DAC8 will expand the scope of crypto regulation beyond MiCA

The European Crypto Initiative (EUCI) welcomes the new rules put forward by the Commission through the proposed amendments to the Directive on administrative cooperation in the field of taxation (DAC8). However, at first glance, it remains concerned that it would apply to a far wider range of obliged entities and individuals than the recently finalised Markets in crypto-assets regulation (MiCA).

Moreover, the proposed amendments would not just apply to crypto-asset service providers (CASPs) as defined under MiCA’s latest version but also to what DAC8 refers to as “crypto-asset operators”. This effectively expands the scope of the directive to encompass CASPs in a far broader sense, diluting MiCA’s initial concept and potentially weakening its effect.

In more practical terms, DAC8 would apply to both centralised and decentralised exchanges and cover those transactions involving a wide array of crypto-assets such as stablecoins, NFTs and even e-money tokens, to name a few. Notably, truly decentralised projects and NFTs are currently outside the scope of MiCA, but if adopted, DAC8 would implement a far more encompassing regime in the field of taxation, further bringing ambiguities and possibly application issues due to MiCA being directly applicable as a regulation and DAC8 being a directive and needing to be transposed in member states laws.

“Although we tend to expect that all regulations affecting crypto would follow an overall logic, we shouldn’t forget about the context in which they were drafted,” noted Marina Markezic, EUCI’s co-founder and executive director.

“In the case of DAC8, we should acknowledge the spill-over effect of both the war in Ukraine and the sanctions imposed by the EU, as well as COVID-19 and the efforts to restore the EU economy. In practice, what we see is that entities and projects that might be outside the scope of MiCA might be scoped in DAC8 as they are considered obliged entities in this specific context. We do understand the broader logic of this. However, we also worry that such obligations are disproportionate, especially as the nature of the blockchain infrastructure makes them quite unsuitable
for secret transactions,” added Markezic.

Furthermore, there doesn’t seem to be a clear definition of some of the key terms introduced by the proposed amendments, namely “crypto-assets operator”.

According to Simon Polrot, EUCI’s co-founder and president, the text “expressly targets “crypto-asset operators” who “trade”, among other digital assets, non-fungible tokens (NFTs) when these may represent non-financial rights. However, asking all players who manage crypto-assets on behalf of third parties, without these uses being financial, to identify their customers and report all their transactions to the authorities of the member states seems to go well beyond the expected scope of the regulation”.

Another potential issue is that the information requested from the CASPs is extremely significant and complex to calculate. “The estimated cost for service providers seems underestimated, and the mass of information to be produced and sent will be enormous. Will the member state tax authorities have the means to process this information?Also, how will this impact SMEs which do not have the same financial resources compared to larger crypto actors?” adds Polrot, quoting prior issues that the EU has faced in exchanging information between member states at an even smaller scale.

“And speaking of the application of the proposed amendments to the directive, we also see some issues in the way in which the text provides for the subjection of foreign entities to avoid any market distortion and leakage of information. It does seem logical, but the effectiveness of these obligations does not seem obvious to us,” concludes Polrot, suggesting that the EU institutions spend a bit more time on this particular part of the proposal.

The European Crypto Initiative (EUCI) is a Brussels-based advocacy organisation that supports innovative & innovation-friendly regulation adapted to decentralised applications that leverage blockchain technologies. EUCI’s work is supported by the Ethereum Foundation, Maker DAO and the Interchain Foundation.