Crypto-Asset Reporting Framework: Answers to fundamental questions

The Organisation for Economic Co-operation and Development has published final guidance for the Crypto-Asset Reporting Framework, also known as CARF, along with proposed amendments to the Common Reporting Standard, or CRS, which are designed to facilitate the automatic exchange of information on crypto transactions between participating jurisdictions. Crypto-asset exchanges, brokers and anyone who engages in crypto transactions will face increased reporting requirements and a greater compliance burden upon adoption of this global transparency framework for crypto-asset transactions.

Here are answers to some fundamental questions that could enhance your understanding of CARF and what it means for your business.

What is CARF?

The CARF builds on the global Financial Action Task Force (FATF) rules developed to prevent money laundering and terrorist financing activities. The rules apply to individuals and entities in the business of effectuating crypto-asset transactions; specifically, those regarded as being in the best position to determine the value of these transactions.

The OECD created CARF as a stand-alone regime that is a global framework which requires the annual automatic exchange of tax information on transactions involving digital assets that is similar in nature to the information exchanged under CRS. As a result, taxpayers resident in jurisdictions that have adopted CRS and that participate in crypto transactions or custody crypto-asset-denominated transactions should review their product masters and evaluate gaps in their systems, internal controls and procedures for complying with CARF and CRS’ due diligence and reporting requirements for digital assets.

What is the purpose of CARF?

The primary purpose of CARF is to allow for global transparency by implementing rules and commentary that can be transposed into domestic laws allowing for the collection of information from crypto-asset service providers that have a nexus to the jurisdiction implementing the CARF. Like the CRS, CARF is a standalone framework with model rules that can be enacted as domestic legislation and related commentary to support legislative implementation, but CARF is focused on crypto-assets.

How will CARF be implemented?

The final guidance clarifies that CARF will be implemented similarly to CRS. It will require bilateral or multilateral agreements for the automatic exchange of information among the various participating jurisdictions. Crypto-asset service providers will be required to use a dedicated XML schema to support the exchange of information to participating jurisdictions.

What is a crypto-asset?

For purposes of CARF, the proposed definition of crypto-assets includes cryptographically secured distributed ledger technology and similar technology. Some of the assets it targets are stablecoins, derivatives issued in the form of crypto-assets, and certain non-fungible tokens, as these assets can be held and transferred in a decentralized manner without the use of traditional financial intermediaries. However, certain crypto-assets are excluded from this definition due to their limited tax compliance risk. Those assets include:

1. Closed-loop crypto-assets that cannot be used for payment or investment purposes
2. Central bank digital currencies that function similarly to money held in a traditional bank account
3. Specified electronic money products that represent a single fiat currency and are redeemable in the same fiat currency at par value

Note that the latter two of those exceptions, although excludable from CARF reporting, will be reportable under CRS to the extent that certain assets are held in a financial account.

Who is considered a reporting crypto-asset service provider?

Under the rules, entities or individuals whose primary business activities include providing services effectuating exchange transactions in relevant crypto-assets for or on behalf of customers are considered reporting crypto-asset service providers, or RCASPs. CARF also treats brokers and dealers of relevant crypto-assets and operators of crypto-asset ATMs as RCASPs.

How do you know if reporting nexus exists requiring a provider to report under the CARF?

RCASPs will be subject to the CARF rules if they are:

1. A tax resident
2. Incorporated or organized under the law of a participating jurisdiction
3. Managed from, have a regular place of business in, or effectuate relevant transactions through a branch based in a participating jurisdiction

What transactions are required to be reported?

There are three types of transactions subject to reporting under CARF:

1. Exchanges between relevant crypto-assets and fiat currencies
2. Exchanges between one or more forms of relevant crypto-assets
3. Transfers (including reportable retail payment transactions) of relevant crypto-assets

These transactions must be reported on an aggregate basis by type of relevant crypto-assets and differentiating outward and inward transactions. The value and the proceeds of an asset must be reported in fiat currency.

Reporting service providers will be required to report the number of units and the total value of transfers of crypto-assets that they effectuate. In addition, reporting will be required when a RCASP processes payments of high-value transactions on behalf of a merchant accepting relevant crypto-assets as payment for goods and services.

Will due diligence requirements differ from the CRS?

No. Due diligence requirements for CARF will essentially build on the self-certification forms currently used under the CRS, in addition to existing anti-money laundering and know-your-customer obligations.

Similar to the CRS, RCASPs will be required to follow due diligence procedures for both individual and entity crypto-asset users, identify reportable users and, where applicable, identify reportable controlling persons.

To limit the need for RCASPs to collect duplicative documentation under CARF and CRS, the OECD amended the CRS reporting and due diligence procedures to streamline the due diligence procedures for both CARF and CRS.

How has CRS been amended?

As part of its first comprehensive review of the CRS, the OECD is proposing to change the existing CRS framework to include certain digital financial products that facilitate the transfer or sale of crypto-assets.

The OECD will do this by broadening the definitions of “financial institution,” “financial account” and “financial asset” to cover what the proposed rule changes define as “specified electronic money products,” “central bank digital currencies” and “relevant crypto-assets.” These new terms are consistent with the terms used under CARF as described above and aim to capture a broader variety of digital assets than previously covered under CRS.

The OECD’s proposed amendments to the existing CRS framework include the following changes:

• General reporting requirements: CRS will now include new reportable data elements including:
  • Controlling person roles
  • Preexisting or new account indicators
  • An indicator that shows whether a valid self-certification has been obtained
  • Data on whether an account is jointly held
  • An indicator showing the type of financial account
• Due diligence for preexisting and new accounts: Financial institutions can now rely on AML/KYC procedures for preexisting and new entity accounts when determining a controlling person if the procedures are substantially similar to the 2012 FATF recommendations.
• Due-diligence requirements: A reporting financial institution must now apply the due diligence procedures for preexisting accounts when the exceptional circumstances arise that it cannot obtain a self-certification for a new account in time to meet its due-diligence and reporting obligations for the reporting period that the account was opened.
• Definitions
  • Excluded accounts: Certain capital contribution accounts are now included in the definition of excluded accounts.
  • Depository institution: The definition of depository institution under CRS now includes entities that hold specified electronic money products or central bank digital currencies for the benefit of customers. The definition also includes entities that are licensed to engage in certain banking activities but end up not engaging in banking or similar activities.
  • Investment entity: The amended definition clarifies that investors of funds can be considered “customers,” and that the funds themselves can be considered to conduct activities “as a business.” This definition aligns with the FATF recommendations.
  • Dual-resident account holders: Under the amended definition, reporting financial institutions must now report account holders with multiple tax residencies as tax residents in all of the jurisdictions for which they are residents, regardless of tiebreaker rules in applicable tax conventions.
  • Miscellaneous: CRS will now allow financial institutions to meet due-diligence requirements using government verification services (GVS).
• Review procedures for controlling persons: CRS now allows the FATF exclusion from controlling person disclosure where the passive nonfinancial entity’s controlling person is already subject to disclosure requirements that will ensure adequate transparency of beneficial ownership information.
• Administrative relief and transitional measures: In addition to the above provisions, the OECD amended the regulations to provide administrative or transitional relief including:
  • For assets that may be subject to both reporting as crypto-assets under CARF and financial assets under CRS, the OECD will allow reporting solely under CARF where the disposal of such assets may result in duplicative reporting.
  • A reportable account that is maintained by a reporting financial institution as of the effective date of the revised CRS and for reporting periods ending by the second calendar year following such date, information with respect to the role(s) of a controlling person or equity interest holder of the entity is only required to be reported if such information is available in the electronically searchable data maintained by the reporting financial institution.

The changes in key provisions of the amended CRS, as well as the finalized CARF, highlight the need for further clarification as entities scramble to understand the rules in anticipation of implementation.