Table of Links Abstract and 1. Introduction Abstract and 1. Introduction Bitcoin and the Blockchain 2.1 The Origins 2.2 Bitcoin in a nutshell 2.3 Basic Concepts Crypto Exchanges Source of Value of crypto assets and Bootstrapping Initial Coin Offerings Airdrops Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.3 Tokens 7.4 Non-Fungible Tokens Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets Conclusion and References Bitcoin and the Blockchain 2.1 The Origins 2.2 Bitcoin in a nutshell 2.3 Basic Concepts Bitcoin and the Blockchain 2.1 The Origins 2.1 The Origins 2.2 Bitcoin in a nutshell 2.2 Bitcoin in a nutshell 2.3 Basic Concepts 2.3 Basic Concepts Crypto Exchanges Crypto Exchanges Crypto Exchanges Source of Value of crypto assets and Bootstrapping Source of Value of crypto assets and Bootstrapping Source of Value of crypto assets and Bootstrapping Initial Coin Offerings Initial Coin Offerings Initial Coin Offerings Airdrops Airdrops Airdrops Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.3 Tokens 7.4 Non-Fungible Tokens Ethereum Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.2 Smart Contracts 7.3 Tokens 7.3 Tokens 7.4 Non-Fungible Tokens 7.4 Non-Fungible Tokens Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Finance and 8.1 MakerDAO Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs Decentralized Autonomous Organizations - DAOs Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs 9.2 Taxation issues of DAOs International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets International Cooperation and Exchange of Information International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets 10.4 The Challenge of Anonymity Enhancing Crypto Assets Conclusion and References Conclusion and References Conclusion and References 10. International Cooperation and Exchange of Information Ever since the first Bitcoin was mined in 2009 the landscape and scale of crypto assets has changed significantly. Even with recent dips in value of crypto assets this asset class remains, and is likely to remain a challenge for tax administrations across the world due to its pseudonymous and extraterritorial nature. Many tax administrations have formulated laws and policies to tax this asset class, whereas some jurisdictions have put an outright ban or a partial ban on crypto assets, whose efficacy has not been very high (Chen & Liu, 2022). However, many jurisdictions do not have any tax or regulatory policies regarding crypto assets which creates a regulatory arbitrage. Due to the unique characteristics of crypto assets, in absence of clearly defined tax treatment and guidance, lack of third-party-reporting and regulatory arbitrage, the collection of taxes is primarily based on voluntary compliance, which might result in significant tax gaps. The UNCTAD has observed that crypto assets may enable tax evasion or avoidance through offshore flows whose ownership is not easily identifiable, undermine capital controls, erode the tax base, and consequently hinder Domestic Resource Mobilization for achieving the Sustainable Development Goals[150]. The IMF Executive Board also discussed a board paper on key elements of an appropriate policy response to crypto assets[151] and considered that “the growing adoption of crypto assets in some countries, the extra-territorial nature of crypto assets and its providers, as well as the increasing interlinkages with the financial system, motivate the need for a comprehensive, consistent, and coordinated response” and it also agreed that the applicability of tax regimes should be clarified. “the growing adoption of crypto assets in some countries, the extra-territorial nature of crypto assets and its providers, as well as the increasing interlinkages with the financial system, motivate the need for a comprehensive, consistent, and coordinated response” The UNCTAD also issued a policy brief that “highlights the importance and urgency of international cooperation regarding cryptocurrency tax treatments, regulation and information sharing as well as of redesigning capital controls to take account of the decentralized, borderless and pseudonymous features of cryptocurrencies.” [152] “highlights the importance and urgency of international cooperation regarding cryptocurrency tax treatments, regulation and information sharing as well as of redesigning capital controls to take account of the decentralized, borderless and pseudonymous features of cryptocurrencies.” The G20 Roadmap on crypto assets also highlighted the significance of international collaboration in tackling regulatory hurdles associated with crypto assets[153]. It underscored the necessity to share information and coordinate actions to establish uniform regulatory frameworks across different jurisdictions. This concerted effort aims to effectively address the challenges arising from the global nature of crypto activities and promote regulatory consistency to ensure a cohesive approach worldwide. Presently, the FATF standards on virtual assets and virtual asset service providers and the Crypto-Asset Reporting Framework proposed by the Organisation for Economic Co-operation and Development (OECD) aim at achieving the comprehensive, consistent, and coordinated approach to Tax and AML/CFT related aspects of crypto assets. They are discussed in the following sections. 10.1 FATF Standards on VAs and VASPs The FATF standards pertaining to virtual assets (VAs) establish a comprehensive framework aimed at regulating virtual asset service providers (VASPs) to mitigate the risks associated with money laundering, terrorist financing, proliferation financing and other illicit activities. These standards mandate that countries enforce licensing and registration protocols for VASPs, conduct thorough customer due diligence (CDD), maintain transaction records, and promptly report any suspicious activities to relevant authorities[154]. Furthermore, the FATF guidelines stress the importance of robust supervision, enforcement mechanisms, international collaboration, and the adoption of risk-based approaches to safeguard the integrity of the financial system while fostering innovation in the virtual asset realm. The FATF recommendations obligate VASPs to implement the Travel Rule, which requires VASPs to share the information related to a transaction's sender and recipient with other VASPs. It mandates that VASPs must obtain, hold, and transmit required originator and beneficiary information, immediately and securely, when conducting virtual asset transfers, particularly for those surpassing a designated threshold. This regulation aims to boost transparency and curb the potential for money laundering, terrorist financing, and other unlawful activities within the virtual assets ecosystem by enabling authorities to track and monitor transactions more efficiently, mirroring the obligations imposed on conventional financial institutions. It characterizes some products like so called Stablecoins and P2P transactions as high risk and guides the jurisdictions to take measures limiting the ability of users to transact anonymously. However, the guidance does not quantify the size of the P2P transactions and its associated money laundering/terror financing/proliferation financing risks. The FATF defines virtual assets as a *“digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations.”[*155] This definition covers almost all types of virtual assets except few like NFTs. A VASPs is defined as: any natural or legal person who is not covered elsewhere under the Recommendations and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person: any natural or legal person who is not covered elsewhere under the Recommendations and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person: i) Exchange between virtual assets and fiat currencies; i) Exchange between virtual assets and fiat currencies; ii) Exchange between one or more forms of virtual assets; ii) Exchange between one or more forms of virtual assets; iii) Transfer of virtual assets; and iii) Transfer of virtual assets; and iv) Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; iv) Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; v) Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset. v) Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset. This definition does not cover miners, validators and ancillary service providers like hardware wallet manufacturers, cloud service providers, software developers etc. DeFi Applications are not VASPs as per this definition. However, DeFi applications which have strong centralized operations, colloquially known as DeFi in Name Only (DINO), as well as not yet decentralized nascent DAOs may qualify as VASPs as per the definition. The Travel Rule requires the following information to be obtained and transferred before the VA transfer takes place i) originator’s name ii) originator’s account number (wallet address) iii) originator’s physical (geographical) address, or national identity number, or customer identification number, or date and place of birth iv) beneficiary’s name v) beneficiary’s account number (wallet address) The information is not required to be a part of the blockchain transaction. In case of transfer to an unhosted wallet the VASPs are required to obtain the counterparty information from the customer. Moreover, VASPs are required to perform CDD for customers transacting above a threshold amount of virtual assets. The ordering VASP is required to perform due diligence on the beneficiary VASP about the Data Protection and Privacy (DPP) measures related to security of travel rule information. It also encourages VASPs to collect additional information like: a. the purpose of transaction or payment; b. details about the nature, end use or end user of the item; c. proof of funds ownership; d. parties to the transaction and the relationship between parties; e. sources of wealth and/or funds; f. the identity and the beneficial ownership of the counterparty; and g. export control information, such as copies of export-control or other licenses issued by the national export control authorities, and end-user certification. 10.1.1 Challenges in Travel Rule implementation 10.1.1 Challenges in Travel Rule implementation The FATF Travel Rule requires VASPs to obtain, hold, and transmit required originator and beneficiary information, immediately and securely, when conducting virtual asset transfers. However, due to the pseudonymous nature of crypto assets it might not be easy to ascertain the identity of the beneficiary VASP and might require reliance on blockchain analytics and specialized networks/protocols for travel rule solutions like TRISA156 , OpenVASP[157] and Notabene[158]. The FATF acknowledges that “To date, the FATF is not aware of any technically proven means of identifying the VASP that manages the beneficiary wallet exhaustively, precisely, and accurately in all circumstances and from the VA address alone” [159]. The technology neutral stand of FATF recommendations makes them agnostic to the products, services, solutions, or technologies provided by various vendors if they comply with the AML/CFT obligations. “To date, the FATF is not aware of any technically proven means of identifying the VASP that manages the beneficiary wallet exhaustively, precisely, and accurately in all circumstances and from the VA address alone” There are many commercial solutions which provide travel rule services, but some of suffer from various shortcomings like: a) Lack of interoperability – this remains the most important challenge in Travel Rule implementation b) Lack of consensus on counterparty VASP due diligence c) Inability to transfer information of both originator and beneficiary VASP before the transaction on blockchain d) Issues in recordkeeping and retrieval of Travel Rule information e) Transmission of transaction IDs instead of wallet addresses by some Travel Rule solution providers Besides these, there are jurisdiction specific issues like different approaches to transaction thresholds, data privacy laws and approach on transactions to unhosted wallets. There are also issues related to jurisdictions where the FATF recommendations related to VASPs have not been applied yet – The Sunrise Issue. Moreover, as the FATF recommendations might not be complied by some jurisdictions and tax administrations might find it difficult to access information that is mainly intended for AML use, they may face challenges related to real-time use of such information for tax administration purposes. Also, there are many technological challenges in compliance to the Travel Rule. In the Targeted Update on Implementation of the FATF Standards on virtual assets and virtual asset service providers, FATF has called on industry to accelerate efforts to strengthen solutions that are global, and can accommodate nuances in requirements across jurisdictions, in line with the expectations of the FATF Standards. Author: (1) Arindam Misra. Author: Author: (1) Arindam Misra. This paper is available on arxiv under CC BY 4.0 DEED license. 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