What is the Crypto-Asset Reporting Framework (CARF) & What Does it Mean for the Future of Crypto?

This month, the Organization for Economic Co-operation and Development (OECD) published its new tax reporting framework, dubbed the Crypto-Asset Reporting Framework (CARF).

Approved in August, the CARF ensures “the collection and automatic exchange of information on transactions for relevant crypto,” stated the report. 

The Motive

As a part of the latest OECD Secretary-General's Tax Report, the CARF was to be discussed during the G20 finance ministers and central bank governors' meeting.  After all, CARF was developed together with G20 countries due to the rapid growth of the crypto industry, which touched a whopping $3 trillion market capitalization in 2021. 

Other than growing market cap, the official press release notes “a rapid adoption of the use of crypto-assets for a wide range of investment and financial uses” as a motive behind drafting the CARF.

Surprisingly, these developments are also in line with the recent development made by the Financial Action Task Force (FATF) that sets the global anti-money laundering and combatting the financing of terrorism (AML/CFT) standards.

As outlined by an OECD's comment to the CARF, one noteworthy technology viz encryption, has enabled an entirely new type of asset, namely cryptocurrencies, that can be transferred and held without the involvement of traditional middlemen; and without any central administrator having complete visibility into where both transactions are executed, and locations of cryptocurrencies held. 

Traditional financial intermediaries like banks are typically information providers under third-party tax reporting regimes. However, these intermediaries are removed by crypto exchanges and wallet providers, which “currently remain unregulated,” it noted.

Hence, OECD has also published a global tax transparency framework in the draft, allowing the automatic sharing of tax information about transactions on crypto-assets in standardized ways. 

Defining Crypto Assets

Naturally, the more obvious question is which types of crypto assets and transactions are covered, who would be required to collect and report the information, and how would a new reporting framework from the OECD apply?

For this, CARF covers a broad set of digital assets, including crypto-assets, stablecoins, tokenized financial instruments, and some NFTs. 

The report, released on Oct. 10, defines crypto as those “assets that can be held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens.”

For those wondering what about non-fungible tokens, the term “Crypto-Asset” also includes NFTs representing rights to collectibles, works of art, games, physical property, or financial documents that can be traded or transferred to other individuals/entities digitally, the report said.

The scope of the definition will also include intermediaries and other service providers that facilitate crypto asset exchanges.  This way, OECD's proposal would place the intermediaries providing services to trade transactions for relevant cryptocurrencies entirely accountable for reporting under CARF.  Intermediaries facilitating crypto-asset exchange transactions, either as a commercial service or on behalf of clients, would then be liable for reporting under the proposed CARF. 

Aiming for Tax Transparency

Surprisingly, the reporting required under the proposed CARF appears to exceed those under the CRS that applies to traditional financial institutions. Implementing necessary procedures to allow reporting of these transactions is likely resource-intensive for many cryptocurrency service providers.   

As per the report, cryptocurrencies and associated transactions are not fully covered under the Common Reporting Standard (CRS), increasing their potential to be used for tax avoidance and eroding progress made on tax transparency by adopting the CRS. This is why the OECD has created this new crypto framework.

Besides that, the report also notes that the current scope of assets and that of obligated entities, covered by the current standards of CRS, “do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in or hold relevant crypto assets.”

But this new crypto asset reporting framework and the amendments to CRS “…will ensure that the tax transparency architecture remains up-to-date and effective,” said OECD Secretary-General Mathias Cormann.

In addition to cryptocurrencies, some emerging payment products (i.e., digital currency products, including both cryptocurrencies-based and other electronic cash products and central bank digital currencies) also offer electronic storage and payment functions that are analogous to cash held in traditional bank accounts; and are often offered by actors not covered by the CRS.

Amendments were made to include CBDC in the CRS. Now, indirect investments in crypto via investment vehicles and derivatives are also covered by the CRS.

Much like OECD's CRS framework, CARF requires a due diligence process under which both the individual and entity customers and controlling persons will have to identify themselves.

Incorporating into National Laws

In terms of reporting, the CARF set rules that crypto companies first must report in the country where they conduct business.

Basically, the reported cryptocurrency service providers would be liable to the regulations in the reported jurisdictions in which they are tax residents, organized according to domestic laws, and are subject to tax reporting requirements, in which they are managed and are operating out of an ordinary place of business, and in which they are conducting related transactions through subsidiaries established in the jurisdiction adopting the rules.   

Here, they have to report on crypto transfers, including retail payment transactions, exchanges between relevant crypto assets and fiat currencies, and exchanges between one or more types of crypto and transfers of crypto.

For countries that actually adopt the OECD's new reporting framework, CARF can be incorporated into national laws so participating countries will have the power to collect information from residing intermediaries in cryptocurrencies. 

With regard to decentralized exchanges or decentralized financial protocols, the report indicates that entities that influence or control, but do not necessarily own, decentralized exchanges or decentralized financial protocols will also be covered by the definition of a crypto-asset service provider and will be required to collect and report required information.   

For reporting retail payment transactions, the OECD would require crypto-asset service providers who handle payments on behalf of a merchant accepting crypto-assets as payments for goods or services.

Working on Wider Implementation

Over the coming months, the OECD will advance work on legal and operational instruments that facilitate international sharing of the information collected on this basis by CARF. The agency will also ensure that it is effectively and widely implemented, including on timing for starting to exchange information under CARF. 

The OECD also noted it would continue developing guidelines that support consistent application of CARF, including with respect to definitions of eligible crypto assets and specific criteria to appropriately define whether a crypto asset may or may not be used for payments or investment purposes, and with a focus on developing decentralized finance. 

With the crypto regulatory landscape heating, we could see certain products and services offered by a registered entity that is exempt from regulatory supervision or are only subject to specific regulatory regimes, such as exchanges and wallets, subject to new and additional forms of regulatory oversight.    

It is unclear how the new OECD reporting framework will affect the United States since it has existing information reporting requirements, which were clarified further regarding digital assets under the infrastructure investment and jobs act (IIJA). As such, the Treasury is expected to publish detailed regulations regarding this reporting soon.