New Tax Regulations for DeFi: A New Chapter in American Financial Colonialism and Industry Response Strategies

The U.S. Treasury Department and the IRS recently issued an important new regulation that includes DeFi front-end service providers in the definition of "broker." This means that starting in 2026, these platforms will need to collect user transaction data and submit Form 1099 to the IRS starting in 2027, which will include users' total earnings, transaction details, and taxpayer identification information.

Although the implementation of the new regulations is still one or two years away and the definition of "broker" is controversial and may face challenges, it is necessary for us to explore the historical inevitability of this policy's introduction and how industry practitioners should formulate strategies to respond.

The Evolution from Traditional Colonialism to New Financial Colonialism

traditional colonial resource logic

During the traditional colonial era, resource plunder was mainly achieved through military power and territorial possession. For example, the British controlled cotton and tea in India, and the Spanish obtained gold from Latin America, both of which are typical cases of direct resource possession resulting in wealth transfer.

Modern Model of Financial Colonialism

Modern colonialism is centered around economic rules, achieving wealth transfer through capital flows and tax control. The United States' Foreign Account Tax Compliance Act (FATCA) requires global financial institutions to disclose asset information of American 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, aiming to leverage technology 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

FATCA mandates global financial institutions to disclose asset information of U.S. citizens, setting a precedent for the weaponization of tax. The new DeFi tax regulation continues this logic by requiring DeFi platforms to collect and report user transaction data, thereby expanding the U.S. control over the digital economy.

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

In the $200 billion stablecoin market, USD stablecoins account for over 95%, with the underlying anchor assets primarily being U.S. Treasury bonds and dollar reserves. These stablecoins, through their application in the global payment system, not only reinforce the global position of the dollar but also lock more international capital into the U.S. financial system.

The Appeal of Financial Products: Bitcoin ETF and Trust Products

The Bitcoin ETFs and trust products launched by Wall Street giants have attracted a large 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 incorporate global investors into the U.S. economic ecosystem. The current market size has reached $100 billion.

Real Asset Tokenization (RWA)

The tokenization of real assets has become 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 the global capital markets.

Economy and Finance: Deficit Pressure and Tax Equity

US deficit crisis and tax loopholes

In the fiscal year 2023, the U.S. federal deficit approached $1.7 trillion, while the global market value of cryptocurrencies once exceeded $3 trillion, yet most of it remained outside the tax system. This is intolerable for modern states that rely on tax revenue.

Defending Financial Sovereignty and the US Dollar

The rise of DeFi and stablecoins challenges the dominance of the US dollar in the global payment system. Through tax regulation, the United States aims not only to gain financial benefits but also 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 US Market

Practitioners of DeFi projects need to rationally assess the strategic value of the U.S. market to their business. If the majority of trading volume and user base comes from the U.S. market, exiting could mean significant losses. Conversely, if the share of the U.S. market is not high, a complete exit becomes a viable option.

Three Major Countermeasures

1. Partial Compliance: A Compromised Path

   • Establish a subsidiary in the United States, focusing on meeting the compliance needs of American users.
   • Separate the protocol from the front end to reduce legal risks through community-based management.
   • Introduce KYC mechanism, reporting necessary information only for U.S. users

2. Complete Exit: Focus on Global Market

   • Implement geographic blocking to restrict access for users in the United States
   • Focus resources on markets that are more friendly to cryptocurrencies

3. Complete Decentralization: Adherence to Technology and Philosophy

   • Abandon front-end services and fully transition the platform to protocol autonomy.
   • Develop trustless compliance tools that technically circumvent regulation

Deeper Thoughts: The Future Game of Regulation and Freedom

The evolution of legislation and long-term trends

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

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. The future of the crypto industry may exist in the 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 an inevitable result of the development of political, economic, and cultural logic in the United States. For the DeFi industry, this is a challenge as well as an opportunity for transformation. At this historical juncture, how to balance compliance and 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.