The European Council Adopts Stricter Reporting and Tax Transparency Rules for Crypto-Asset Transfers

The European Council has recently approved an updated version of the Directive on Administrative Cooperation (DAC8), aimed at expanding reporting requirements for crypto-asset transfers.

This move comes shortly after unanimous approval by EU Finance Ministers of the Markets in Crypto-Assets (MiCA) bill, which establishes regulatory principles and requirements for the use of cryptocurrencies and related services within the European Union.

The DAC8 directive, commonly referred to as the “common approach,” aligns with the Organisation for Economic Cooperation and Development’s (OECD) crypto reporting framework and is consistent with existing EU regulations. Its objective is to enhance tax transparency by imposing stricter reporting obligations on service providers involved in crypto transfers.

Under DAC8, crypto-asset providers will be mandated to collect detailed information on all crypto-asset transfers, regardless of the transfer amount or source. This information must include the beneficiary and recipient’s account number, ensuring transparency, traceability, and the identification of suspicious transactions.

Previously, EU lawmakers proposed applying the “travel rule” to track crypto transfers only for transactions exceeding €1,000 and occurring between wallets of crypto-asset service providers. This meant that person-to-person transfers without involving service providers were not subject to the rules.

The adoption of DAC8 represents a tightening of EU regulations concerning cryptocurrency transfers. According to Elisabeth Svantesson, the Minister for Finance of Sweden, these new rules will pose a significant challenge for individuals engaged in illegal activities, evading EU sanctions, or financing terrorism using crypto-assets. Svantesson views the implementation of DAC8 as a crucial step towards standardizing and regulating cryptocurrencies in Europe, with the aim of reducing risks, increasing confidence in using crypto-assets, and facilitating tax cooperation among European countries.

Importantly, the revisions to DAC8 are being implemented through consultations among European Council member states, meaning they do not require legislative changes.

Furthermore, the unanimous approval of the MiCA bill by EU Finance Ministers on May 16 paves the way for its final approval by the European Council and subsequent publication in the Official Journal of the European Union. The MiCA bill is expected to come into effect within a year, meaning that the new rules and requirements outlined in MiCA will be fully effective by mid-2024.

The MiCA bill encompasses several key provisions and components that regulate the use of cryptocurrencies and related services within the European Union:

1. Registration and authorization: MiCA establishes registration and authorization requirements for cryptocurrency issuers, exchanges, and wallet providers to ensure reliability and transparency in the crypto market.
2. Stablecoin issuers: The legislation imposes specific security and risk mitigation requirements on stablecoin issuers, ensuring the stability and reliability of stablecoins tied to specific assets or currencies.
3. Crypto custody services: MiCA sets security and protection standards for cryptocurrency custody services, necessitating adequate measures to prevent cybersecurity and operational failures in safeguarding customers’ crypto-assets.
4. Combating misuse and manipulation: The regulations provide a framework for preventing misuse, insider trading, and manipulation within the cryptocurrency market. They establish standards and requirements to ensure integrity and transparency in the crypto ecosystem.
5. Unified market environment: MiCA harmonizes regulatory requirements and operational procedures across the EU, reducing fragmentation and fostering trust in the cryptocurrency market.
6. ICO regulation: Provisions within MiCA address the regulation of Initial Coin Offerings (ICOs), requiring ICO projects to provide sufficient information to investors and protect their interests.
7. Legal protections for investors: MiCA offers legal protections for investors and users of cryptocurrency services. It establishes mechanisms for handling disputes, ensuring transparency, and protecting investors’ rights to information.

Although the MiCA bill was provisionally approved by the European Parliament in July 2022, the final vote on the bill faced repeated delays due to concerns raised by representatives of private payment systems, who claimed that it would restrict business opportunities in the EU.