A convention visitor checking Bitcoin stocks on her phone by a Bitcoin symbol, the largest … (+)
The Organization for Economic Cooperation and Development recently introduced the Cryptoasset Reporting Framework, a regulatory approach some are calling CRS 2.0. This could signal the arrival of ChokePoint 3.0, as its expanded reporting requirements will expand government oversight over people’s crypto activity and holdings on a global scale. A similar trend is seen in the EU’s recently adopted anti-money laundering regulation, which also imposes strict data requirements that raise concerns over privacy and financial freedoms.
CARF requires crypto-asset reporting service providers to submit annual reports on clients’ crypto transactions to tax authorities in 48 participating countries, including the UK, US and much of the EU . While this aims to standardize cryptocurrency tax transparency globally, its broad scope has raised questions about privacy and the future of cryptocurrency tax compliance.
CARF data is aggregated to assess users’ crypto holdings, but it lacks the detail needed to calculate net gains or losses. Its real purpose is to identify risk profiles, not to report on the entirety of tax obligations. This leaves tax authorities with a simplified view of individuals’ crypto activity, which does not necessarily reflect their actual tax situation, potentially opening the way to unwarranted inquiries and investigations.
This global push for compliance targets gaps in crypto tax reporting. Tax authorities around the world, including HM Revenue & Customs in the UK, face challenges related to non-compliance with the rules. Recent estimates suggest that 55-95% of crypto asset holders in the UK are not complying with the rules and reporting their cryptocurrency taxes.
However, CARF seeks to fill this gap. By requiring exchanges, wallet providers, and payment processors to report details of user balances and transactions, CARF aims to standardize reporting of crypto holdings. For example, if a user trades through an exchange like Kraken, the platform will now share account details with tax authorities or any CARF participating country in which the user resides.
Under these proposals, exchanges and platforms will retain the physical location and home address of their users, obtained through KYC and AML checks, as well as details of their crypto assets. There are concerns about the collection and sharing of this data, especially in light of the frequent data breaches reported each year.
Crypto asset holders whose physical locations and crypto holdings are obtained or disclosed by malicious actors are at particularly high risk of personal physical attacks, and collecting this information – even for legitimate purposes – increases the likelihood of such damage.
Governments around the world have adopted CARF as a tool to improve compliance, but critics warn it could introduce risks and complexities for crypto users. Laura Knight of Knightbridge Tax points out a troubling paradox: “CARF will collect data to assess taxpayers’ risk of non-compliance, but it only provides half the picture. This could lead to inaccurate risk profiles. tax complexities generally reserved for high finance, compounded by frequent, multi-year, multi-blockchain transactions. Despite this, support for tax compliance is minimal, with governments prioritizing enforcement over solving the practical challenges faced by retail users, accountants and advisers.
PARIS, FRANCE – NOVEMBER 30: In this photo illustration, a visual representation of digital … (+)
The decentralized nature of Bitcoin poses challenges to traditional financial tracking and taxation systems. Its transactions span multiple layers, creating many data points requiring extensive processing.
Some analysts say the complexity of tracking many crypto transactions could prompt governments to explore other reporting approaches, such as wealth-based taxation. Under CARF, a wealth tax on bitcoin could be implemented using annual holdings data to assess the net worth of crypto wallets, taxing individuals based on unrealized gains.
Financial institutions reporting user data to tax authorities is not a new practice. Under the Common Reporting Standard, banks and brokers have long reported account details, facilitating international tax compliance for traditional assets. Crypto assets deviate from this model: they circulate across multiple platforms and networks, with transactions often involving multiple layers of exchanges, side chains, and lending protocols.
The extensive data captured by CARF may even exceed what tax authorities can effectively process, especially given the lack of established standards for the tax treatment of collateralized loans and complex cryptographic interactions.
According to Dan Howitt, CEO and co-founder of Recap, “the new CARF Crypto-Asset Service Provider Standard, or RCASP, imposes significant obligations on OECD service providers, including exchanges, providers wallets and smart contract developers. financial, crypto transactions are permissionless and final, leaving users vulnerable if their holdings data is exposed. Such leaks could lead to extortion or theft without recourse, as crypto transactions cannot be reversed. Although established exchanges have advanced security, RCASP’s scope includes services that may lack robust protections, raising pressing concerns about the privacy and secure processing of asset data before transmission to the tax authorities.
This data collection may impact the decentralized philosophy of crypto. Some industry analysts expect that if CARF gains momentum, Bitcoin users concerned about government overreach could migrate to non-KYC and decentralized exchanges or exchange jurisdictions outside of the country. OECD, which may not be subject to CARF reporting requirements.
Countries outside the OECD’s CARF agreement, such as the United Arab Emirates, could attract those seeking stronger privacy protections for their financial transactions. These jurisdictions are not required to report crypto transaction data to the OECD Tax Network. This development could create a privacy advantage for non-signatory countries, attracting users seeking financial sovereignty.
POLAND – 2023/03/21: In this photo illustration a Bitcoin logo is displayed on a smartphone with … (+)
Some analysts also associate CARF’s strict reporting mandates with the work of companies like Chainalysis, which specialize in blockchain tracking for law enforcement and government agencies. Chainalysis data has been carefully reviewed for accuracy; Critics argue that without independent audits, the analyzes can sometimes lead to misinterpretations or unfair actions against individuals or companies.
Given the large volumes of data and compliance obligations, the risk of misinterpretation is significant. CARF’s reliance on service providers to accurately report account details raises questions about data integrity and accuracy. Without rigorous monitoring or independent auditing, there is a risk of inaccurate assessments, which could have serious consequences for those wrongly labeled non-compliant.
For now, CARF remains a high-stakes experiment regulating the crypto asset sector. The promise is to improve tax compliance in global jurisdictions, bringing cryptocurrency closer to traditional financial assets under CRS. The fundamental nature of crypto, with its pseudonymous transactions and decentralized platforms, poses challenges to the prospect of seamless regulatory integration.
The rollout of CARF marks an important moment for the crypto industry. The success of this framework will depend on the need to balance governments’ efforts toward financial transparency with individuals’ desire for privacy. Whether this will achieve this balance or intensify existing tensions remains to be seen.
