CARF: Navigating the New Crypto Reporting Requirement

Transcript

Next up, we have a very important discussion uh regarding taxation in crypto. So, navigating cough uh pron uh presented by Matias masterclass. Good afternoon everybody. So I have now the pleasure to bring a oh how always here a boring topic to you and on chairman Dishbas because I'm talking about reporting in the crypto space um but I also think that transparency is also something which could help and with a reporting we might go into a more

transparent world. we might can solve some of negative comments on negative understandings which are currently running around if we talk about crypto world compared to traditional financing. Um what is car at all? Where are we coming from? Maybe everyone has already heard something from the automatic exchange of information. Let's assume I have a bank account at a German bank. I'm living in Switzerland. The bank is reporting myself to the Swiss tax administration. Tell them, hey, Matias has five euro on the account. He received one euro dividend. Here is the

information. Hopefully, I have shared that with my tax declaration. Otherwise, the tax administration will come to me and say, "You're a bad guy." Now, in this reporting world, we do not report on digital assets. We do not report on crypto assets. Therefore, the OCD came up with the idea and say, well, we might have some people who are not declaring crypto assets, digital assets in their tax declaration. Let's do something. Let's take the CRS, the common reporting standard, which is already known system.

Tweak that a little bit, put it into a new form, call it carf crypto asset reporting framework. If you look on the map on the screen, we see that a lot of juris jurisdictions have already committed to implement next year. So we're talking about something which is going to be implemented 2026 by the first jurisdictions which means the whole EU and also some other jurisdictions. There is one country which has also declared to implement it. It's the one in the middle with the president with the orange hair color but we still have colored it black at the moment because we don't know what happens there. They have said last year

we are going to implement calf as well. We don't know what happens now at the moment in the US. We just don't have a view. We know that they are already implementing the so-called 1099DA. Maybe you have heard of it. It's the digital asset reporting in the US that's already going to be implemented. But that's just USU US that's only in the same country. So we will see what's going to happen next. What is now this carf thingy? Who needs to do something in carf? Well, it's all about the so-called crypto asset service provider. And that means someone that could be an individual or an entity

who provides a service which means effectuating exchange transactions or operating or making available a trading platform. So we have two elements in the definition. one on the left side we have effect trading exchange transactions and on the right side we have the trading platform let's start with the effect rate exchange transactions that means I am a service provider I am helping someone to perform a transaction I'm helping someone to transfer an asset and I'm doing this as a business. We

will go a bit more in detail later on on that one. The other thing is the trading platform. I make available a trading platform or I'm operating a trading platform. So again, we have two components in there. Very easy example. I have a software with which you can trade Bitcoin in Ethereum or in somewhere else. That's typically a trading platform. They are considered to be a CASP. They need to do a reporting.

Now the interesting part comes with this making available because there we still have some uncertainties in the interpretation of the rules. What does it really mean? If I'm giving access to someone to a platform but this platform is not mine, am I still making it available? If I offering an app or a service to a client which allows a client to access a trading platform but I'm not controlling the platform I must still consider to making it available. If we take the current wording on USCD guidelines yes because I might be the last one in a chain who knows the client and

identifies the client. So let's go a bit more into exactly this discussion and we have made two examples here scenario one and two on scenario one you can see we have two countries India Switzerland we have India which has not yet implemented carve let's say we are now in 2026 we are Switzerland has implemented carve we have an entity this entity has created a trading platform but the Swiss entity only holds the license.

They cannot access the protocol. They cannot change it. They cannot do anything. The platform is operated in India. India can change the code. India can amend something. India could also turn it off. And all those criterias I just mentioned are criterias to determine are you actually controlling it in the term of cal regulation. We have now the situation in scenario one. The Swiss entity does not need to do anything on the calf. The Swiss end is not regarded as a crypto as a service provider.

However, also the Indian entity is not a crypto sales provider because they have not yet implemented it. Now let's go into scenario two. The Swiss entity could theoretically change something on the protocol. They have access to the protocol. They could turn it off. They could identify the user. They might know ultimately who is accessing the platform and they are in the contact with the user.

In this situation, even though the platform technically is operated in India, all the programmers are in India, the Swiss entity is regarded as a crypto as a service provider and needs to do the reporting. Now, let's take another example of constellation. We have a client. We have a bank. Let's say a traditional bank. We have a crypto bank. Our traditional bank has an omnibus wallet, uses a crypto bank to offer trades to their clients.

Our traditional bank here might be regarded as crypto as a service provider. What's the result out of it? Well, from a cal perspective, our crypto bank looks who is my account holder. Okay, it's another bank. It's not a crypto asset service provider. It's an FI, financial institution. I don't have to do anything. I'm not going to report another FI. The trading platform looks also back into the chain say well okay I have a crypto bank there. They are an FI there are crypto service provider I don't need to do anything which means that the reporting falls back to our Swiss bank here or international bank

which has the omnibus wallet. Now for them it's quite difficult to identify what do I need to report for my client who is doing a trade via the cryptobank on this platform B. How do I get the data? How am I able to collect all the single transactions? How do I value them? How do I collect them and bundle them and report them? Those are the challenges we are having at the moment when we have discussions with traditional banks and explaining them. Well, depending on the service offering you have for your clients in the crypto space, you might be reportable. You might have to do something even though you don't operate the platform, but you making it available because you are the

last one identifying the client. Now, there's another very interesting rule which comes into place. That's a so-called nexus rule. This rule was designed by the OECD in order to avoid that crypto asset service providers are trying to jump from country to country in order to avoid having a reporting obligation. It would be very easy if I say well okay let's now restructure my groups in order to only be operating in a country which does not yet implement the carve or let's structure it in a way that I have

owned in my headquarter in Germany or in Switzerland and my operating unit where all the transactions are handled is in let's take North Korea as a stupid example because they most likely will not implement carf Right. And what happens now with those Nexus rules, we create kind of a mechanism which will bring in again everything into the country where I might be resident as overall company as the headquarter.

So what that means in reality, it could be that even though I do not have an operating entity in Switzerland or in Germany, but everything is ruled by a branch in a non-carf jurisdiction. I might have to do a reporting in Switzerland or in Europe. We could also make this a more realistic example. Let's assume you have a branch in the US and your US branch is your main hub for all transactions. and your headquarter is in Austria or in Switzerland.

That now means that technically if you look into Nexus rules even though the US might not yet implement KARF you might have report everything in Germany or in Austria and with everything I do not mean just the things which are Austria related but worldwide and that's a very important rule to understand if you talk about carf it's not only about where is my entity operating but also considering the whole structure I have in place with this example here. That's just to show you what it means. Actually, I will

not explain the example more in detail. There is one solution for example in Switzerland which will be implemented in the law to avoid double reporting or to over avoid over reporting which means if I have knowledge that my other country where I'm resident is going to implement the car within the next year. I do not have to do now everything in Switzerland. I think that's quite a cool rule. It's not in every law which is currently drafted in Europe or outside of Europe. But um I think that that might be helpful because it just simplifies the process for the next two

years because if we do not have that this will exactly happen. We might have one country jurisdiction A has not yet implemented CARF in 27 jurisdiction B has implemented CARF. I have to report everything unless I have this rule where I can say well I know that my jurisdiction A will anyway implement it a year later then I can avoid this problem otherwise I'm running into this nexus problem.

Now I was talking about Nexus problem and and who needs to do something but maybe we should also focus a bit on actually what do we have to report because we don't have to report everything which is let's say crypto or digital has provided a definition which says it's a digital representation of a value which is cryptographically secured on a distributed ledger. technology. So you open up a wide wide range of possible um assets, but then the OCD says, well, let's take away some of those because we're only

interested in the so-called relevant crypto assets. We don't want to know everything. Some of the things we don't care about. We don't want to know them. So one is we take away the central bank digital currencies let's say the Swiss coin issued by the Swiss national bank if they would ever want to do that but let's take this example because that will be reported in the old CRS regime we will report that there we implement it there also as of next year the second thing we take away are so-called specified electronic money products

Also they will be reported in the CRS for example stable coins if they fulfill the requirement to be a stable coin as per OCDC car regulations not every stable coin is a specified electronic money product and can be excluded that's very important to understand and then we have the last category the one which I think is the interesting because it's the one which is the less clearest crypto assets not for payment or investment purpose. Now what does that mean?

It means something which I cannot use for payment and not for investment. But now who can tell me what is an NFT? Is this now for investment purpose or not? Or what should be excluded there? The USD says if you are in doubt you have to report. Now when you think about that in a bit more detail and you can see some of our thoughts on the left side here in this box there are some I don't want to say guidance because it's not clearly yet the guidance. It's mainly some hints on how to deal with that. So we can ask ourself how do we look into this kind of thing from the

FATF recommendation point of view. How do we treat it from that perspective? Or we can ask ourself the question well is it something which has nothing to do with any kind of regulation on the financial market. Sometimes we can also ask yourself the question well what is the idea behind this token? A very easy example would be I have a token which I'm using for my production. I have a worldwide production facility.

I use a digital asset to track that through my whole process. Or for those who are from Switzerland maybe you know kumulos punk. So if we would assume we would do kumos punk in a token form that might be also something which we could regard as a crypto as a not for payment and investment purpose because it's a very very closed um closed world where I could use it. However, what is much more important and I don't think I need to explain that to you, but that's sometimes very important to stress this out if I talk to banks or traditional finance players. It's about

tokenized funds about the whole tokenization about crypto deriv issue to say this derivatives. I hate this word. Sorry for that. Um but there we have the real big thing because if you just look into the trends in tokenization I think that that's going to be big and if we consider that then the calf is not just oh I have some bitcoins I need to report something but that's really in my view the area which we are going to see the reportings in the future and that's also why I say it's important for the banks who are not yet offering let's say

Bitcoin storage or anything as they sometimes call that because if you look into the development of the financial systems tokenization is really something which will happen and those are all considered to be financial assets they're going to be crypto assets and they need to be reported what transactions are we going to report so we are going to bought exchange transactions, which means we're changing crypto asset into fiat. Let's assume I'm going to buy Bitcoin with fiat money or I'm going to sell Ethereum and I'm getting fiat

money. I have to report this transaction or I'm going to exchange Ethereum into Bitcoin. That's another the second category. Or I'm going to buy a new car which costs $51,000 US so-called retail payment transaction. In the first draft, they did not have a threshold in there. And then the obvious question was, well, what the heck? If I go to Migro and buy a chewing gum for one Frank, does that need to be reported? That's just insane. So they came up with this 50,000 threshold and then we have the so-called other

transfers airdrop staking income and they deliberately keep this category quite open in order to bring in more transactions in the future depending on how the ecosystem is developing. Why do we have those different categories listed here? Well, in the reporting I need to really use them. If you know CRS or FATKA there we say okay end of year Matias has five Franks he has received overall $1. I report that on a summarized value under calf rules. I'm going to report Matias has done five exchange transactions Bitcoin

against fiat for this value. I going to report he has done five times a exchange bitcoin into ethereum for this value and that's really the big difference compared to what we already reporting under the CRS and fatka rules. It's much more granular and that makes it also much more important to collect the right data. Beside the data, you also need to identify the clients. For those who have already done that because they are a bank or an FI under rules or FATKA rules, that's something not new. You need to get a selfcertification.

Your client or your user needs to tell you, hey, I'm Matas. I'm tax resident in Switzerland. Here is my tax identification number. And you need to do a plausibleization. Whether this makes sense, you need to follow up. You need to monitor whether in two years time Matias is still living in Switzerland or maybe has moved to Germany. You need to be aware of that. You need to track it. You need to do something. That's the second leg of what needs to be implemented. Now we have now 2025. In 2026 the whole thing needs to start. In 27 we have the first reporting in Switzerland. Same in the EU. Other countries which are one

year later they will start collecting data 27 will do the first reporting 28. What does it now mean? What are we suggesting clients to do? Well, first of all you should understand what am I offering to my clients? Am I falling into this definition? Am I a crypto asset service provider or not? or do I want to become one in the next few years? Maybe I do not want to but are people who are designing the services of our company are they thinking about adding services which falls under those rules because it's going to be very difficult to implement

the car within a month. So what you always say is like now it's a time to really get the understanding of what actually are we offering and how are we affected by those rules and then only if I know this I can go ahead and say good now I need to think about what data do I have where do I get transactional data how do I evaluate them what is the fair market value how I'm going to solve the problem that compared to the normal stock market. I have a worldwide 24-hour, 7 day a week market where I could have the situation that on market A 0.005 and market B I pay 0.007.

What is now the right value for my reporting? Where do I get the data from? But those questions I can only start to digging around with once I know how am I affected and then I cannot think about what technology I'm going to use. How am I doing the reporting? Can I do it by myself? Do I need a third party? How do I structure an XML file? And last but not least, if I have not been yet in the pleasure to do a reporting on a Fatkan CRS or an FI, how do I collect all those data from my users? How do I know where they are tax resident? What am I going to do with all the clients I might have already onboarded one, two, three years ago?

Because there is one really mean thing in the rules. They say if you are implementing KARF or if you're subject to implement, you have one year to redoment all existing clients. If you're not able to do that, if the clients do not provide you with the documentation that year, you need to block them. And that's something quite hard if you think about that. So what else to consider? If you look at this matrix, we need to think about processes, about guidance, about data, about tools. How are we going to structure that? How are we going to do

the reporting? So that's very interesting questions which are for the text nerds quite cool to think about. For other people it's quite annoying. So I hope I was able to give you at least a little bit of an impression about what is carve at all. I know 30 minutes is quite short to bring you into a maybe not familiar topic. Are there any questions? Something you would like to know or maybe you have heard something, read something and you say, "Well, why you don't say that?"

Yeah. Mhm. No, I I I I completely share your your thought on that. If we if we look back 15 years ago before we have implemented FATKA and also CRS, we had a bit the

same situation with the banks. It was quite long like other cannot be we are banks, we have data secrecy in Switzerland. We have the bank secrecy for sure. We never will report data. And it took a while until it was really understood. And then it took another while until the people have realized how heavy the lift is to implement that. And I think based on discussions I'm having at the moment we having quite of let's say three different worlds. One that the traditional banks they say well we know fatka we know CRS in principle we understand that is nothing new for us but we don't know how to bring it technology in in order to get the

transactional data. That's our painoint but we can solve that somehow. Then we have those crypto players who are still in the denial phase which I still have today discussions with some crypto players which are clearly reporting entities which say well come on we are the free spirit we are the free world why the hell should we do a reporting so we have that phase and then the third one is I still see a lot of entities around there who have just not understood that this is not something which will be implemented within a month. It's just not the understanding that this is quite a heavy lift. If you have nothing done yet in that

respective, it's going to be really difficult to be compliant because the real pain point is you need to start collect data from first gener. It's not like that you can go into the system and interfere and say well okay first reporting is only June 27 so I will collect the data in 27. Well, how you want to do that if you did not collect all the transactions before? I think that's the in my view there are three reasons why it's not yet that loud. Any other question?

If not, thank you very much for your patience and have a nice afternoon. Thank you.