Published: November 7, 2022

Summary

Today’s blog explores how transactions in, and the holding of, stablecoins are handled differently by the CARF and CRS, and how these treatments interact with each other. In some cases, stablecoins could be treated the same as fiat currency and in others treated the same as crypto-assets. At the end of the day, the CARF and CRS are frameworks recommended by the OECD. As such, this blog can really be viewed as a hypothetical discussion based on what we have been presented by the OECD. We will ultimately have to wait and see how each domestic implementation approaches this topic and what guidance is issued by governments regarding the treatment of stablecoins.

What is the CARF and CRS?

The Common Reporting Standard (CRS) is a set of recommendations drafted by the OECD and adopted by over 100 OECD member jurisdictions around the world. Local adoption can vary from country to country. Sticking as close to a common standard allows for effective cross-border exchange of tax information with the tax residence jurisdiction of Account Holders of Financial Assets. The legal basis for the CRS first came into force in many countries around 2017 with other waves coming into force in 2018 and later. Under the CRS, Reporting Financial Institutions are required to annually report their non-resident Account Holders directly to their local tax authorities who further exchange the information with the foreign jurisdictions of Account Holder tax residence(s). The financial information that is reported includes the year-end account balance, income paid to the account during the year (e.g. interest on a Depository Account, dividends on a Custodial Account, etc), and sometimes gross proceeds on the sale of Financial Assets (e.g. sale of ETF shares from a Custodial Account, etc).

The Crypto-Asset Reporting Framework (CARF) is a sort of complementary set of rules based off of the CRS but for Reporting Crypto Asset Service Providers (CASPs or RCASPs). The overarching objective is the same as CRS which is to allow for effective cross-border exchange of tax information with the tax residence jurisdiction of Account Holders but for Relevant Crypto-Assets that did not meet the definition of a Financial Asset under the original CRS framework. Different from the CRS, the financial information that is reported does not include year-end account balance, but does include acquisitions of crypto, disposals of crypto, exchanges of crypto, and transfers of crypto (which includes income payments).

With the publication of the CARF by the OECD, amendments to the CRS were also necessary which are contained in the same published document. Separately, on October 5, 2022 the EU published the final draft of one of the most important pieces of crypto regulation we have seen in the EU this year, Markets in Crypto Assets (MiCA). MiCA is important for this discussion as it requires regulation of stablecoins (among other things) and proposes a number of requirements on issuers of stablecoins and the crypto exchanges that list them (see Title IV starting on page 158).

Relevant Definitions

I won’t copy too many definitions word-for-word from the CARF and CRS Amendments but will shortly summarize the relevant points for this discussion. Our focus is also going to be well-known crypto exchanges that are clearly in scope of the CARF and CRS, for the sake of simplicity in illustrating the stablecoin treatment.

Crypto exchanges as Reporting providers or institutions:
- Under CARF, most global crypto exchanges are clearly Reporting CASPs (RCASPS)
- Under CRS, those same exchanges would likely fall under the definition of Custodial Institution (a type of Financial Institution). This is because the CRS definition of Financial Asset is now updated to include Relevant Crypto-Assets and Custodial Institutions hold Financial Assets on behalf of customers
Reportable assets under CARF:
- Crypto-Assets include stablecoins
- Relevant Crypto-Assets are a subset of Crypto-Assets, and only Relevant Crypto-Assets are reportable under CARF
  - Relevant Crypto-Assets excludes Specified Electronic Money Products (SEMPs), there are 5 criteria in evaluating if a Crypto-Asset is a SEMP
  - SEMPs are therefore not reportable under CARF
Reportable assets under CRS:
- Custodial Accounts that hold Financial Assets (which now includes Relevant Crypto-Assets)
- Depository Accounts that hold SEMPs (which includes Crypto-Assets that are not Relevant Crypto-Assets and that meet the 5 criteria)

The Commentary to the CARF (Page 46) uses examples that indicate that SEMPs were imagined to capture appropriately regulated stablecoins (that are not Central Bank Digital Currencies since CBDCs are carved off separately).

So, stablecoins could be SEMPs if they meet the 5 criteria (discussed later). So what? If a stablecoin is a SEMP is it then excluded from the CARF reporting? Yes, but not from CRS. Before we get into the more academic discussion of the 5 SEMP criteria, let’s first walk through an example of why this discussion matters and what the practical outcomes are to the crypto exchanges.

Example of the interaction of CARF and CRS for stablecoins

In words (we will assume all of this occurs in same calendar year):

Jane opens an account at CryptoExchange A and funds her account with Fiat USD $100 from her local bank via SEPA transfer or ACH
CryptoExchange A loads her Fiat USD $100 into her account by immediately buying her a position in Stablecoin for the equivalent of $100.
Jane sells $50 of her Stablecoin to buy $50 worth of Bitcoin (BTC). Jane’s Bitcoin grows in value to $1,000.
Jane sells her Bitcoin for $1,000, which is a gain to her of $950. The CryptoExchange A puts her sales proceeds in Stablecoin.
Jane withdraws her $1,000 value of Stablecoin off-exchange to her private wallet.
CryptoExchange A pays $2 interest in Stablecoin on Jane’s holding of Stablecoin.

Where Stablecoin is a Specified Electronic Money Product (SEMP)

* CARF Commentary page 52 confirms “Subparagraph C(5) – Fiat Currency, 34. [...] a stablecoin that qualifies as a Specified Electronic Money Product is treated as Fiat Currency.”

** Where CryptoExchange A is holding balances of the Fiat USD in a demand deposit type account, amongst other features, then it could also be a Depository Account reportable under CRS

Where Stablecoin is not a Specified Electronic Money Product (SEMP)

*** CRS Commentary revisions page 79 confirms “Paragraph C through G - Exceptions [...] – Financial Assets subject to reporting under Crypto-Asset Reporting Framework, 36. Paragraph G contains an optional exception for reporting by Reporting Financial Institutions with respect to the gross proceeds from the sale or redemption of a Financial Asset, to the extent such gross proceeds from the sale or redemption of such Financial Asset are reported by the Reporting Financial Institution under the Crypto-Asset Reporting Framework [...]” which interestingly does not provide an exception for payments of income. The result is that payments of income could be double reported under the CARF and CRS unless otherwise addressed in domestic implementations and guidance.

Which stablecoins are SEMPs and which are not?

Interestingly, the answer may not lie in just the stablecoin itself but also the crypto exchange (RCASP) that lists it. The two most famous stablecoins out there are USDT (usually said to be “issued” by Tether) and USDC (usually said to be “issued” by Circle). Let’s examine this closer by first listing the 5 criteria of a SEMP:

A) a digital representation of a single Fiat Currency;
B) issued on receipt of funds for the purpose of making payment transactions;
C) represented by a claim on the issuer denominated in the same Fiat Currency;
D) accepted in payment by a natural or legal person other than the issuer; and
E) by virtue of regulatory requirements to which the issuer is subject, redeemable at any time and at par value for the same Fiat Currency upon request of the holder of the product.

The reason I put the word “issued” in quotes above when referencing Tether and Circle is because of Page 87 of the CARF and CRS Amendments. Under the revisions to the Section VIII Commentary of the CRS, update to Line 14 we can see that CryptoExchange A itself is considered the issuer for purposes of the SEMP definition as well as the Depository Institution definition. This is further confirmed in the same Line 14 which states that the CryptoExchange A is the issuer of Central Bank Digital Currencies, which we intellectually know not to be true in the more general use of the word “issuer” (since governments/Central Banks should issue CBDCs).

Line 14: [...] In most instances, such Entity will be the issuer of the Specified Electronic Money Products or Central Bank Digital Currencies. With respect to Specified Electronic Money Products issued in the form of a Crypto-Asset, the Depository Institution that holds such product will typically be a custodial Crypto-Asset exchange or wallet provider.

This also makes sense when you consider that Tether, Circle, etc could not have the knowledge of non-institutional end users (KYC, AML, customer agreement, etc) in order to even comply with CARF or CRS.

This means that when evaluating the above SEMP criteria, we could also replace the word issuer with CryptoExchange A to make it easier to read as follows:

A) a digital representation of a single Fiat Currency;

B) issued on receipt of funds for the purpose of making payment transactions;

C) represented by a claim on the CryptoExchange A denominated in the same Fiat Currency;

D) accepted in payment by a natural or legal person other than the CryptoExchange A; and

E) by virtue of regulatory requirements to which the CryptoExchange A is subject, redeemable at any time and at par value for the same Fiat Currency upon request of the holder of the product.

Many have argued that most stablecoins on the market won’t meet the 5 criteria. However I believe that it deserves a second look given that the evaluation of the crypto exchange holding the stablecoin is most relevant. As such, we cannot make blanket evaluations like “USDC is a SEMP” or “USDT is not a SEMP”. Instead, each crypto exchange will have to evaluate whether USDC, USDT, and other stablecoins held on their exchange are a SEMP or not in the context of their own ecosystem and the geography of their clients.

Page 49 of the CARF and CRS Amendments provides the CARF Commentary on the definition of SEMP and each of its 5 criteria. The most troublesome criteria will be B) and E) in most cases.

B. issued on receipt of funds for the purpose of making payment transactions;

I would argue that a stablecoin itself is issued for the purpose of making payment transactions, even if it is not used to buy goods or services. Buying bitcoin with USDC is making a payment transaction. Using bitcoin to buy ethereum could also be said to have a purpose of making a payment transaction, but bitcoin does not meet the other criteria about representing fiat currency so goes out of scope of a SEMP. We can look to other contexts, such as the UK’s FCA Payment Services Regulations and Electronic Money Regulations to find out if a payment transaction is meant to only refer to the purchase of goods or services. In this FCA Q&A page under Question 8, we can see that the definition of electronic money largely mirrors the SEMP definition. It defines a “payment transaction” by reference to the Payment Services Regulations Section 2 which is:

“payment transaction” means an act initiated by the payer or payee, or on behalf of the payer, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and payee;

Payment for a good or service is not a requirement of a payment transaction. In general, the use of “Retail Payment Transaction” in other sections of the CARF appears to be the term used for narrowing a payment transaction to one of goods or services. As the SEMP definition is not “retail payment transactions” but simply “payment transactions”, then it’s application can be more broadly interpreted.

There is a question of portability which is unique to crypto. Does the fact that I can take my stablecoin with me off of one crypto exchange and onto another affect its classification as a SEMP? Portability does not typically occur in traditional financial e-money products like prepaid debit cards. For example, if a stablecoin was a SEMP at one crypto exchange and is transferred in by a customer to a second crypto exchange, can it still be considered “issued” by the second crypto exchange? Or are only purchases of stablecoins with fiat currency considered SEMPs? If so, then crypto exchanges would have to track transferred-in stablecoins separately from purchased stablecoins.

E. by virtue of regulatory requirements to which the CryptoExchange A is subject, redeemable at any time and at par value for the same Fiat Currency upon request of the holder of the product.

A natural question is, regulation by whom? Many global crypto exchanges obtain regulatory licenses from a variety of jurisdictions in which they operate, both on a country and regional level. How do we account for regulation in one jurisdiction that requires redemption at par value but regulation in another jurisdiction which does not? After a closer look, it appears that this item E) was added in order to align with MiCA which has been in development since 2020. Under Title IV of MiCA, approved and regulated stablecoins will be required to offer redemption at par value once MiCA is in effect. As such, it seems that item E) was targeted at making sure that only MiCA authorized stablecoins (or MiCA equivalent outside of the EU) would achieve SEMP status. It is interesting to consider though that the issuer of a stablecoin under MiCA appears to be Tether and Circle (from our example), and not the crypto exchanges themselves. This means that the crypto exchanges are not necessarily in control of whether a stablecoin meets points A) through E) even though they will be considered the issuer for purposes of its execution. This is further confirmed in MiCA with regards to the regulations that apply to crypto service providers / exchanges which list these regulated stablecoins.

Other notes of interest regarding MiCA

Title IV of MiCA references “a Union currency” which seems to mean that USDC or USDT may never be authorized / regulated under MiCA. Indeed much of the discussion around MiCA and stablecoins has focused on the possiblity that Title IV could effectively ban USD referenced stablecoins in the EU due to limitations on its trading volumes. If that is true, then USDC and USDT could only qualify as SEMP when an equivalent regulation is in place in the United States which requires redemption at par value.

It is worth pointing out that in the examples provided above with Jane, she was paid interest of $2 on her Stablecoin holdings. Under Title IV of MiCA, approved stablecoins (called e-money tokens) are prohibited from paying interest, both by the issuer and the crypto exchanges that list them. Looking at the example of CryptoExchange A through a MiCA lense, the Stablecoin in our example could not be a SEMP because a Stablecoin that pays interest under MiCA is not likely to be an authorized / regulated stablecoin (and therefore would not meet point E) of the SEMP criteria).

Conclusion

The drafters of the CARF and CRS Amendments intended for SEMP to capture at least some stablecoins. It seems that the framework was drafted with a view to the future where such regulation of par value redemption would exist (e.g. MiCA) even if it currently does not exist today for most crypto exchanges or stablecoins.

This is an interesting area to keep an eye on. If various crypto exchanges interpret the stablecoin treatment differently then this could lead to very confusing tax data exchanges for local governments as they try to track the ins and outs of crypto assets. As the CARF and CRS Amendments are not law, but a framework, then we will have to wait for the EU DAC8 and other domestic implementation and guidance to see how this all shakes out.

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CARF, CRS, and the treatment of stablecoins