Andreessen Horowitz (a16z), Uniswap Labs, and the DeFi Education Fund submitted a letter to Illinois regulators on October 30 opposing the state's proposed implementation of its Digital Asset Tax Act, warning that the rules could effectively ban decentralized finance (DeFi) activity in the state.
The three organizations argue that the Illinois Department of Revenue incorrectly treats decentralized exchanges (DEXs) as conventional financial brokers. DEXs operate through autonomous software rather than intermediaries that control customer assets or execute transactions on their behalf. Unlike centralized exchanges, DEXs cannot identify customers, determine their locations, collect taxes, or file returns on individual transactions.
The groups contend that imposing broker obligations would make compliance practically impossible, creating a de facto ban on DeFi services in Illinois. Miles Jennings, head of policy at a16z, criticized the proposal as "politicized rulemaking" that would classify DEXs as tax-collecting brokers despite their inability to comply.
Security and Implementation Concerns
A particularly controversial provision would require brokers to maintain records containing cryptocurrency private keys, which control digital assets. The organizations warn that collecting and storing these credentials could expose customer funds to theft if records were compromised, conflicting with established cybersecurity practices.
The letter proposes replacing "private keys" with "public keys," which can track blockchain transactions without granting control over customer funds. The organizations also object to provisions that could tax withdrawals from centralized exchanges to personal wallets and transfers of assets between blockchains.
Broader Legal Challenge
Illinois enacted its Digital Asset Tax Act in June, imposing a 0.2% tax on the value of qualifying cryptocurrency transactions. The law has attracted legal challenges from the Blockchain Association and Crypto Council for Innovation, which argue it discriminates against digital assets and creates unreasonable compliance burdens.
Illinois officials postponed implementation from January 1 to July 1, 2027, allowing litigation to proceed. The three organizations are asking regulators to delay implementation until at least July 2027 and allow courts to review the tax's legality before proceeding with the proposed rules.
