Tax Planning Strategies Increase Credit Risk in DeFi Protocols

An academic study has found that tax planning strategies in DeFi can increase credit risk. The analysis used data from Venus on BNB Smart Chain and examined how wallets possibly linked to the United States reacted to changes in tax reporting.

The researchers treated the U.S. infrastructure law of 2021 as an external shock to expectations. This rule expanded reporting requirements for digital asset brokers, leading operators to expect more transactions would be reported to the tax authority, specifically the IRS.

According to the study, after the law was passed, wallets associated with the United States were 24.5% less likely to trade assets compared to international users. Among borrowers with stablecoin debt, there was an additional 23% drop in trading activity.

The study also estimated that a 1% increase in tax-induced illiquidity was associated with an 11.2% rise in delinquent accounts and a 39.6% rise in the value of overdue loans.