The global rise of digital assets has prompted a wave of regulatory developments aimed at ensuring transparency, security, and compliance in the crypto space.
One of the most significant advancements in this realm is the introduction of the Crypto-Asset Reporting Framework (CARF), designed by the Organisation for Economic Co-operation and Development (OECD).
Around 50 countries announced they will transpose the CARF into domestic law and activate exchange agreements in time for exchanges to commence by 2027. The signatory jurisdictions to the Common Reporting Standard (CRS) will also implement amendments to this standard.
What is the Crypto-Asset Reporting Framework (CARF)?
CARF, an international framework established to address the growing challenges of tax evasion and financial crimes associated with crypto asset, represents a monumental shift in how crypto assets are monitored and reported on a global scale.
It provides a standardized approach for the automatic exchange of information between jurisdictions concerning crypto assets. Essentially, CARF aims to bring the same level of transparency to crypto transactions as exists for traditional financial assets under the Common Reporting Standard (CRS).
Reporting obligations under CARF would largely fall on intermediaries which allow the exchange of crypto-assets into currency or other assets, facilitate reportable payments or allow for the transfer of crypto-assets. Additionally, CARF introduces 3 proposed amendments to the CRS (referred to as CRS 2.0):
- Changes to manage the interaction with the CARF
- Changes to bring e-money and central bank digital currencies into scope of CRS and
- Changes to improve compliance by organizations already in scope of CRS with a view to close loopholes unrelated to crypto-assets.
Many Financial Institutions will need to consider both CARF and CRS 2.0 changes across their organization. There is likely to be substantial data uplift and procedural requirement changes to comply with increased reporting and the addition of new elements to reports.
Who collects and reports this information?
- CASPs: This includes exchanges, brokers, and wallet providers who facilitate crypto transactions. They are expected to have the most comprehensive access to the relevant transactional data.
- Entities with control over decentralized exchanges (DEXs) or DeFi protocols: Given their role in facilitating peer-to-peer transactions, they must ensure compliance with the new reporting requirements.
- NFT marketplaces: Those facilitating transactions in NFTs may also be responsible for reporting data on certain large-value transactions involving crypto assets.
What is reported?
- Exchanges between crypto and fiat: This includes buying or selling crypto assets for traditional currency, such as exchanging Bitcoin for USD.
- Exchanges between different types of crypto-assets: For instance, trading Bitcoin for Ethereum falls under this category.
- High-value retail payment transactions: Retail payments involving crypto assets that exceed $50,000 in value must be reported. This is to capture larger transactions that might otherwise evade traditional tax reporting systems.
- Transfers of crypto-assets (on- or off-platform): Both on-platform (within the exchange) and off-platform (to an external wallet) transfers of relevant crypto-assets will need to be tracked and reported.
Enforcing CARF will be difficult due to the decentralized nature of crypto transactions
According to CRS and CARF expert Mark Morris, CARF is far more complex than CRS, and many Crypto Service Asset Providers (RCASPs) may not be easily classified as Reporting Institutions. He explains that CARF expands the scope to both individuals and entities, unlike CRS, which limits reporting to financial institutions. Morris highlights that RCASPs are involved in effectuating transactions, while CRS institutions primarily hold accounts. Crypto miners, he notes, are exempt from reporting as they operate independently.
Morris also points out that CARF does not clearly define what it means to “effectuate” a transaction, but it provides examples like crypto dealers, ATM operators, and brokers who would qualify. He emphasizes that merely providing a trading platform could classify an entity as an RCASP if they have sufficient control or influence over it. However, Morris observes that only those with a nexus to CARF-compliant jurisdictions are subject to these regulations.
Morris believes enforcing CARF will be difficult due to the decentralized nature of crypto transactions, making it hard to identify RCASPs. He adds that CARF lacks enforcement provisions similar to CRS, which could lead to a divide between compliant and non-compliant exchanges.
Finally, Morris underscores that CARF closes a major loophole in CRS regarding Managed Investment Entities (PMIEs). CARF now looks through these entities to identify controlling persons and requires double reporting on equity and debt holders, which he sees as a significant shift from CRS.
OECD to update CARF amid growth of DeFi
David Wren, Partner, Operational Tax at KPMG UK, commented on the revision of the CARF guidelines, highlighting that the “removal of wallet address reporting is the biggest change and addresses real data privacy concerns, although CASPs will be required to hold that information themselves for 5 years.”
Complaining that authorities don’t usually publish mark-ups of final vs draft rules, Wren added that the OECD plans to update CARF where needed, with particular focus on the growth of DeFi.
Wren told Raconteur.net that asset managers must keep abreast of changes to the Automatic Exchange of Information (AEOI) as recent amendments resulted in a substantial increase in the amount of information to be reported for every customer relationship and created an even heavier burden for asset managers. “For example, the crypto digital token reporting that asset managers will soon be required to complete is oriented around transactions, whereas the reporting currently undertaken tends to focus on a point in time.”
Transaction-level tracking and fair market value assessments are essential
CARF is seen as a critical step towards global tax harmonization for digital assets, requiring detailed customer activity tracking and market value assessments. Max Bernt, Managing Director, Europe, Taxbit, noted that CARF addresses the growing need for oversight in the digital asset industry, which has seen the rise of new intermediaries and service providers that have traditionally operated outside the scope of existing tax reporting frameworks.
“Under CARF, businesses and financial institutions dealing with digital assets—including cryptocurrencies, certain stablecoins, tokenized financial instruments, and certain non-fungible tokens (NFTs)—will be required to adhere to a set of new reporting obligations. This includes detailed tracking of customer-level activities such as buying, selling, trading, and transferring digital assets, both on and off platforms. While reporting to tax administrations will be done on an aggregate basis, transaction-level tracking, along with fair market value assessments, most likely will be essential to meet compliance requirements.
“Additionally, businesses will face enhanced due diligence requirements akin to those already in place under the Common Reporting Standard (CRS). This will necessitate the collection of customer tax information through Self-Certification processes not only at the time of account opening, but also for pre-existing accounts, further aligning the digital asset industry with global tax compliance standards.
“For businesses operating within this space, early preparation and a proactive approach to compliance will be critical, as penalties for non-compliance are mostly quite harsh. By 2026, those who have embraced these changes will not only mitigate potential risks but also position themselves as trusted and compliant players in the rapidly growing digital asset ecosystem.”
CARF will help reduce market uncertainties
The standardization of reporting requirements under CARF could significantly enhance regulatory compliance and transparency for institutional investors. Lennix Lai, Global Chief Commercial Officer at OKX, echoes this sentiment, noting that CARF, set for implementation in 2027, will help reduce market uncertainties and foster trust. Lai refers to an OKX-commissioned report, which suggests that the convergence of regulatory frameworks will strengthen consumer protection and offer more opportunities for institutional investors in the digital asset space.
The report from Economist Impact, commissioned by OKX, explores the growing role of digital assets in institutional portfolios and provides insights for institutional investors navigating the rapidly evolving digital asset landscape. Key takeaways include:
- Increased Adoption of Digital Assets: Digital assets like cryptocurrencies, NFTs, and tokenized securities are gaining traction among institutional investors. A 2023 survey found that 40% of financial market participants already engage with digital assets.
- Opportunities for Institutional Investors: As blockchain technology matures and regulatory clarity improves, digital assets are expected to become a standard in institutional portfolios. The projected value of tokenized assets could exceed $10 trillion by 2030, with digital assets expected to account for 7.2% of institutional portfolios by 2027.
- Diverse Investment Vehicles: The report notes a growing range of investment products, including ETFs, tokenized funds, and crypto derivatives. Institutional interest is shifting beyond traditional cryptocurrencies to tokenized real-world assets, including bonds and equities.
- Regulatory Developments: Global regulatory frameworks, such as the EU’s Markets in Crypto-Assets Regulation (MiCA) and various national guidelines, are providing much-needed clarity, enhancing market stability, and fostering institutional confidence in digital assets.
- Risk Management and Custody: The rise of institutional-grade custodians and security measures, such as multi-party computation wallets, is helping mitigate risks like hacking and system failures, encouraging more institutional involvement in digital asset markets.
So….is CARF good or bad?
The introduction of the Crypto-Asset Reporting Framework (CARF) by the OECD, coming into effect in 2027, seeks to harmonize the reporting of crypto transactions across jurisdictions, providing a much-needed structure for transparency and accountability in the crypto space. However, the implications of CARF are mixed, and the impact on the crypto industry depends on various factors.
From a regulatory perspective, CARF is a positive step towards reducing risks associated with crypto, including tax evasion, fraud, and money laundering. By enforcing standardized reporting rules, CARF could enhance trust in digital assets, making them more attractive to institutional investors. This, in turn, could foster wider adoption of crypto in traditional financial markets. For many in the industry, the legitimization of digital assets through CARF might outweigh concerns over compliance costs and operational burdens.
On the other hand, the decentralized nature of crypto presents a unique challenge for CARF enforcement. Many crypto transactions occur on decentralized exchanges (DEXs) or through peer-to-peer networks, which may not fall under the jurisdiction of specific regulators. This could create a divide between compliant and non-compliant platforms, potentially pushing illicit activity to less-regulated corners of the crypto ecosystem. The lack of clear enforcement mechanisms for CARF raises concerns about its effectiveness in a space designed to operate independently of centralized control.
Privacy is another major issue for crypto enthusiasts. One of the founding principles of cryptocurrencies is the ability to transact with a degree of anonymity. CARF’s reporting requirements may undermine this principle, leading to pushback from privacy advocates. However, proponents argue that the framework’s focus on larger transactions and high-value payments is a necessary compromise to balance privacy with the need for oversight in an industry prone to misuse.
For crypto service providers, especially smaller firms, the implementation of CARF could mean higher compliance costs and significant changes to their operational models. The need to track and report detailed customer activity and ensure fair market value assessments could be burdensome for businesses. While larger institutions may absorb these costs more easily, smaller platforms could struggle to meet the new obligations, potentially stifling innovation and competition in the industry.
Finally, the success of CARF largely hinges on the level of global cooperation. If only a few jurisdictions adopt and enforce CARF, it risks being ineffective, with transactions simply shifting to non-compliant regions. On the other hand, widespread adoption could create a unified regulatory framework that boosts confidence in digital assets while reducing market uncertainty. Ultimately, CARF’s impact on the crypto industry will depend on how well it is integrated into national regulatory systems and the willingness of the crypto community to adapt to the new landscape.
