is control. This game has no end. Perhaps the future of the crypto industry will exist in a form of "compliant decentralization": where technological innovation coexists with regulatory compromise, and privacy protection alternates with transparency.

Conclusion: The Inevitability of History and the Choices of the Industry

This bill is not an isolated event, but rather an inevitable result of the development of political, economic, and cultural logic in the United States. For the DeFi industry, this is both a challenge and an opportunity for transformation. At this historical juncture, how to balance compliance with innovation, protect freedom while bearing responsibility, is a question that every practitioner must answer.

The future of the cryptocurrency industry depends not only on technological advancements but also on how it finds its place between freedom and regulation.