New Tax Regulations on DeFi: Reflections on America's New Financial Colonialism and Strategic Choices for the Industry

Recently, the U.S. Department of the Treasury and the IRS issued a new regulation expanding the applicability of existing tax laws, incorporating front-end service providers of DeFi into the definition of "broker." These service providers include platforms that interact directly with users and will be required to collect user transaction data starting in 2026 and submit 1099 forms containing total user earnings, transaction details, and taxpayer identification information to the IRS starting in 2027.

Although there is still a year or two before the new regulations come into effect, and the definition of "broker" is highly controversial and may face overturning, we still need to explore the historical inevitability of the issuance of the new regulations from multiple perspectives, as well as the strategic choices of industry practitioners.

The Logical Evolution from Traditional Colonialism to New Financial Colonialism

traditional colonial resource logic

The core of traditional colonialism lies in the plunder of resources through military power and territorial possession. The British control of cotton and tea in India, and the Spanish plundering of gold from Latin America, are typical examples of directly possessing resources to achieve wealth transfer.

Modern model of financial colonization

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

America's New Colonial Tool

Tax rules: From FATCA to Decentralized Finance new regulations

The tax rules are the foundation of the new colonial model in the United States. FATCA mandates global financial institutions to disclose the asset information of U.S. citizens, setting a precedent for the weaponization of taxes. The new regulations on DeFi taxes further extend this logic by requiring DeFi platforms to collect and report users' transaction data, thereby expanding the U.S. control over the digital economy. With the implementation of this rule, the U.S. will gain more precise data on capital flows 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 over 95%, with their underlying anchor assets mainly consisting of U.S. Treasury bonds and dollar reserves. Dollar 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 ETFs 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 incorporate global investors into the U.S. economic ecosystem. The current market size is $100 billion.

Real Asset Tokenization (RWA)

Tokenization of real-world 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 the global capital markets. By controlling the ecosystem of RWA, the U.S. can further promote the global circulation of Treasury bonds.

Economy and Finance: Deficit Pressure and Tax Fairness

The US deficit crisis and tax loopholes

In the fiscal year 2023, the U.S. federal deficit approached $1.7 trillion, exacerbated by pandemic-related fiscal stimulus and infrastructure investments. At the same time, the global market value of cryptocurrencies once surpassed $3 trillion, largely existing outside the tax system. This is clearly unacceptable for modern nations that rely on tax revenues.

Taxes are the cornerstone of state power. Historically, the United States has always sought to expand the tax base under the pressure of deficits. The hedge fund regulatory reforms of the 1980s are a prime example of filling fiscal gaps by widening the coverage of capital gains tax. And now, cryptocurrencies have become the latest target.

Defending Financial Sovereignty and the US Dollar

The rise of Decentralized Finance and stablecoins has challenged the dominant position of the US dollar in the global payment system. Although stablecoins are an extension of the US dollar, creating a parallel "private currency" system by being pegged to the dollar, they also circumvent the control of the Federal Reserve and traditional banks. The US government realizes that this form of decentralized currency could 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 hegemonic status of the dollar.

Industry Perspective: Choices and Trade-offs for Practitioners

Assessment of the Importance of the US Market

As a practitioner of DeFi projects, 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 U.S. market's share is not high, a complete exit becomes a viable option.

Three Major Response Strategies

Partial Compliance: A Compromise 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 DAO or other community management methods.
• Introduce KYC mechanism, reporting necessary information only for US users.

Complete Exit: Focus on Global Markets

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

Fully Decentralized: 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 bypass regulations.

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 rules through litigation. However, in the long run, the trend towards compliance is difficult to reverse. Regulation will drive the DeFi industry to become polarized: on one end are fully compliant large platforms, and on the other end are small decentralized projects that choose to operate in secrecy.

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

A Philosophical Reflection on 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 cryptocurrency industry will exist in a form of "compliant decentralization": a coexistence of technological innovation and regulatory compromise, with privacy protection and transparency advancing alternately.

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

This bill is not an isolated event but a necessary 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 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.