As appetite and interest for digital currency soars across the world, global investment for crypto has now reached $43 billion, up 25% from $34.30 billion last year.
However, in light of the rapid development and growth of the crypto-asset market, world leaders and governments have recognised the need to ensure global tax transparency in crypto.
In 2022, the Organisation for Economic Co-operation and Development (OECD) proposed the Crypto-Asset Reporting Framework (CARF) which aims to address the need for global tax transparency in the digital asset industry.
CARF will require the automatic exchange of information on crypto ownership from reporting Crypto Asset Service Providers (RCASPs), when previously exchanges have not been responsible for disclosing financial information to tax authorities.
In June, the OECD Ministerial Council Meeting took place in Paris, confirming the decision to adopt CARF as an international standard, supporting revisions to the Common Reporting Standard (CRS).
It’s not just CARF that is going to impact tax administrations and investors, either. The European Union is releasing a landmark Markets in Crypto Assets (MiCA) regulation. First of its kind, MiCA will see new stringent rules for service providers to protect consumer funds.
With these new changes ahead, what will the future of cryptocurrency look like? And how will these new tax processes make a difference to a user's privacy. But ultimately - what potential benefits could this change bring?
Recap polled crypto experts to find out how they think CARF and new tighter rules on crypto will impact investors across the world.
A renewed interest in self-custody
With the fourth-largest cryptocurrency exchange platform, FTX, going bankrupt, many users have already turned to self-custody as a way to secure investments.
Louise Lane, Associate Tax Director at Wright Vigar says, "We have already seen a shift of priority to self-custody, in light of the exchange collapses over the last year. As investors move their crypto activity away from the centralised exchanges, this is sure to lead to increased self-custody."
Self-custody enables the crypto user to have full control over their assets by storing them in digital wallets. The owners have complete responsibility without the need for a third party to assist.
Daniel Jenkins, founder at Boldr agrees:
I wouldn't be surprised if some folks start thinking about self-custody as a way to hold on to a bit of privacy. However, it is important for people to understand, if the rules say you have to report, you have to report, no matter where you're storing your crypto. Ignorance of the law is not to be a defence.
If tax reporting becomes easier for self-custody holders, experts suggest it could make self-custody a more attractive option for those who value control and security over convenience. Crypto-based privacy was brought into the spotlight recently when Ledger launched a seed phrase recovery feature, which led to speculation that it may leave their hardware wallets vulnerable, prompting the company to reassure users that they are in control.
Antoni Trenchev, Co-Founder and Managing Partner at Nexo shares, "More investors will like to seek out third-party custodians to simplify their tax reporting. Naturally, some people may still prefer self-custody for their crypto assets because it gives them more control over their assets and eliminates the risk of theft or loss through a third-party custodian.
"If CARF becomes widely adopted, it ought to also make tax reporting for self-custody holders more straightforward. If you hold your crypto assets on an exchange or other custodial crypto platform, it will typically provide you with a tax report at the end of the year that summarises your transactions and helps you calculate your tax liability. This can be convenient for people uncomfortable with calculating their gains and losses. In our experience, clients tend towards what is convenient, user-friendly and secure."
An increase in trust and security for crypto users
Knowing what the immediate impact on investors will be might be hard to gauge, but predictions from the poll suggest that it will have a positive effect on the industry.
Dion Seymour, who previously worked as a policy advisor at HMRC and is now Crypto and Digital Asset Technical Director at Andersen in the UK said:
CARF reporting requirements may have little impact on the use of crypto exchanges. Let us not forget that crypto-asset exchanges have made it easier to buy and sell crypto as they provide a ready market. Before exchanges, the process of buying and selling was much more fraught with risk.
"Perhaps the question is will CARF see an increasing number of users moving away from centralised exchanges to decentralised exchanges that might not be in the scope of CARF. However, even before the ratification of CARF, there is already an increasing number of individuals using decentralised exchanges."
Antoni believes investors will be better protected, “The establishment of harmonised rules and legal certainty for crypto-assets will also provide a much-needed sense of security for investors when dealing with crypto exchanges. This will, in turn, lead to wider adoption and increased trust – something the industry is prioritising and completely rebuilding now after multiple insolvencies in 2022. The CARF will have a positive impact on this industry-wide process.”
A two-tiered system?
CARF has been approved by the OECD, following a mandate from the G20 in April 2021 to develop the framework. While CARF is intended to ensure a higher standard of tax across the globe, there are concerns that it can impact people differently, if investors trade in countries outside of the G20. It’s worth noting that currently the OECD has not disclosed which countries will follow CARF.
Daniel Howitt, co-founder and CEO of Recap, said:
These compliance measures are the next iteration of CRS that already captures assets like stocks and shares. CARF is just an evolution of CRS, but for cryptoassets which shows how far the asset class has come.
’m concerned that CARF will create a system whereby expert privacy-focused investors can keep outside of the scope of CARF by choosing to trade on exchanges in jurisdictions or decentralised exchanges outside of the scope, but new or novice entrants to the field will face full tax implications.
CARF will boost the reputation of crypto long-term
Experts believe that CARF could be beneficial for the industry as a way to streamline and move away from damaging stereotypes.
Daniel said, “On one hand, CARF could make things more standardised and transparent, which could give the crypto world a bit more respectability. On the flip side, it might also ramp up the costs of compliance and could put a bit of a damper on the free-spirited, decentralised nature of blockchain tech. That being said, we think that a healthy balance between regulation and room for innovation is necessary for an industry where trust (and therefore adoption) has fallen behind development.”
Louise further agreed, explaining how following numerous crypto scandals last year, the “increased transparency of crypto activity and tax compliance across the sector is going to help improve public perception and is part and parcel of this new asset class maturing.”
Antoni also believes that CARF will be a giant leap forward for the industry, and governments will benefit from it being a brand new law.
“We learned via trial and error that applying only existing laws and regulations directly to crypto created some “grey areas” – an issue now being resolved.
“By far, the biggest change in the crypto tax process will likely end up resting with providers of financial services for this asset class, who will have to dedicate time and resources to ensure their platforms provide users with quick and easy access to their personal reports. This is a great opportunity to automate some of these processes – something the innovative world of blockchain finance is great at.
According to Dion, the cryptocurrency industry could defy stereotypes with CARF:
It is fair to say that the crypto-asset industry has a presentational issue. International reporting frameworks may help by reducing the opportunity for those that do not want to play by the rules.
Cameron Lee, Head of Strategy at Total Processing, supports this and says, “The key takeaway for anyone using cryptocurrency, whether for trading or purchasing goods, is that the markets will become more secure due to a prioritisation of conduct and marketing. This could complicate matters for any crypto-asset service providers, but any investors will now be protected in a more efficient manner, an essential for a market prone to tampering and hacking.”
Crypto is an ever-evolving industry, but understanding the impact of CARF before it’s rolled out can help exchanges and investors to get ahead.
