The Organisation for Economic Co-operation and Development (OECD) has published its report on the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS) after undertaking public consultation.
The CARF has been developed as a global framework providing for the automatic exchange of tax information on transactions involving crypto assets. The new rules are very broad and will capture entities that are not currently subject to CRS.
The amendments to the CRS seek to bring alternative financial products within scope, while avoiding duplicative reporting with the CARF, and enhance the reporting outcomes under the existing CRS.
The new CARF rules have been designed around four building blocks:
The proposed definition of “Crypto-Assets” focuses on the use of cryptographically secured distributed ledger technology. The definition also includes a reference to “similar technology” to ensure it can include new technological developments that emerge in the future and that operate in a functionally similar manner to Crypto-Assets.
The definition of Crypto-Assets targets those assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries, including certain stablecoins, derivatives issued in the form of a Crypto-Asset and certain non-fungible tokens.
There are three categories of Crypto-Assets which are excluded from reporting requirements:
- Crypto-Assets which the “Reporting Crypto-Asset Service Provider” has adequately determined cannot be used for payment or investment purposes;
- “Central Bank Digital Currencies” (which will be included in the scope of the amended CRS); and
- “Specified Electronic Money Products” that represent a single “Fiat Currency” and are redeemable at any time in the same Fiat Currency at par value (these will also be included in the scope of the amended CRS). These could include some types of stablecoins.
In-scope Crypto-Assets are referred to as “Relevant Crypto-Assets”.
2. Reporting Crypto-Asset Service Providers
Entities or individuals that provide services effecting exchange transactions in Crypto-Assets as a business for or on behalf of customers would be considered “Reporting Crypto-Asset Service Providers” under the CARF.
Such entities would be subject to the CARF due diligence and reporting requirements for Relevant Crypto-Assets.
3. Relevant Transactions subject to reporting
The following three types of transactions are “Relevant Transactions” that are reportable under the CARF:
- exchanges between Relevant Crypto-Assets and Fiat Currencies;
- exchanges between one or more forms of Relevant Crypto-Assets; and
- Transfers of Relevant Crypto-Assets.
The information to be reported broadly includes:
- for Crypto-Asset to Fiat Currency transactions, the fiat amount paid or received (being the acquisition amount or gross proceeds);
- for Crypto-Asset to Crypto-Asset transactions, the value in Fiat Currency of the Crypto-Asset (at acquisition) and the gross proceeds (upon disposal); and
- for Transfers of Relevant Crypto-Assets, the number of units and the total value of Transfers of Relevant Crypto-Assets effected by a Reporting Crypto-Asset Service Provider, on behalf of a Crypto-Asset User, to wallets not associated with a virtual asset service provider or a financial institution.
The CARF may also apply where a Reporting Crypto-Asset Service Provider processes payments on behalf of a merchant accepting Relevant Crypto-Assets in payment for goods or services, focusing on high-value transactions. In such instances, the Reporting Crypto-Asset Service Provider may be required to treat the customer of the merchant as a Crypto-Asset User and report with respect to the value of the transaction on that basis.
4. Due diligence procedures
The CARF contains due diligence procedures to be followed by Reporting Crypto-Asset Service Providers in identifying their Crypto-Asset Users and collecting relevant information.
The due diligence procedures build on the self-certification process of the CRS, as well as existing Anti-Money Laundering and Know Your Customer (AML/KYC) obligations.
The CARF is intended to be a similar regime to FATCA/CRS. However, the United States has been actively involved in developing the CARF, and therefore there will not be a parallel FATCA regime.
The OECD will now work on a competent authority agreement and other materials to assist countries with domestic implementation.
While these initiatives will take some time to become Australian law, entities which provide crypto asset services or which are otherwise involved with crypto asset transactions (i.e. who are possible Reporting Crypto-Asset Service Providers) should consider how the CARF will apply to them and start building the required system and process changes.
Due to the broad reach of the CARF, entities which are not reporting Financial Institutions under FATCA/CRS may nevertheless be caught by the CARF. Reporting Financial Institutions may have additional obligations as a result of the CARF.
Amendments to the CRS
In addition to the CARF, the OECD’s report also details changes that will be made to the CRS.
These amendments include bringing new financial assets, products and intermediaries (which are potential alternatives to traditional financial products) within the scope of the CRS and contain rules which prevent overlap with the CARF.
Additional amendments will also be made to enhance the reporting outcomes under the CRS, including:
- more detailed reporting requirements;
- strengthened due diligence procedures;
- the introduction of a new optional Non-Reporting Financial Institution category for Investment Entities that are genuine non-profit organisations; and
- the creation of a new Excluded Account category for capital contribution accounts.
When will these developments apply in Australia?
The start date of the proposed regime is not currently known. The Australian Treasury will need to prepare draft legislation to implement the CARF and the CRS amendments. In addition, competent authority agreements need to be developed and signed by countries to give effect to the automatic exchange of information under the proposed new regime.
Entities which provide services in relation to crypto assets and reporting Financial Institutions under FATCA/CRS should:
- analyse their status, and the status of any Crypto-Assets, under the current FATCA/CRS regime, the CARF and the proposed amendments to the CRS;
- start tailoring their compliance processes in line with the current and expected future positions; and
- build best practice governance controls to assist with complying with the regime.