The OECD presents new transparency framework for crypto-assets to G20

The rapid development and growth of the crypto-asset market in recent years has led the OECD to develop the Crypto-Asset Reporting Framework (CARF), which aims to ensure transparency in respect to crypto-asset transactions by reporting certain cross border investors. The CARF was presented to the G20 last week, where it was reviewed by the Finance Ministers and Central Bank Governors. This is broadly the same as the proposed revisions to the amended EU Directive on Administrative Coordination (also known as DAC8) and HMRC are also expected to introduce a similar regime. This is in addition to proposed updates to the Common Reporting Standard (CRS) that is already in effect.

The CRS, which was adopted in 2014, was originally designed to promote tax transparency with respect to financial accounts held abroad. In the seven years since the CRS was adopted it has been implemented by over 100 jurisdictions, however, financial markets have continued to evolve, giving rise to new investment practices such as the rapid development and growth of the crypto-asset market. This has created a need for a new framework and a set of amendments to the CRS.

In April 2021, the G20 mandated the OECD to create a framework that “provides for the reporting of tax information on transactions in crypto-assets in a standardised manner, with a view to automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis”.

In March 2022, the OECD released a public consultation document on its proposals, stating that the CARF will cover crypto-assets that can be held and transferred in a decentralised manner, without the need for financial intermediaries, as well as potential asset classes using similar technology that may emerge in the future. Under the CARF, entities and individuals that as a business provide services to exchange crypto-assets against other crypto-assets, or for Fiat currencies, will be required to apply certain due diligence procedures to identify their customers, and then report the aggregate values for such customers annually.

Following this consultation the CARF was approved by the OECD in August 2022 and has now been presented to the Finance Ministers and Central Bank Governors of the G20 as part of their meeting on the latest OECD Secretary-General’s Tax Report. The CARF contains “model rules that can be transposed into domestic legislation, and commentary to help administrators with implementation”.

The CARF is focussed on four areas:

• Scope of crypto-assets covered: The definition is deliberately broad and includes ‘cryptographically secured distributed ledger technology’ as well as similar technology which is designed to future proof the rules and ensure assets cannot be structured to circumvent the rules, which therefore includes stable coins, derivatives issued in the form of a crypto-asset and non-fungible tokens;
• Intermediaries and other service providers in scope: The term Reporting Crypto-Asset Service Provider will be introduced under the CARF. This will include intermediaries facilitating exchanges between crypto-assets as well as between crypto-assets and Fiat currencies. This is likely to include exchanges, operators of crypto ATMs, crypto brokers/dealers and wallet providers;
• Reporting requirements: Reporting will be required across four types of transaction: exchanges between crypto-assets and Fiat currencies, Exchanges between crypto-assets, certain retail payment transactions using crypto-assets and transfers of crypto-assets; and
• Due diligence procedures: Due diligence requirements when opening an account with a Crypto-Asset Service Provider have, wherever possible, been aligned with CRS (the reporting regime for conventional products, e.g. bank accounts). However, the proposed rules on the self-certification form appear much stronger than CRS, where if the form is not obtained on opening (and for pre-existing accounts, within 12 months of the start of regime) then the intermediary must stop facilitating further transactions for that account holder.

It is worth noting that Central Bank Digital Currencies and some Specified Electronic Money Products are within the CRS rather than CARF, which means some writers of crypto-assets may be within both regimes.The OECD also put forward a set of additional amendments to the CRS, with the intention to modernise its scope to “comprehensively cover digital financial products and to improve its operation, taking into account the experience gained by countries and business”. The most welcome is the fact that CRS reporting by ‘genuine’ (an OECD term) charities will no longer be required and will be achieved by introducing a new category of Non-Reporting Financial Institution. Other changes include:

• Levelling of the playing fields to bring Electronic Money Providers into scope, as well as digital currencies issued by central banks (see above);
• Expanding the definition of Excluded Account to some additional types of Escrow account (primarily for capital contribution accounts) subject to certain safeguards; and
• Inclusion of additional reporting points including:
  • Whether the account is a new or pre-existing account;
  • Whether a self-certification has been obtained;
  • What type of Financial Account it is, e.g. depository, investment etc.;
  • Whether it is a joint account and how many joint account holders there are; and
  • What role the Controlling Person has, e.g., Owner, trustee, etc.

The OECD will now work on the legal and operational instruments to facilitate the international exchange of information under the CARF. The timing for starting exchanges under the CARF is also still to be confirmed.

The key actions for those impacted will be to determine:

• Whether the entity is scope;
• Which regime is in point;
• Which products are in scope; and
• How CARF transactions on products are blocked if they have to be (i.e. no self-certification).
  

For further information please contact:

• Jeanette Cook