On Friday, a coalition of crypto‑industry groups led by Andreessen Horowitz (a16z) sent a letter to Illinois regulators demanding changes to the state’s proposed digital‑asset tax rules. The letter argues that the current draft would effectively outlaw decentralized finance (DeFi) in Illinois by treating decentralized exchanges (DEXs) as tax‑collecting brokers, a status that the software‑based platforms cannot meet. The groups also warn that the rules would force brokers to store users’ private keys, exposing funds to theft and violating standard cybersecurity practices.

DEXs Cannot Meet Broker Requirements

According to a16z’s Miles Jennings, DEXs such as Uniswap run on autonomous code and do not control customers’ assets or identify users. Because they cannot determine a user’s location, file tax returns or enforce tax collection, the proposed obligations would be impossible to satisfy. Jennings called the law “anti‑innovation” and said the state’s rulemaking was “politicized.” The letter calls for a clear exclusion of decentralized protocols from the definition of digital‑asset brokers.

Storing Private Keys Poses Security Threats

The draft would require brokers to keep records of cryptocurrency private keys, the credentials that authorize transactions. The signatories argue that storing such sensitive data would create a single point of failure and could expose customers’ funds if the records were compromised. They suggest replacing “private keys” with “public keys,” which can track blockchain activity without granting control over assets. The groups also object to potential taxes on withdrawals from centralized exchanges to personal wallets and on cross‑chain transfers, likening it to taxing a person for moving money between their own bank accounts.

Illinois enacted its Digital Asset Tax Act in June, imposing a 0.2% tax on the value of qualifying cryptocurrency transactions. The law has already faced lawsuits from the Blockchain Association and the Crypto Council for Innovation, which argue it discriminates against digital‑asset activity and imposes unreasonable compliance burdens. In response, Illinois officials postponed the tax’s implementation from January 1 to July 1, 2027, allowing the litigation to proceed. The industry groups support the lawsuits and predict that the challengers will succeed in overturning the legislation.

What to Watch Next

The next major development will be the court’s decision on the Digital Asset Tax Act’s legality. Regulators will also need to decide whether to adopt the industry’s request for a delay and to clarify the definition of a broker for DEXs. Market participants should keep an eye on any changes to the tax rules that could affect DeFi operations and the broader regulatory environment for digital assets in the United States.