The G-20 Summit in Japan brought 20 finance ministers and central bank governors to officially commit to implementing the guidelines of the Financial Action Task Force (FATF). The lack of regulation in the crypto markets can be fertile ground for money laundering, terrorist financing, tax evasion, etc. Therefore, it is not surprising why the FATF guidelines are calling for the end of anonymity in the crypto market.
In fact, after the G-20’s determination to comply with the FATF standards, we are soon going to see their implementation around the world, and crypto users will be required to put aside their privacy — and for some, even their ideology — in order to use services under the control of the regulator.
White vs. black crypto markets
Pretty soon, what we are going to get is two separate groups of crypto addresses: clean crypto and black-market crypto. To get into the clean group, you must declare your crypto addresses, account numbers, location information, beneficiary’s name, etc. If you choose not to disclose this information, you will be automatically assigned to the black-market group.
The standards require crypto exchanges to perform extensive Know Your Client (KYC) and Anti-Money Laundering (AML) procedures. Each address will be identified and linked to a specific person, and there won't be any anonymous addresses coming in and out of the exchanges. This might be the end of the crypto world as we know it.
While many users will mourn the loss of their privacy, the bright side of these standards is the ability to integrate the crypto market into traditional financial markets, which can lead to a significant increase in usage and the ability to cash out crypto to fiat within the banking system.
However, because of the anarchist nature of some hodlers, there will be some who choose to retain their privacy and to be a part of the black-market group. As Jeff Horowitz, chief compliance officer at Coinbase, said:
“I get why the FATF wants to do this. But applying bank regulations to this industry could drive more people to conduct person-to-person transactions, which would result in less transparency for law enforcement.”
Therefore, it is necessary to carefully consider which side to belong to — because once you go black, you can never go back. If you choose to have your addresses in the black market, it will be tough to "come clean" and use them without the risk of facing criminal charges.
And what about taxes?
All eyes are facing the United States Internal Revenue Service (IRS) now, which, after pressure by U.S. Congress to provide clarity on reporting crypto taxes, is going to publish a clarification to tax reporting soon, as stated in the response letter to Congress from May 16. This clarification will determine the executable methods for crypto tax calculation, such as determine whether taxpayers need to use a specific identification method to report or if there are other acceptable methods.
While the specific identification method identifies the exact Bitcoin (BTC) that the user sold, and calculates his/her tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the first-in-first-out (FIFO) method is not taking under consideration real-time user activity. Basically, to calculate in the FIFO method, one has to make a list of all purchases and another list of all sales. Then, to do the matching: Take the first one in the purchase list and calculate the tax results as if he/she sold it at the price and on the date from the first sale in the sales list. This results in an over taxation, especially if you bought your first Bitcoin in the early years.
In order to calculate using the specific identification method, one has to identify — using evidence from the blockchain — the purchase dates and sales date of all Bitcoin that came in and out of his/her wallet for the same tax year. Then, he/she must match the purchase and sale dates and prices of the same Bitcoin using blockchain data, and finally calculate the tax liability.
The specific identification method, just like the new FATF regulation, will require the crypto taxpayer to disclose all his/her crypto addresses. Will the IRS enforce it? Stay tuned, and we will soon find out.
Anonymity claimed to be one of the fundamental essences of crypto, but will this regulation destroy cryptocurrency? Probably not. Meanwhile, the European Union’s regulatory framework sets a goal “to unveil the anonymity,” calling it “the biggest problem for combating money laundering and countering terrorist financing.” Regulation is an inevitable step in the process of market maturation, and is a major and significant step toward a much broader adoption.
Will crypto exchanges successfully adapt to the new regulation or is it a technical challenge that they are unable to implement? Will the IRS also ask for a declaration of crypto addresses? Let us know what you think in the comment section below.
The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Or Lokay Cohen is a vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation, managing a leading tax consultant firm. She holds a LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging between cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.