Impact of Crypto Asset Reporting Framework on US Banks

Impact of Crypto Asset Reporting Framework (CARF) on US Banks

The Crypto Asset Reporting Framework (CARF), developed by the Organisation for Economic Co-operation and Development (OECD), represents a significant shift in the regulatory landscape for digital assets. This is also different from the Digital Asset legislation which the IRS announced around the same time as CARF and is related to activities for digital brokers in the US.

With 54 jurisdictions, including the United States, committing to implement CARF by 2027, this framework aims to enhance tax transparency and combat tax evasion in the rapidly evolving world of cryptocurrencies. This article explores the impact of CARF on US banks and how it will reshape their approach to cryptocurrency.

Overview of Crypto Asset Reporting Framework

CARF is designed to align with Common Reporting Standards reporting, and address tax evasion due to the challenges posed by the decentralized and often anonymous nature of crypto-assets. It introduces new reporting requirements for financial institutions and service providers involved in crypto transactions. The framework mandates the collection and exchange of detailed information on crypto-asset transactions, including the identification of users/account holders, and the nature of their transactions.

CARF Impact on US Banks

US banks are used to complying with IRS regulations, and the extra operational steps needed to collect tax forms at onboarding, identify withholding, track cost basis on debt and equity instruments, and complete information reporting for each transaction. However, this new set of legislation, organized by the OECD, and making sure international account holders are documented adds more layers of complexity:

Increased Compliance Burden:

• US banks will face a significant increase in compliance requirements. They will need to implement robust systems to collect, verify, and report detailed information on account holders as well as details around the crypto transactions. This includes identifying crypto-asset users and reporting transaction level details around their crypto-asset.

Enhanced Due Diligence:

• Banks will be required to perform enhanced due diligence on their customers involved in crypto transactions. This includes obtaining self-certification forms and ensuring the accuracy of the information provided to determine all of their tax jurisdictions and tax identification numbers, as well as date and place of birth. They also must collect a W8 or W9 forms to ensure compliance with the Digital Asset regulations. Failure to comply with these requirements could result in penalties and reputational damage.

Integration with Existing Systems:

• US banks will need to update or integrate CARF requirements with their existing compliance systems, such as those for the Common Reporting Standard (CRS). This will involve updating their data collection and reporting processes to ensure they meet both CARF, CRS, and maintain IRS reporting requirements.

Operational Challenges:

• Implementing CARF will pose operational challenges for US banks. They will need to invest in technology and training to ensure their staff are equipped to handle the new reporting requirements. Additionally, banks will need to establish processes for ongoing monitoring and updating of customer information. Like any new regulation, advisors and vendors with expertise will help ensure a firm is taking the necessary steps to remain competitive and compliant.

Reshaping US Banks' Approach to Cryptocurrency

Increased Transparency:

• CARF will bring greater transparency to the crypto market. US banks will be required to store more detailed information on crypto transactions, enabling them to better assess risks and ensure compliance with regulatory requirements.

Enhanced Risk Management:

• With detailed reporting requirements, banks will be better positioned to manage risks associated with crypto transactions. This includes identifying potential money laundering and tax evasion activities, and taking appropriate measures to mitigate these risks.

Improved Customer Trust:

• Crypto customers typically like the idea of being anonymous and having decentralized record keeping. However, legitimizing the crypto space with regulations around onboarding and reporting will make customers less weary of fraud or ponzi schemes that are running rampant in the crypto space. By complying with CARF, US banks can enhance their reputation and build trust with customers. Demonstrating a commitment to regulatory compliance and transparency can attract more customers and foster long-term relationships.

Innovation and Adaptation:

• The implementation of CARF will drive innovation in the banking sector. Banks will need to develop new tools and technologies to meet customer appetite for new investment or payment opportunities. This could lead to the creation of more efficient and secure systems for managing crypto transactions and help meet the reporting requirements easier.

How can TAINA help?

The Crypto Asset Reporting Framework (CARF) represents a significant regulatory development that will have a profound impact on US banks. By increasing transparency and enhancing compliance requirements, CARF will reshape how US banks approach the future of the industry. While the implementation of CARF will pose challenges, it also presents opportunities for banks to innovate and improve their risk management practices. As the regulatory landscape continues to evolve, US banks must adapt to ensure they remain compliant and competitive in the growing crypto market.

The first step is to perform some due diligence on your accounts and systems. Confirm you have good presumption rules where documentation is not present. Categorization of transactions, and the collection of account documentation will be required to ensure that reporting is done under the correct reporting regime. Documentation will identify which reporting requirements the account falls under and if there are any exemptions.

At TAINA we continue to monitor the crypto and digital asset regulatory landscape and will track the published regulations with the expectation initial reporting year will be in 2027. We believe that regulatory compliance doesn't need to become a blocker to user growth or affect your user experience.

By using TAINA's fully automated CRS self-certification Validation Platform you can continue to focus on growing your business whilst we take care of your CRS and CARF onboarding compliance. TAINA's flexible and lightweight platform has helped financial institutions of all types improve efficiency, reduce cost, mitigate risk and improve their overall customer experience whilst ensuring that they have more accurate, complete, and clean year-end data for CRS reporting to tax authorities. We would love to talk to you more about your compliance process and how our award-winning CRS Validation platform may help you deal with the new Crypto reporting and add value to your organisation.

We would love to talk to you more about how our award-winning FATCA and CRS Validation platform will help you deal with the CARF requirements. For more information get in touch or request a demo to see it in action.