Blockchain startups and the new regulations: TOFR and CARF

The blockchain industry is known for its love of acronyms – and that’s a good thing, because this year there are two new ones you should know about when it comes to legal compliance. Who would have thought that TOFR and CARF will soon be as well known as ICO or NFT? But seriously, these new regulations are crucial for blockchain startups that want to assert themselves in an increasingly regulated market.

Changing regulatory landscape: TOFR and CARF

The Transfer of Funds Regulation (TOFR)also known as the Travel Ruleis an EU regulation that will come into force on December 30, 2024. It aims to make crypto asset transfers more traceable in order to combat money laundering and terrorist financing. Providers of crypto services must collect, transmit and store information about senders and recipients. For start-ups, this means that they must verify the identity of users and collect data such as names, addresses and dates of birth. This data must be stored and retained for a certain period of time so that it can be made available in the event of an investigation. Startups are also obliged to report suspicious activities, which requires a well-functioning risk management and compliance program.

Implementing the TOFR regulation will be a challenge for many blockchain start-ups. They will have to adapt their systems to collect and transmit the required information. This can lead to additional costs and technical challenges, especially for decentralized applications (dApps) and crypto exchanges. Nevertheless, there is also an opportunity here to strengthen the trust of investors and users by adapting to the new requirements at an early stage.

Tax transparency through CARF

The Crypto-Asset Reporting Framework (CARF) is a global initiative of the OECD that aims to create tax transparency in the area of crypto assets. Providers of crypto services must record information about their customers and transactions and report this to the tax authorities. This serves the tax authorities as a source of information on income from crypto assets and promotes the international exchange of information to combat tax evasion. CARF is expected to come into force from 2026 and could lead to stricter requirements for customer identification and transaction tracking.

The introduction of CARF means that blockchain startups will need to further develop their compliance structures to meet the new requirements. This could require investment in customer identification (KYC) and anti-money laundering (AML) technologies. Startups must also ensure that they can correctly record and report the tax information of their users. This requires not only technical adjustments, but also a deep understanding of the tax requirements in different countries.

Effects on blockchain start-ups

The combination of TOFR and CARF shows that the crypto market is becoming increasingly regulated. For blockchain startups, this means that they need to adapt their systems and processes to the new requirements in order to minimize legal risks and strengthen the trust of their users. By investing in compliance and technology, they can not only meet the legal requirements, but also gain a competitive advantage by positioning themselves as responsible and transparent players in the market.

Overall, TOFR and CARF are a sign that the crypto market is increasingly becoming the focus of regulatory authorities. Blockchain startups that adapt to these requirements at an early stage can not only minimize legal risks, but also strengthen the trust of investors and users. In an industry known for its innovative strength, such adaptations are crucial to long-term success. By implementing these regulations at an early stage, start-ups can consolidate their position in the market and prepare themselves for the challenges of the future.

Future prospects and strategies for blockchain start-ups

The new regulations also offer blockchain start-ups the opportunity to position themselves strategically and increase their competitiveness. By adapting to TOFR and CARF at an early stage, they can not only minimize legal risks, but also strengthen the trust of investors and users. In addition, by investing in compliance and technology, they can optimize their systems and processes to work more efficiently and securely.

In order to be successful in the long term, blockchain start-ups should pursue a proactive strategy. This includes dealing with the new requirements at an early stage and making the necessary adjustments. It is also important that startups inform their users about the new regulations and make transparent how they handle the collected data. This transparency allows them to strengthen the trust of their users and position themselves as responsible players in the market. In addition, startups should also consider the international aspects of regulations. As CARF is a global initiative, they need to ensure that they comply with tax requirements in different countries. This requires a deep understanding of local laws and regulations as well as close collaboration with international partners and experts.

Overall, TOFR and CARF are an important step towards a regulated and transparent blockchain industry. Blockchain startups that adapt to these changes will be able to benefit from these developments in the long term and consolidate their position in the market. By combining technological innovation and legal compliance, they can establish themselves as leading players in the industry and help shape the future of the crypto market.

Start-ups should also take advantage of the opportunities created by the new regulations. The increased transparency and security can lead to more institutional investors entering the crypto market, which in turn can lead to greater liquidity and stability. By adapting to TOFR and CARF at an early stage, startups can prepare for these new market conditions and benefit from the resulting opportunities. Finally, it is important that blockchain startups see their adaptation to the new regulations as an opportunity to prove their innovative strength. By developing new technologies and solutions that meet the requirements of TOFR and CARF, they can increase their competitiveness and establish themselves as pioneers in the industry. This requires not only technical expertise, but also a deep understanding of the regulatory requirements and the ability to translate these into innovative solutions.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.