The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

This article considers the implications of CARF for the current and emerging use cases for blockchain technology in banking and payments.

Overview

Crypto-Assets reporting under CARF will begin from 1 January 2026 – 50+ jurisdictions are already committed to implementing these rules globally, including the UK and the EU27.

CARF targets a wide range of tokens used for payment or investment purposes. That’s likely to include any tokens that could be traded on an exchange – whether that’s a traditional exchange, a crypto-native exchange like NFT marketplaces, or de-fi pooling and swaps, or on permissioned blockchains.

The framework requires enhanced customer documentation and information collection, exceeding Anti-Money Laundering (AML) and Know Your Customer (KYC) norms, and necessitates detailed annual reporting of transactions at the token level. 

This initiative is part of a global movement to regulate digital assets akin to financial services, paralleling developments like the EU’s Markets in Crypto-Assets Regulation (MiCA) and the Financial Action Task Force’s Guidance for Virtual Asset Service Providers.

Why does this matter now?

1. Crypto-Asset Service Providers are in scope for CARF where they effectuate transactions in digital assets. Current digital assets trends in financial services mean that many banks digital asset products will be in scope once they evolve beyond simply using blockchain as a record of ownership.
2. Banks' current digital asset initiatives, including tokenized deposits, assets, and transactions, will likely fall into CARF. Tokenized funds are likely to be in scope where the traditional fund register is replaced by blockchain technology.
3. Private, permissioned blockchains are not exempt from CARF; banks managing these blockchains may need to consider how their infrastructure supports comprehensive participant identification and reporting.
4. Unless token issuers can 100% sure that counterparties will be limited to other banks, asset managers or listed corporates (all of whom do not need to be reported), there is an immediate need to think about how CARF will impact digital asset and tokenization projects now – from collection of counterparty documentation to reporting significant volumes of information.
5. Even when tokens are restricted to low-risk entities like banks, asset managers, and listed companies, there are still documentation obligations to confirm reporting exemptions and controls to limit transactions to these parties.
6. On chain payment and settlement mechanisms, and new ways to comply with anti-money laundering, KYC and sanctions rules are being explored. Any new solutions in this space will need to be aligned with CARF requirements. 
7. CARF will also apply to the use of digital assets for payments and transfers unless the underlying assets are Central Bank Digital Currencies or fall into the category of Specified E-money Products. This would likely require reporting on the recipients of payments (such as merchants or sellers) on whose behalf the transaction is effectuated, but in the case of push payments would apply to the sender. In some cases, both sender and recipient would need to be identified. 
8. Balancing the advantages of blockchain and tokenization with regulatory compliance is crucial; without addressing CARF now, it could become a significant obstacle, increasing compliance demands for digital asset initiatives.

What to think about now

1. For organizations launching blockchain use cases – every new use case needs to be reviewed from a CARF perspective, with a clear action plan for those which will be live in 2026.
2. Engage with domestic tax authorities as the transpose CARF into local law – are there use cases which should be treated as equivalent to existing financial assets and reported under existing regimes (eg, CBDCs, tokenized deposits, stablecoins); are there challenges to implementation that should be addressed?
   • In the UK, HMRC have recently launched a consultation on the implementation of these rules and the introduction of an equivalent domestic reporting regime, closing on 29 May 2024. UK Finance are responding to this consultation, including consideration of UK Finance’s Regulated Liability Network project.
3. Tax colleagues should engage with compliance, legal and financial crime discussions on new products – understanding who is responsible for AML/KYC, sanctions etc. 
4. There is a need for banks to engage with owners of on-boarding processes to identify changes required before 2026 – note that for many counterparties CARF requires a positively affirmed statement of residence that cannot be satisfied through public information.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular product. You should seek specific tax advice in relation to any of the issues discussed.

Register to our webinar Reporting on Crypto-Assets – why you need to act now on CARF! on 15 May to learn more.