Key Highlights
- Andreessen Horowitz (a16z), the DeFi Education Fund and Uniswap Labs submitted comments on October 30 opposing parts of Illinois’ draft rules under the Digital Asset Tax Act.
- The groups said decentralized exchanges and the interfaces used to access them should not be classified as digital asset brokers.
- They argued that requiring brokers to record customers’ private keys could expose digital assets to theft and create cybersecurity risks.
Andreessen Horowitz (a16z), the DeFi Education Fund and Uniswap Labs have urged the Illinois Department of Revenue to revise its proposed rules for taxing digital asset transactions, arguing that several provisions could impose broker obligations on decentralized finance (DeFi) software that cannot fulfil them.
In an October 30 report, the three organizations commented on draft rules released on September 28 to implement Illinois’ Digital Asset Tax Act.
They argued that the rules fail to distinguish between centralized platforms that hold customer assets and decentralized protocols through which users trade directly from self-custodied wallets.
Their comments focus on four areas: broker classification, fee treatment, private-key recordkeeping and transfers between wallets and blockchains.
Groups oppose treating DEXs as digital asset brokers
The submission argues that decentralized exchanges (DEXs) should not fall under the draft rules’ definition of a digital asset broker.
Under the proposed framework, a digital asset broker would be responsible for identifying customers, determining whether they are located in Illinois, calculating and collecting tax, filing returns and maintaining transaction records.
The organizations said these duties are intended for intermediaries that hold or control customer assets and execute transactions on their behalf. A typical DEX, they argued, operates differently: users retain their private keys, authorize transactions through their own wallets and interact directly with smart contracts.
The groups also cited Illinois’ Digital Assets and Consumer Protection Act (DACPA), which excludes certain peer-to-peer exchanges and transfers conducted through automated software from the digital asset business activities it regulates.
They argued that the Department of Revenue should follow the Act’s definition of a broker rather than expand it through the draft rules. The submission also asks the department to clarify that individuals trading through a DEX for their own accounts qualify for the relevant principal-capacity exclusion.
Interface providers should also be excluded
The organizations said the rules could extend broker obligations to software interfaces used to access DeFi protocols.
Interfaces allow users to view blockchain information, prepare transaction instructions and send them to a protocol through a self-custodied wallet. According to the submission, users review and authorize transactions themselves, while interface providers do not take custody of the assets.
The groups argued that these providers generally lack the customer information needed to determine users’ locations or comply with the proposed tax collection and reporting requirements.
The submission asks Illinois to clarify that developing, maintaining or providing a DeFi interface does not, by itself, make a person a digital asset broker.
Protocol and interface fees should not create broker status
The draft rules identify decentralized exchanges that collect protocol fees or other fees for the exchange itself as potential digital asset brokers. The three organizations said the rules do not clearly define protocol fees and could also be interpreted to cover fees charged by interfaces.
They distinguish between several types of charges. Swap fees may be directed to liquidity providers, while protocol fees can be allocated to a treasury, tokenholders or a smart contract. Interface fees are charged for access to the software used to interact with a protocol.
The groups said collecting these fees should not, by itself, make a protocol or interface a broker. They also argued that protocol fees burned or made inaccessible to any individual do not necessarily benefit an operator. The submission asks the department to define protocol and interface fees separately and clarify that charging, paying or collecting them cannot, on its own, establish broker status.
Private-key roundkeeping could create security risks
Another concern involves Section 497.155(a)(3) of the draft rules, which the organizations interpret as requiring brokers to maintain records of digital asset movements that include private keys.
The organizations said this requirement could expose customers’ assets to theft. A private key authorizes transactions involving the digital assets associated with a wallet, meaning anyone who obtains it may be able to transfer those assets.
The submission warned that storing private keys in tax records accessible for inspection could create an additional target for hackers. It also noted that some custodians use multi-party computation, a security method in which a complete private key is never assembled in one place.
The groups argued that public wallet addresses and transaction identifiers can show asset movements without giving anyone control over the funds. They therefore asked the department to replace the reference to “private keys” in the draft rule with “public keys.”
Groups want own-wallet transfers and bridging excluded
The submission also challenges provisions that could treat withdrawals to a customer’s own wallet and transfers between blockchains as taxable transactions.
The organizations argued that moving digital assets from a custodial exchange to a wallet controlled by the same person does not change ownership. They compared the process to transferring money between two bank accounts belonging to the same individual.
They raised a similar objection to bridging, which moves assets or their representations from one blockchain network to another. In their view, these transactions should not be taxed when the user retains ownership and does not sell or exchange the assets.
The groups warned that recording activity on both blockchains could result in a single bridge transaction being counted more than once. They asked Illinois to exclude these movements when ownership remains unchanged.
Miles Jennings says draft rules go beyond the law
In an October 30 post on X, a16z head of policy and general counsel Miles Jennings argued that the proposed rules went beyond what lawmakers had approved.
Jennings described the Digital Asset Tax Act as one of the country’s most anti-innovation bills. He said treating DEXs as tax-collecting brokers was not workable because autonomous software cannot collect taxes.
Jennings also compared taxing transfers between a user’s own wallets to taxing someone for moving money between checking and savings accounts. He said the Crypto Council for Innovation and Blockchain Association were separately challenging the law in court.
In an October 30 thread on X, DeFi Education Fund policy lead Gavin Zavatone outlined the joint submission’s objections to broker classification, private-key recordkeeping and the tax treatment of own-wallet and cross-chain transfers.
He shared the full submission and pointed readers to coverage in Politico’s Illinois Playbook.
Illinois has already paused the tax until July 2027
The submission comes as litigation over the Digital Asset Tax Act continues. The law introduced a 0.2% levy on covered digital asset activity.
On October 1, Illinois and industry groups agreed to a stipulated preliminary injunction pausing the tax’s effectiveness and enforcement until July 1, 2027. The pause did not resolve whether the tax is lawful.
On October 13, the Blockchain Association and Crypto Council for Innovation, together with the State of Illinois and other industry groups, filed a joint motion seeking an expedited schedule for the court cases.
The proposed timetable called for summary judgment briefing to finish by January 22, 2027, a hearing in February and a decision by March 1, 2027, subject to the court’s approval.
In a July 22 report, Crypto Industry sues Illinois to kill first-ever U.S. Digital Asset Tax. The industry groups’ challenge to the 0.2% levy, which they argued violated state and federal constitutional protections.
In an October 30 submission to the Illinois Department of Revenue, the three organizations commented on draft rules released on September 28 to implement the state’s Digital Asset Tax Act.
Illinois Department of Revenue yet to respond to comments
The submission was signed by a16z head of policy and general counsel Miles Jennings, DeFi Education Fund CEO and chief legal officer Amanda Tuminelli, and Uniswap Labs general counsel Robert Pratt.
The Illinois Department of Revenue has not announced whether it will revise the draft rules in response to the comments.
Also read: Digital Chamber Urges Crypto Exchange Oversight After Binance Hack