OECD amends the Common Reporting Standard and issues Crypto-Asset Reporting Framework

The new global transparency framework, CARF, was developed in response to a G20 request that the OECD establish a dedicated framework for the automatic exchange of information between countries on crypto-assets. Crypto-assets are now used for a wide range of investment and financial purposes and tax administrations have suffered from a lack of visibility under existing regimes as crypto-assets/platforms have not been brought into scope. The CARF seeks to address the emergence of crypto-assets, which can be transferred and stored in a decentralised manner without interacting with traditional financial intermediaries and without any central administrator having full visibility on either the location of the crypto-asset holdings or the transactions carried out.

Under the CARF, the term “crypto-asset” means a digital representation of value that relies on a cryptographically secure distributed ledger or a similar technology to validate and secure transactions. Examples include stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens. The amendments to the CRS are intended to modernise its scope to comprehensively cover digital financial products and improve its operation, taking into account the experience of countries and businesses.

The CARF consists of rules and commentary that can be transposed into domestic law to collect information from reporting crypto-asset service providers (RCASPs) and which have been designed around four key building blocks:

1. The scope of crypto-assets to be covered;

2. The entities and individuals subject to data collection and reporting requirements;

3. The transactions subject to reporting, as well as the information to be reported in respect of such transactions; and

4. The due diligence procedures to identify crypto-asset users and controlling persons, and to determine the relevant tax jurisdictions for reporting and exchange purposes.

Although the scope of the transactions subject to reporting is expected to evolve, three types of transaction are currently considered reportable under the CARF: exchanges between relevant crypto-assets and fiat currencies; exchanges between one or more forms of relevant crypto-assets; and transfers, including retail payment transactions, of relevant crypto-assets (subject to a de minimis limit). Transactions will be reported on an aggregate basis based on the type of relevant crypto-asset. The commentary to the CARF provides further detail in relation to valuation rules. Given the volatility of the value of the assets, it is important to have certainty around the approach to valuation.

The CARF also enhances recent developments in the global anti-money laundering (AML) standards of the Financial Action Task Force (FATF), which aim to prevent money laundering, terrorist financing and financing of proliferation of weapons of mass destruction. While reporting requirements apply to RCASPs—that is individuals or entities that, as a business, provide a service effectuating crypto-asset transactions—these intermediaries and other service providers are also expected to fall within the scope of obliged entities for FATF (i.e. virtual asset service providers or VASPs) as they are expected to have the best and most comprehensive access to reportable information.

CRS amendments

The amendments to the CRS expand the scope of the CRS to certain e-money products and Central Bank digital currencies. They also seek to enhance the reporting outcomes, including requiring the reporting of the role of each controlling person, whether a valid self-certification has been obtained or not and whether an account is pre-existing or new.

One of the deficiencies of the existing CRS identified by the OECD is that it does not comprehensively cover crypto-asset-related transactions. The suggested enhancements to the CRS seek to address this point, in addition to others that were unveiled as part of the first comprehensive review of the CRS since its adoption in 2014. The commentary has also been enriched to incorporate previously released FAQs and interpretative guidance, and to increase consistency in the application of the CRS.

At OECD level, work is ongoing to finalise an implementation package that will ensure the consistent domestic and international application of the CARF. This package is expected to include a framework of bilateral or multilateral competent authority agreements for the automatic exchange of information collected under the CARF, IT-solutions to support the exchange of information and a further elaboration of the effective implementation requirements. Work will also continue to design and deliver the appropriate mechanisms to automatically exchange information in keeping with the amended CRS. Finally, coordinated implementation timelines for both the CARF and amended CRS will be determined at a future date to avoid overlapping rules and the potential for duplicate reporting.

The three key actions to take now

The following key steps should be considered to assess the impact of the CARF and/or amendments to the CRS:

1. Conduct an analysis of any entities in your group that may have reporting requirements. Identify relevant reporting jurisdictions and monitor legislative developments as local CARF legislation is adopted.

2. Review user and investor onboarding processes so that the necessary know your customer (KYC) information is gathered and an appropriate governance and due diligence framework is in place.

3. Understand how transaction information is gathered and analyse whether systems are in place to collate, report and maintain the information.

For insightful analysis of the new OECD release, listen to the PwC global webcast, OECD Final Crypto-Assets Reporting Framework. In this podcast, PwC’s digital assets tax leaders are joined by OECD panellists to discuss the key changes in the final framework and outline the potential implications for intermediaries, tax authorities and other stakeholders.

We are here to help you

Although implementation timelines have yet to be established, impacted stakeholders such as crypto-asset service providers, financial institutions, administrators and transfer agents, for example, should begin to assess the impact this new transparency framework may have on their processes and systems, investor onboarding/account opening and so on. We are ready to help you as you navigate these new rules. Contact us today.