CARF: The New Global Cryptoasset Reporting Framework

The Organization for Economic Co-operation and Development recently introduced the Cryptoasset Reporting Framework, a regulatory approach some call CRS 2.0.

The Organization for Economic Co-operation and Development (OECD) recently introduced the Cryptoasset Reporting Framework (CARF), a regulatory approach that some are likening to CRS 2.0. This framework could significantly expand government oversight into people’s cryptocurrency (CRFA) activity and holdings globally.

A similar trend is observed in the European Union's (EU) recently adopted Anti-Money Laundering (AML) Regulation, which also imposes sweeping data requirements that raise concerns over privacy and financial freedoms.

CARF requires Reporting Crypto-Asset Service Providers (RCASPs) to submit annual reports on customers’ crypto transactions to tax authorities in 48 participating countries, including the United Kingdom (UK), United States (US), and much of the EU. While this aims to standardize tax transparency for crypto globally, its wide scope has raised questions about privacy and the future of crypto tax compliance.

CARF's 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 account for the complete tax obligations. This leaves tax authorities with a simplified view of individuals' crypto activity, which may not necessarily reflect their actual tax position, potentially paving the way for unwarranted enquiries and investigations.

This global push for compliance targets gaps in crypto tax reporting. Tax authorities worldwide, including HM Revenue & Customs in the UK, face challenges related to non-compliance. Recent estimates suggest that 55-95% of crypto-asset holders in the UK are not compliant and do not file their crypto taxes.

CARF, however, seeks to address this gap. By mandating that exchanges, wallet providers, and payment processors report details on user balances and transactions, CARF aims to standardize reporting for crypto holdings. For example, if a user transacts through an exchange like Kraken, the platform will now share account details with the tax authorities or any CARF-participating country where the user holds residency.

Under the proposals, exchanges and platforms will hold their users’ physical location and home addresses, obtained through Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, along with details of their crypto asset holdings. The collection and sharing of this data raise concerns, particularly in light of frequent data breaches reported each year.

Crypto asset holders whose physical locations and crypto holdings are obtained by or disclosed to bad actors are at a particularly high risk of personal physical attacks, and the gathering of this information - even for legitimate purposes - increases the likelihood of this harm.

Governments worldwide have embraced CARF as a tool to enhance compliance, but critics warn it may 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 provides only half the picture. This could lead to inaccurate risk profiles. Basic-rate taxpayers are burdened with navigating tax complexities typically 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 addressing practical challenges faced by retail users, accountants, and advisers."

Bitcoin’s decentralized nature poses challenges to traditional financial tracking and taxation schemes. Its transactions span multiple layers, creating numerous data points requiring extensive processing.

Some analysts argue that the complexity of tracking numerous crypto transactions might prompt governments to explore alternative reporting approaches, such as wealth-based taxation. Under CARF, a wealth tax on bitcoin could be implemented using annual holdings data to assess crypto portfolios’ net value, taxing individuals based on unrealized gains.

Financial institutions reporting user data to tax authorities is not a new practice. Under the Common Reporting Standard (CRS), banks and brokers have long reported account details, facilitating international tax compliance for traditional assets. Crypto assets diverge from this model: they circulate through multiple platforms and networks, with transactions often involving several layers of exchanges, side chains, and lending protocols.

The extensive data CARF captures might exceed even what tax authorities can efficiently process, particularly given the lack of established standards for the tax treatment of collateralized loans and complex crypto interactions.

According to Dan Howitt, CEO and Co-Founder of Recap, "CARF's new Reporting Crypto-Asset Service Providers, or RCASPs, standard imposes significant obligations on service providers across the OECD, including exchanges, wallet providers, and smart contract developers. Unlike traditional finance, crypto transactions are permissionless and final, leaving users vulnerable if holdings data is exposed. Such leaks could lead to extortion or theft with no recourse, as crypto transactions cannot be reversed. While established exchanges have advanced security, RCASP's scope includes services that may lack robust protections, raising urgent concerns about privacy and the secure handling of asset data before transmission to tax authorities."

This data collection may impact crypto’s decentralized ethos. Some industry analysts expect that if CARF gains momentum, bitcoin users concerned about government overreach might migrate to non-KYC and decentralized