TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Hochman Salkin Toscher Perez attorney Philipp Behrendt was recently quoted in Tax Notes Federal regarding finalizing the Treasury Department’s decentralized finance (DeFi) broker reporting regulations. The article, titled The Sweeping Reach of the DeFi Broker Reporting Regulations by Lee A. Sheppard (posted Feb. 10, 2025) (subscription required), explores current legal challenges the new regulation faces through the lawsuit filed by Blockchain Association, along with the DeFi Education Fund and the Texas Blockchain Council in the U.S. District Court for the Northern District of Texas (Docket no. 3:24-cv-03259-X).

The Treasury Department’s final regulations under section 6045 expand the definition of “brokers” and the current regulation defines DeFi front-end service providers as brokers—entities that function as user interfaces for DeFi protocols. These regulations impose customer reporting obligations on these services, even if they do not take custody of digital assets. Critics argue that such an approach is overly broad, technologically unworkable, and may ultimately push DeFi activity offshore.

Behrendt on the Risks of DeFi Front-End Reporting

Philipp Behrendt commented on one of the core concerns surrounding the new regulations: the security risks and liability issues that come with requiring DeFi front-end services to collect and store customer data.

“Forcing DeFi front-ends to store sensitive user data would create a single point of failure, undermining both security and privacy. The liability for front-end operators that would come with a potential data breach might be in and of itself discouraging,” Behrendt stated. “The regulations acknowledge that but justify the implementation by arguing that this risk is the same for all other brokers as well. However, this justification may not adequately account for the unique vulnerabilities in the DeFi ecosystem.”

While traditional financial institutions have long been subject to customer reporting obligations, DeFi operates in a fundamentally different technological environment. DeFi front-end services merely provide access to self-executing smart contracts on public blockchains. Unlike conventional brokers, these platforms do not intermediate transactions, raising fundamental questions about whether the statutory definition of a broker truly applies.

The Legal Challenge and the Overreach of the Treasury’s Interpretation

A legal challenge filed by industry groups Blockchain Association, Texas Blockchain Council, and DeFi Education Fund asserts that the Treasury’s interpretation of “broker” under section 6045 is overly expansive and conflicts with the statutory language.

Behrendt pointed out that the Treasury’s comparison of DeFi front-ends to traditional brokerage interfaces faces challenges:

“The core issue remains the Treasury/IRS’s overbroad reading of the statute, which effectively turns a line of communication to a broker into a broker itself,” Behrendt explained. “In the regulations, the comparison is drawn between DeFi front-end services and apps that traditional brokers use to communicate with clients. However, the regulations fail, in my opinion, to recognize a key distinction: In traditional brokerage systems, these communication tools are integrated into a broker’s operations but do not define the entity as a broker.”

One potential legal battleground is statutory interpretation, which was fundamentally reshaped by the Supreme Court’s decision in Loper Bright Enterprises Inc. v. Raimondo last year. In that ruling, the Court overturned the so-called Chevron deference, which had previously required courts to grant broad leeway to agency interpretations of ambiguous statutes. Behrendt was quoted that the court may not even need to invoke Loper Bright if it finds that the regulations exceed the authority granted by Congress, making the case a direct challenge to the Treasury’s statutory overreach:

“If courts agree that front-end services merely channel user inputs and that their service does not ‘effectuate’ transfers, the Treasury/IRS’s approach may fail under a proper statutory interpretation even without Loper Bright,” Behrendt commented.

Conclusion

The Treasury Department and IRS have taken what they consider a necessary step toward tax compliance. There is no doubt that they conducted a detailed analysis of the DeFi ecosystem’s layered structure, significantly refining their regulatory approach from the initial proposed regulations to develop a reporting framework that is, in their view, minimally intrusive, practical, and yet effective. Rather than imposing reporting obligations directly on DeFi protocols, the final regulations shift the burden to an earlier stage—front-end service providers.

Opponents argue that this approach stretches the statutory definition of “broker” beyond recognition, raising serious security and operational concerns.

As the legal battle unfolds, the key question will be whether courts uphold the Treasury’s interpretation or determine that DeFi front-end services fall outside the intended scope of section 6045. Behrendt’s insights suggest that this case could shape the future regulatory landscape for DeFi in the United States, with far-reaching implications for the industry.

Stay tuned for further updates on this pivotal legal challenge.

For more information please contact Philipp Behrendt at behrendt@taxlitigator.com