The Privacy Edge, Part 1: Global Crypto Reporting and Self-Custody

The increasing digitization of financial transactions has ushered in a new era of tax transparency, with governments worldwide leveraging reporting frameworks to monitor and control capital flows.

The OECD’s Common Reporting Standard (CRS), introduced in 2014, marked a significant step in automatic tax information exchange. Now, the Crypto-Asset Reporting Framework (CARF) aims to extend similar oversight to crypto-assets, further tightening global financial surveillance.

For users of crypto-assets, CARF represents a direct challenge to the pseudonymity that is an important part of the appeal of  cryptocurrencies. While institutional custody of crypto-assets provides convenience and regulatory compliance, it also comes with heightened scrutiny and mandatory reporting obligations.

This raises an important question: Does self-custody offer a privacy advantage over institutional custody in the face of expanding financial reporting frameworks?

CARF and CRS: A Brief Overview

The Common Reporting Standard (CRS) was developed by the OECD to facilitate the exchange of financial account information between tax authorities across jurisdictions.

Under CRS, financial institutions are required to report account balances, interest, dividends, and other income to tax authorities, who then share this data with their counterparts in participating countries.

The Crypto-Asset Reporting Framework (CARF) extends this principle to crypto-assets. It mandates that Crypto-Asset Service Providers (CASPs), including exchanges, brokers, and wallet providers, report transactions involving cryptocurrencies, stablecoins, and certain NFTs.

The objective is to prevent tax evasion by ensuring that governments receive detailed transaction data, just as they do with traditional financial assets under CRS.

Both frameworks rely on third-party reporting, meaning that intermediaries, rather than individuals, are responsible for compliance. However, this distnction is critical when considering the privacy implications of self-custody.

Implementation Deadlines

The OECD has set forth an ambitious timeline for the implementation of CARF. While exact adoption dates will vary by jurisdiction, participating countries are expected to begin integrating CARF into their legal frameworks by 2025, with reporting obligations likely commencing in 2026 or 2027. CRS amendments to incorporate crypto-assets are also in progress, with many jurisdictions expected to enforce compliance in a synchronized manner with CARF.

Financial institutions and CASPs are already preparing for compliance by adapting their systems to capture, store, and report the required data. For individuals, this means that transactions conducted via centralized platforms will soon be subject to automatic exchange of information, increasing the necessity for informed decision-making regarding custody choices.

Institutional Custody: Convenience at the Cost of Privacy

Institutional custody, such as storing assets on centralized exchanges or with regulated custodians, offers clear advantages:

• Ease of access: Users do not need to manage private keys.

  
  

• Regulatory compliance: Institutions handle Know-Your-Customer (KYC) and Anti-Money Laundering (AML) obligations.

  
  

• Reduced risk of key loss: Unlike self-custody, where losing a private key can mean permanent loss of funds, custodians provide recovery options.

However, these benefits come with significant trade-offs in terms of privacy:

• Mandatory reporting under CARF and CRS: Institutional custodians are required to disclose user data to tax authorities, making transactions fully traceable.

  
  

• Data security risks: Centralized entities are attractive targets for data breaches, potentially exposing sensitive financial information.

  
  

• Potential for asset freezing or seizure: Regulatory authorities can exert pressure on custodians to freeze or seize assets, limiting financial sovereignty.

Self-Custody: A Privacy Shield Against CARF and CRS?

Self-custody—where users hold their private keys and transact directly on the blockchain—eliminates reliance on intermediaries. This offers several privacy advantages:

• No third-party reporting obligations: Since CARF and CRS depend on institutions to report data, transactions that occur outside of custodial platforms may remain unreported.

  
  

• Greater control over personal information: Self-custody removes the need to share identity details with exchanges or custodians, reducing exposure to data leaks.

  
  

• Mitigation of seizure risks: With self-custody, assets cannot be arbitrarily frozen or confiscated by centralized entities.

However, privacy in self-custody is not absolute. Several factors can still lead to exposure:

• Chain analytics and transaction tracing: Governments and private firms use sophisticated tools to track blockchain transactions and link them to individuals.

  
  

• On-ramp and off-ramp vulnerabilities: Moving funds between fiat and crypto often requires interaction with regulated entities that perform KYC checks.

  
  

• Jurisdictional risks: Some governments may implement legal measures to criminalize non-compliant self-custody practices.

  
  

Legal Considerations: Privacy-Enhancing Tools and Regulatory Risks

While self-custody provides certain privacy benefits, it is important to acknowledge that privacy-enhancing tools and methodologies, such as coin mixers and privacy coins, may not be legal in some jurisdictions.

Governments have increasingly scrutinized these technologies, with some outright banning their use due to concerns over illicit financing. Individuals considering self-custody strategies should carefully assess the regulatory environment in their country.

Expert legal advice should be sought before utilizing privacy-enhancing mechanisms, as violations of anti-money laundering (AML) laws or other financial regulations can result in severe penalties, including fines or criminal charges.

The Future: A Balancing Act Between Privacy and Compliance

As CARF moves toward implementation, the global crypto landscape will face increasing regulatory scrutiny. Institutional custody will likely remain the default option for mainstream adoption, ensuring compliance but at the cost of financial privacy. Meanwhile, self-custody may continue to provide a privacy buffer, but only for those who can navigate its complexities and risks.

For privacy-conscious individuals, solutions such as privacy coins, CoinJoin transactions, and non-custodial wallets with enhanced anonymity features may become increasingly important. However, these solutions may also attract regulatory crackdowns, as seen with past actions against privacy-centric crypto services.

Ultimately, the tension between privacy and regulatory oversight will shape the future of crypto-assets. The question is not just whether self-custody provides a privacy advantage, but for how long governments will allow that advantage to exist.

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Disclaimer: The content of this article is for informational purposes only and does not constitute legal advice. The opinions expressed are the author’s own and do not represent the views of any organization the author may be associated with. Please consult me in my professional capacity for advice tailored to your individual circumstances before making any decisions based on this article.