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a16z, Uniswap Labs and the DeFi Education Fund told Illinois on Friday, October 30, 2026, that its draft rules for a 0.2% crypto transaction tax would effectively shut decentralized exchanges out of the state, because autonomous software cannot identify users, locate them or collect tax.
Their joint letter to the Illinois Department of Revenue also asks regulators to drop a proposal that brokers record users’ private keys, warning the data would become a theft target. The tax is due to take effect on July 1, 2027, and is already being challenged in court by the Blockchain Association and Crypto Council for Innovation.
The organizations argue that the proposed regulatory framework fails to distinguish between centralized cryptocurrency exchanges and decentralized protocols operating through automated software.
Under the draft regulations, certain decentralized exchanges could be classified as digital asset brokers and required to identify customers, determine their locations, collect transaction taxes, maintain records, and submit returns to state authorities.
However, decentralized exchanges such as Uniswap generally allow users to trade directly through smart contracts without transferring custody of their cryptocurrency to a conventional intermediary.
The groups maintain that these protocols typically lack the operational control and customer information necessary to meet the proposed obligations.
Consequently, they warn that enforcing the requirements could effectively exclude decentralized trading services from Illinois rather than simply requiring them to pay taxes.
Miles Jennings, head of policy at a16z, criticized the proposal in an October 30 post on X.
“The law is already one of the most anti-innovation bills in the country—a tax on transactions just because they’re digital,” — Miles Jennings, Head of Policy at a16z.
Jennings also accused Illinois regulators of engaging in politicized rulemaking by extending tax collection responsibilities to protocols that cannot independently fulfill them.
The debate highlights the technical difficulties of applying traditional financial regulations to decentralized infrastructure.
While conventional exchanges can collect customer information and process transactions through centralized systems, decentralized protocols generally rely on blockchain-based software that executes transactions according to predefined instructions.
Jennings emphasized the distinction, writing:
“Autonomous software is not a person that can collect a tax,” — Miles Jennings, Head of Policy at a16z.
The groups argue that crypto tax rules should explicitly distinguish developers and interfaces from businesses that directly control customer assets.
They are requesting exemptions for decentralized protocols and their interfaces, along with clarification that receiving automated protocol fees does not automatically qualify a platform as a taxable broker.
Beyond broker classification, the organizations have raised objections to proposed recordkeeping requirements involving cryptocurrency private keys.
Private keys are sensitive cryptographic credentials used to authorize blockchain transactions and control access to digital assets.
The joint submission warns that requiring brokers to collect and store such credentials could expose users to theft if company databases or internal systems were compromised.
Unlike ordinary transaction records, private keys can provide direct access to cryptocurrency holdings.
The organizations argue that storing them would create unnecessary security vulnerabilities, particularly for platforms designed to allow users to maintain personal custody of their assets.
Their concerns also reflect a broader disagreement over the role of intermediaries in decentralized finance.
While centralized custodians may manage credentials on behalf of customers, noncustodial protocols typically operate without requiring users to surrender control of their wallets.
The proposed crypto tax rules, according to the signatories, could therefore force some businesses to choose between maintaining established security practices and satisfying state reporting obligations.
To address the issue, the organizations recommend replacing references to private keys with public keys.
Public keys and associated wallet addresses can help identify blockchain transactions without granting access to users’ cryptocurrency.
The proposed change would allow relevant transaction information to be recorded while reducing the potential security consequences of storing sensitive credentials.
The three organizations are also urging regulators to ensure that compliance requirements reflect how decentralized systems actually function.
Another major concern involves the potential taxation of cryptocurrency transfers that do not represent sales or changes in ownership.
The organizations argue that the proposed framework could impose charges when users withdraw assets from centralized exchanges into personal wallets.
Similar concerns apply to bridging, a process that allows cryptocurrency assets or their representations to move between different blockchain networks.
According to the joint submission, these activities may simply involve transferring assets between locations while the same individual retains ownership.
The groups contend that treating such transfers as taxable transactions would impose additional costs on cryptocurrency users without necessarily reflecting any investment profit.
Jennings compared the proposal to taxing individuals for transferring funds between their own bank accounts.
The objection is particularly relevant because Illinois’ digital asset tax differs from conventional capital gains taxation.
Under the Digital Asset Tax Act, qualifying transactions are subject to a 0.2% levy based on the value of the digital assets involved rather than the profits generated.
As a result, the tax could apply even when a covered transaction does not produce a financial gain.
For example, a qualifying transaction involving $10,000 in cryptocurrency would attract a $20 levy, regardless of whether the user made a profit.
The organizations argue that such an approach requires clear limitations to prevent ordinary asset movements from attracting unintended charges.
They have therefore requested that the crypto tax rules exclude transfers between wallets belonging to the same person and clarify the treatment of cross-chain transactions.
They also want regulators to distinguish between fees collected by businesses acting as intermediaries and automated charges associated with decentralized protocols.
The groups maintain that these changes would reduce uncertainty and prevent the tax framework from placing disproportionate compliance burdens on decentralized finance services.
Illinois enacted its Digital Asset Tax Act in June 2026, introducing a 0.2% tax on qualifying digital asset transactions and related business activity.
The legislation has faced opposition from cryptocurrency industry organizations, including the Blockchain Association and Crypto Council for Innovation.
Both groups have challenged the law in court, raising concerns over its constitutionality, potential overlapping taxation, and the obligations imposed on businesses operating in the digital asset sector.
The legal challenges also question whether the legislation unfairly targets cryptocurrency transactions compared with other forms of financial activity.
Illinois subsequently agreed to delay implementation from January 1 to July 1, 2027, allowing additional time for the legal proceedings.
The October 30 submission from a16z, Uniswap Labs, and the DeFi Education Fund represents a separate effort to influence how the Department of Revenue interprets and administers the legislation.
Rather than directly seeking to overturn the law through the courts, the organizations are asking regulators to revise the proposed implementation framework.
They want decentralized protocols excluded from inappropriate broker classifications, private-key recordkeeping provisions amended, and transactions involving personal wallets treated more precisely.
Jennings also expressed support for the lawsuits challenging the underlying tax legislation.
“Consumers and entrepreneurs in Illinois deserve better,” — Miles Jennings, Head of Policy at a16z.
The organizations have urged regulators to await judicial review before proceeding with the disputed provisions.
The Illinois Department of Revenue released its draft regulations for public comment on September 28, with feedback accepted through October 30.
The proposals had not yet completed the formal rulemaking process, leaving room for revisions following industry submissions and further legal developments.
For decentralized finance operators, the outcome could determine whether certain blockchain services can comply with Illinois’ taxation framework without substantially changing their underlying operating models.
The dispute also illustrates the wider regulatory challenge of applying traditional financial obligations to software-based systems that do not function like conventional financial institutions.
Although the legislation seeks to establish a tax framework for digital asset activity, its final implementation remains contested.
With the revised implementation date approaching, the debate over Illinois crypto tax rules is expected to remain focused on broker definitions, cybersecurity requirements, user-controlled transactions, and the legal limits of state taxation authority.
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