According to a announcement made on Thursday, the U.K. tax authority wants to hear from the public about a proposed change in tax treatment for decentralized financing (DeFi), lending and staking.

HM Revenue and Customs (HMRC’s) proposal is a response to a call for evidence in 2022. The authority cited recent crypto-market failures, such as the collapse of FTX, as a reason for regulators’ increased interest in the sector.

HMRC stated that regulators around the world are paying attention to DeFi. They have also “highlighted specific risk including cyber risks and technical risks as well as an increased dependence between traditional and decentralized systems, as well as a lack backstops during periods of market tension,” HMRC added.

DeFi transactions are treated as sales or gifts by lenders and liquidity providers, even if the ownership of an asset does not change.

According to the document, “This can result in tax outcomes that don’t reflect the economic substance of the transaction and a tax obligation from a deal where no gain was realized which could be used to pay the liability.” The need to record and determine the market value at every step of the transaction can also lead to an disproportionate administrative burden.

The proposed changes will ensure that DeFi transactions won’t be treated as disposals in tax terms. This would only happen when crypto assets were “economically disposed in a non DeFi transaction,” according to the consultation.

To avoid administrative burdens, the new framework may also treat “all DeFi return as revenue in nature” and be subject to “a new miscellaneous fee”.

The document stated that the proposed framework was not only intended to be used for DeFi lending and crypto staking but also for Centralized Finance (CeFi), in which crypto lending or staking are conducted by intermediaries.

HMRC previously extended tax rules for crypto including a tax deduction for Foreign Investors who purchase crypto through local agents.

The consultation will last eight weeks, ending on 22 June.

Read more: UK extends crypto tax break for investment managers in Financial Reforms

UPDATE (April 27, 13:55): Adds details starting in fourth paragraph.

Sheldon Reback is the editor.