cryptocurrencies: about the automatic exchange of information between countries and fraud potential

GDPR & Cybersecurity
18 July 2022

by Michaël Lagrou and Sander De Landtsheer

Cryptocurrencies: about the automatic exchange of information between countries and fraud potential

Cryptocurrencies remain a hot topic. Regarding the tax treatment by the tax authorities and Ruling Commission, no noteworthy changes have been implemented since then. However, transparency and the regulation of cryptocurrencies remain thorny issues today. It is extremely challenging for the authorities to determine the origins of possible gains. Thanks to these unknowable origins, money laundering and tax evasion are ubiquitous. Such fraud is very difficult to address. The following is a brief update on the legal framework for the automatic exchange of information between countries and the regulations to combat money laundering and fraud.

Cryptocurrencies: about the automatic exchange of information between countries and fraud potential

Automatic exchange of information

Last year, the EU issued Council Directive 2021/514 (DAC7). This Directive aims to improve administrative cooperation in the field of taxation, especially through the exchange of information between Member States, to facilitate the implementation of domestic tax regimes. In practical terms, Europe is obliging all participating Member States to provide certain information on digital platform operators to fellow States. This Directive is to be transposed into national law by 31 December 2022 at the latest. The new Directive does not concern itself with the storage of crypto-assets on digital platforms employed for this purpose, however. In other words, such digital platforms are not subject to any reporting obligation towards the Belgian tax authorities.

The adoption of DAC8 aims to solve this issue. This Directive should expand the exchange of information defined in DAC7 to include cryptocurrencies and digital money in the fight against tax fraud and evasion. In this context and to harmonise European regulations, the European Commission held a round of public consultations on the expansion of the exchange of information to include cryptocurrencies last year. Despite the fact that the public consultations have now been concluded, no actual proposal to create this DAC8 has been submitted so far. That means the Belgian tax authorities remain in a state of uncertainty for the time being and must rely on taxpayers’ willingness to report cryptocurrency gains honestly and voluntarily.

Anti-money laundering and fraud

Due to the system’s decentralisation and anonymity, tax evasion and illicit funds are common in the crypto world. For criminals, fraudsters and money launderers, it is relatively easy to launder money by converting it into crypto-assets. A reporting obligation could be a useful response to such practices. For this reason, the 5th Anti-Money Laundering Directive (AMLD5) was transposed into domestic Belgian law on 20 July 2020. This Directive introduces a reporting obligation for entities offering virtual currency exchange services and custodial wallet providers. If these suspect their investors’ money is implicated in terrorist financing or money laundering, they must report this to the Belgian Financial Intelligence Processing Unit (CTIF-CFI). 

The transposed Directive was further substantiated on 1 February 2022. For example, any foreign entities offering such services are deemed to be located in Belgium. These must therefore monitor investors and consequently, are required to inform themselves of their crypto investors’ identities. This also applies to ATMs used to exchange cryptocurrencies for fiat currencies (e.g. the euro). In this way, the Financial Services and Markets Authority (FSMA) should be able to monitor such transactions effectively. 

Note: these regulations apply only to platforms that exchange fiat currencies for cryptocurrencies and vice versa, not to platforms that trade cryptocurrencies among themselves.

Furthermore, on 20 July 2021 the European Commission presented a package of additional proposals expanding on existing rules against money laundering and terrorist financing:

  • One proposal concerned a Regulation for the establishment of a new European AML/CFT Authority. This to promote internal collaboration.
  • Another proposal was for a sixth Anti-Money Laundering Directive with rules for national supervisors and financial intelligence units in the various Member States. 
  • The European Commission also wishes to expand traceability requirements to include crypto-assets.
  • Furthermore, they want to create an AML/CFT Regulation for the harmonisation of rules within the internal European market.

Finally, in addition to the above, the EU is currently working on a regulation for the financial supervision of markets in crypto-assets, the MiCA Regulation. This Regulation aims to achieve four goals: financial stability, legal certainty within the EU, protecting consumers and investors and encouraging innovation.

Are we on our way to a more regulated and transparent crypto market?

Crypto investors may expect to encounter a more regulated, transparent crypto market in the (near) future. Thanks to the automatic exchange of information between Member States and digital platforms’ reporting obligation towards various authorities, tax authorities will gain a more accurate picture of taxpayers’ crypto wealth. The impending measures aim to improve stability and trust regarding crypto markets and the associated tax treatment. As always, we will keep you informed of further developments.