Government Regulation of Cryptocurrencies and Other Digital Assets
August 1, 2022
At a glance
- Main takeaway: President Biden signed an Executive Order outlining a whole-of-government approach to ensure responsible development and use of cryptocurrencies. The Order adds to changes announced last year regarding Form 8300 and 1099-B reporting.
- Impact on your business: Updated CRS definitions, including that of Depository Account, now include accounts that hold specific electronic money products. Depository Institution now includes entities licensed to engage in certain banking activities, affecting many crypto asset service providers who may have fallen outside of older definitions.
- Next Steps: Your business may be impacted. Aprio’s Technology and Blockchain CPA Services team can help you assess how the changes may affect you.
The full story:
Despite a recent, dramatic drop in the value of the global cryptocurrency market, governments around the world are exploring Central Bank Digital Currencies (CBDCs). In America, the Biden administration is taking steps to address both the risks and benefits of digital assets.
OECD releases CARF, Executive Order outlines the treatment of digital assets
Earlier this year, the Organization of Economic Cooperation and Development (OECD) released a Crypto Asset Reporting Framework (CARF) and updated the Common Reporting Standard (CRS) to include guidance that brings digital financial products within the scope of the CRS. Additionally, President Biden signed an Executive Order outlining a whole-of-government approach to ensure responsible development and use of digital assets.
An investor domiciled in the US or UK, for example, might only be thinking about their domestic compliance with respect to their crypto holdings. However, if their crypto holdings include investments in other countries that subscribe to OECD principles, the investor’s compliance obligations could be significantly more complex.
New Executive Order authorizes six steps
The Executive Order calls for measures to address six matters:
- Protect US consumers, investors and businesses
- Protect US and global financial stability and mitigate systemic risk
- Mitigate finance and national security risks posed by the illicit use of digital assets
- Promote US leadership in technology and economic competitiveness to reinforce American leadership in the global financial system
- Promote equitable access to safe and affordable financial services
- Support technological advances and ensure responsible development and use of digital assets
In addition, the administration announced it will explore establishing a US CBDC.
The Executive Order encourages the Federal Reserve to continue its research, development and assessment efforts for a US CBDC, including developing a plan for broader US government action in support of their work.
US to lead in global CBDC development
Unlike some previous ventures, such as FATCA and CRS where the US went out on its own, this effort prioritizes US participation in multi-country experimentation and ensures US leadership internationally in CBDC development.
The administration intends to work with the US Department of the Treasury and other agency partners to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets.
Order adds to digital asset transaction reporting requirements
This Executive Order adds to changes announced last year regarding Form 8300 and 1099-B reporting, which came as a result of the Infrastructure Investment Jobs Act. That Act, which became law on November 15, 2021, carries significant implications for cryptocurrency markets, including a requirement to report many digital asset transactions to the IRS and/or FinCEN beginning in 2024.
The multi-pillar solution solidifies the OECD’s goal of achieving Global Tax Transparency. The organization recognizes that the crypto asset market, including both the crypto assets offered, as well as the intermediaries involved, poses a significant risk of erosion to recent gains in global tax transparency.
CRS and CARF aim to improve international tax transparency
The CRS, which was first published in 2014, has improved international tax transparency by requiring jurisdictions to obtain information on offshore assets held with financial institutions and automatically exchange that information with the jurisdictions of residence of taxpayers on an annual basis. However, crypto assets will in most instances fall outside the scope of the CRS.
Based on this perceived gap, the CARF was designed to combat these issues with three building blocks:
- Rules and commentary that can be transposed into domestic law to collect information from resident crypto asset intermediaries
- A framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information
- Technical solutions to support the exchange of information
The technical proposal contains detailed rules for crypto asset service providers to follow and defines critical terms.
Changing terms and definitions could impact crypto asset service providers
For instance, CARF defines crypto assets as, “a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.”
The definition is meant to enable reporting intermediaries to expand upon existing KYC/AML procedures to comply with the reporting requirements. For each calendar year, service providers would report certain information with respect to their users.
The CARF also sets forth due diligence procedures that service providers must follow in compiling the information to be reported.
CRS definitions have been updated to include certain digital financial products as assets that need to be reported. For example, the definition of a Depository Account was amended to include accounts that hold specified electronic money products.
The term Depository Institution is being updated to expand the scope to include entities that are merely licensed to engage in certain banking activities but are not actually so engaged. That change will likely capture many crypto asset service providers who may have fallen outside of the old definition.
The bottom line
It’s critical to stay updated on changing terms and definitions as they apply to crypto assets and cryptocurrencies. Aprio’s Blockchain Tax/KYC/AML/BSA Practice can guide you in implementing the proper policies to enable your systems to comply with these filing requirements.
Aprio’s Blockchain Tax Practice team can help you comply with filing requirements. Schedule a consultation today!
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About the Author
Josh Gelernter, is a Director with Aprio’s Tax group. Josh serves businesses in the technology space and the financial services industry. He works closely with CFOs and tax directors of companies of all sizes, including startups, multinational publicly traded companies seeking to expand overseas and non-U.S. enterprises looking to establish operations in the States.
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.