Cryptocurrency, New Regulations, and the FATF
September 19, 2019
By Gregory Bilecki
One of the biggest recent developments – and currently flying under most people’s radar -- is the new regulations from the inter-governmental Financial Action Task Force (FATF) that have been imposed upon crypto exchanges globally. The new regulations require relinquishing certain customer data on any transaction involving 1,000 USD/EUR or more. These are supplemental changes not to be confused with IRS Notice 2014-21, which discusses separate tax reporting requirements for payments to various non-employees involving digital currency. These new regulations are part of an effort to make digital transactions over blockchain more transparent, albeit at the mercy of increased governmental oversight, designed to continue the fight against the criminal use of digital assets.
However, these new regulations create a two-pronged issue, both on the side of the exchanges and on the client/consumer side. The immediate issue, on the exchange end, is that the new regulations poise themselves to force blockchain technology to be backwards-compatible to the new standards. This was something that the technology was never designed to do originally, providing identifying information ad-hoc on all parties involved within a transaction. This is now forcing exchanges to hurry up and figure out a way to make this happen, with a time limit of one year (from June of 2019), or be at risk of being blacklisted by the FATF, which means lumping non-compliant exchanges into the same category that terrorist organizations and various criminal enterprises fall into, for example.
The other issue the new regulations create is a potential exposure risk for clients who are on the other ends of these transactions, especially since the potential for an audit trigger in this area due to these new standards is now bigger than ever, especially in the United States. The best thing a consumer or business owner can do is to perform proper due diligence when performing a high volume of crypto transactions, or any large amount above the $1,000 reporting threshold. This involves maintaining accurate records of parties involved in the transaction such as wallet addresses where the money is being sent to/from, physical addresses, date and places of birth for the sender, and the beneficiary names of the parties receiving the currency. Having proper identifying information on hand in case your exchange falls short of providing underlying information to authorities can potentially save on future tax burdens down the road. Non-compliance to these new standards, as we continue to navigate the ever-changing realm of digital currency, means that you or your business can very well be the ones caught holding the bag when the IRS comes knocking.