Author | TaxDAO
TaxDAO was founded by the former tax director of Bitmain and provides professional cryptocurrency tax and financial consulting. TaxDAO also launched FinTax, a professional financial and tax management software for crypto assets, and is currently an official partner of MetaMask and TON Foundation. Contact: tg @calixliu
On September 5, 2024, a Binance user claimed on a social media platform that Binance restricted his account because he used cryptocurrency assets as his only source of income, and asked the user to provide proof of annual income and tax payment. As of the time of writing this article, the post has been viewed more than 300,000 times and has also caused a lot of discussion. In theory, Binance's behavior is not completely without basis, because it is obliged to comply with the provisions of the asset source proof system and requires users to prove the legitimacy of the source of assets. The deep reason for the controversy is that the traditional asset source proof system does not match the situation where cryptocurrency is the only source of income. In this article, TaxDAO will analyze the crypto asset source proof system and put forward targeted response suggestions.
1. Overview of the Asset Source Proof System
1.1 Definition of the Asset Source Proof System
Source of Wealth (SOW) is a proof of the overall source of a person's wealth, which covers assets accumulated by a person over a period of time through various channels. These channels may include work income, investment returns, inheritance, business profits, etc. Financial institutions often require investors to provide documents such as tax returns, business ownership records or investment certificates to assess whether the source of the client's wealth is legal, thereby effectively managing the risk of fraud and money laundering.
1.2 Asset Type and Proof Form
According to the general logic of the Anti-Money Laundering Law, asset owners usually need to prove that the assets were obtained through legal means. Binance's official website explains the following common asset types and their proof forms:
(1) Salaries: pay slip showing income as early as the last month; bank statement showing wages paid by the employer as early as the last month; tax return for the previous tax year.
(2) Self-employment: tax return for the previous tax year; latest self-employment service invoice/contract/agreement or profit and loss statement proving monthly or annual income.
(3) Deposits: savings account statement issued within the last three months.
(4) Allowances: bank statements showing allowance transfers for the past three months; government-issued allowances or other social welfare statements.
(5) Pensions: bank statements showing pension transfers in the last three months; government-issued pension statements; pension fund statements.
(6) Company dividends or earnings: dividend statement; distribution agreement; bank statement showing dividend payments; latest audited company accounts.
(7) Day trading: a trading statement demonstrating the trading activity for the most recent month and a bank statement showing the withdrawn trading profits deposited into the account. The account registration details and the issuer logo should be clearly visible on both documents.
(8) Gambling: a transaction statement evidencing gambling activities for the most recent month and a bank statement showing the withdrawn gambling profits deposited into the account. The account registration details and the issuer logo should be clearly visible on both documents. Alternatively, a tax return for the previous tax year evidencing the gambling profit income.
(9) Passive income: A signed rental/lease agreement and one of the following documents:
a. Bank statement showing recent rental/lease payments;
b. Latest rental/lease receipt;
(10) Sale of financial assets: investment institution statements; bank statements of investment institution settlements; other statements or documents proving the user’s investment profits (from bonds, stocks, etc.).
(11) Sale of real estate or other assets: sales contract/settlement statement; letter signed by a lawyer/real estate agent confirming the sale of the real estate; copy of land registration/title deed.
(12) Inheritance: a copy of the will; a letter signed by the executor/lawyer/solicitor/verifier of the will.
(13) Donations: Donation agreement for real estate or other assets; affidavit/letter signed by the donor stating the nature of the donation; bank statement showing that the donation has been deposited into the bank.
(14) Cryptocurrency mining: Proof of purchase of mining equipment; Proof of all mining income from relevant platforms/trading platforms. Screenshots of transaction records for at least 3 months are required, detailing all activities related to mining, showing wallet addresses and transaction IDs.
2. The status and role of the asset source certification system
2.1 The status of the asset source certification system
Proof of asset origin has a relatively high status in the Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) systems. It helps to verify whether the wealth accumulation of an individual or entity is related to illegal activities, and is mainly used to prevent money laundering, terrorist financing and proliferation financing of weapons of mass destruction (PF). This system strengthens the integrity and security of the global financial system by ensuring that the source of funds is legal.
In the entire AML/CFT framework, proof of asset source is part of customer due diligence (CDD), which requires financial institutions to collect and verify the source of wealth of their customers. Its purpose is to prevent illegal funds from entering the legal financial system by understanding the wealth background of customers, identifying and reporting any suspicious fund activities.
Globally, international organizations such as the Financial Action Task Force (FATF) and the International Monetary Fund (IMF) have set standards to ensure consistency and effectiveness in the implementation of these policies by countries. FATF's recommendations require countries to ensure that all components of the AML/CFT framework (including SOW) can operate effectively and work together.
2.2 The role of the asset source certification system
2.2.1 Confirmation of legality
The asset source proof system ensures the legitimacy of wealth and prevents illegal funds from entering the legal economic system through strict customer due diligence (CDD), continuous monitoring and compliance with international regulations. First, financial institutions require customers to submit detailed documents including payroll, investment statements, real estate transaction records, etc. to prove the legitimacy of their wealth sources. By verifying these documents, financial institutions can ensure that the financial background of customers is consistent with their source of funds and effectively prevent illegal income from flowing into the legal economy. In addition, the SOW system also requires continuous monitoring of customer account activities, identification and reporting of suspicious transactions, and prevention of money laundering and terrorist financing activities. At the same time, in conjunction with a series of anti-money laundering (AML) and counter-terrorism financing (CFT) policies set by the Financial Action Task Force (FATF), the security and transparency of the global financial system are ensured to the greatest extent.
2.2.2 Tax compliance supervision
The asset source proof system can also play a critical role in tax compliance. By requiring the provision of documents such as wages, investment income, and real estate transactions, SOW can verify whether the client's source of wealth is consistent with the declared income and prevent property concealment or false reporting. In addition, SOW can be combined with international tax information exchange mechanisms (such as CRS and FATCA) to increase cross-border fund transparency and prevent tax evasion in offshore accounts. Financial institutions continuously monitor suspicious fund activities and cooperate with tax authorities to promptly report any possible signs of tax evasion.
2.2.3 Supervision of cross-border capital flows
Cross-border capital flows involve multiple jurisdictions, and criminals may take advantage of differences in national regulations to launder money. SOW enables financial institutions to identify and block the flow of suspicious funds by requiring detailed proof of the source of funds, blocking the flow of illegal proceeds into the legal economy through multi-national money laundering activities. At the same time, due to the high interconnectedness of global financial markets, financial institutions need to ensure that their operations in different jurisdictions meet international standards. The SOW system provides these institutions with unified standards to help them deal with complex cross-border capital flows and ensure compliance operations. By performing strict due diligence, institutions are able to avoid reputational and legal risks associated with illegal funds.
3. Comparison of regulations on asset source certification
When it comes to the review and requirements for proof of asset origin, the United States, the European Union and China each have different regulatory backgrounds and implementation details.
3.1 Regulatory Background and Core Requirements
3.1.1 United States
Proof of asset source in the United States is mainly based on the Anti-Money Laundering Act of 2020 (AML) and the Bank Secrecy Act (BSA). These regulations are designed to prevent money laundering and illegal capital flows. The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department is responsible for supervising and implementing these regulations. Its core requirement is that proof of asset source requires detailed records of the origin and development of funds, including transaction background, legal sources of funds, etc. Financial institutions need to conduct due diligence on customers to ensure that the source of their assets complies with legal regulations. For large or suspicious transactions, financial institutions need to submit detailed reports to report potential illegal activities to regulators.
3.1.2 European Union
The EU's asset source proof regulations are regulated by regulations under the Anti-Money Laundering Directive, which has undergone six iterations so far. The directive requires all member states to take consistent measures to prevent money laundering and terrorist financing. The European Commission oversees the implementation of these regulations and ensures that member states follow uniform standards. Under the Anti-Money Laundering Directive, asset source proof must meet strict requirements, including customer identification (KYC), asset source verification, and review of large and suspicious transactions. Financial institutions in member states are required to provide comprehensive asset proof and report unusual transaction behavior. The directive requires countries to establish effective supervision and reporting mechanisms to ensure the implementation of regulations.
3.1.3 China
China's asset source certification regulations are based on the Anti-Money Laundering Law of the People's Republic of China, the Anti-Terrorism Law of the People's Republic of China, and the Supervision and Administration Measures for Anti-Money Laundering and Anti-Terrorist Financing of Financial Institutions. These laws are implemented by the People's Bank of China and other relevant regulatory agencies. It is worth noting that in December 2023, the Ministry of Finance of the People's Republic of China formulated the "Guiding Opinions on Strengthening Data Asset Management" in accordance with the "Cybersecurity Law of the People's Republic of China", "Data Security Law of the People's Republic of China", "Personal Information Protection Law of the People's Republic of China", etc. Encourage all relevant entities of data assets to disclose and publicize data asset information in a timely manner in accordance with relevant requirements to increase the supply of data assets. Data asset trading platforms should update the transaction circulation in real time and disclose information regularly to promote the openness and transparency of the trading market. The Supervision and Administration Measures for Anti-Money Laundering and Anti-Terrorist Financing of Financial Institutions refer to international common rules and require financial institutions to conduct self-assessment of money laundering and terrorist financing risks, and establish internal control systems and corresponding risk management policies based on risk conditions and business scale. At the same time, in order to prevent the anti-money laundering supervision risks of overseas branches, it clarifies the management requirements of financial institutions for overseas branches. Financial institutions are required to provide detailed asset certification documents, such as house purchase contracts, bank deposit certificates, stock holding certificates, etc. In addition, Chinese regulators oversee the review process of financial institutions to ensure that all capital flows comply with national laws and policies.
3.2 Proof Form
3.2.1 United States
Written proof includes, but is not limited to, bank statements, investment account statements, real estate deeds, etc. These documents usually provide detailed account information and transaction records. Electronic proof documents need to comply with the Electronic Signature Act (ESIGN Act) and the Uniform Electronic Transactions Act (UETA). Financial institutions can also provide digital proof of assets via email or dedicated platforms.
3.2.2 European Union
Written proof includes financial statements, asset certificates, tax documents, etc. These documents usually need to be notarized or authenticated to prove their legitimacy. In the EU, different countries use different electronic document systems, but they usually need to comply with the EU Electronic ID and Trust Services Regulation (eIDAS), which allows electronic proof to be used in cross-border transactions.
3.2.3 China
According to the provisions of the Civil Code of the People's Republic of China and other laws and relevant judicial interpretations, written proof includes real estate certificates, bank deposit certificates, stock certificates, etc. These documents must be authenticated by relevant departments to prove the legitimacy of the assets. Chinese financial institutions also provide electronic proof documents, which must comply with China's electronic signature law and relevant electronic certification standards. Electronic proof is widely used in processing large transactions and cross-border transfers, and its security and reliability must be guaranteed.
4. Challenges posed by crypto assets to the asset origin certification system
4.1 Decentralization of Cryptocurrency
The decentralized nature of cryptocurrencies means that they do not rely on traditional financial intermediaries or central banks, which makes the transfer of funds more anonymous, faster, and difficult to track. Compared with traditional financial assets, cryptocurrency transactions are recorded in distributed ledgers through blockchain technology. Although transactions are open and transparent, the identities of the two parties to the transaction can be hidden through anonymous addresses. The above characteristics make it complicated to track the true source of funds, especially when funds flow through multiple addresses or use mixing services, the traceability of on-chain data becomes blurred. The SOW system usually requires users to provide clear sources of income and documents (such as payroll or bank statements) to ensure the legitimacy of funds. However, cryptocurrency transactions usually do not involve traditional banking institutions and there is no standardized proof of income. Many crypto asset holders can only provide transaction records of trading platforms, which do not always meet the compliance requirements of traditional financial systems. As mentioned in the post, Binance requires users to provide transaction statements and withdrawal records, but if this information is not detailed or cannot be connected with the traditional financial system, there may be a risk of fund freezing or account restrictions.
4.2 The global and borderless nature of cryptocurrency
The global and borderless nature of cryptocurrencies means that there are almost no traditional regulatory barriers to their cross-border flow. The cross-border transfer of traditional financial assets usually requires the review and approval of intermediaries such as banks and payment institutions, while cryptocurrencies can flow freely between different jurisdictions, bypassing these intermediaries. At the same time, cryptocurrency transactions involve multiple jurisdictions, and each country and region has different regulatory frameworks, compliance requirements, and tax policies for crypto assets. This means that asset holders face different standards when proving the legitimacy of their assets in different regions, which may even lead to compliance conflicts.
4.3 Cryptocurrency prices fluctuate drastically
The price of cryptocurrencies fluctuates dramatically, and there are a large number of different types of crypto assets on the market (such as Bitcoin, Ethereum, stablecoins, etc.), which makes the valuation and regulation of cryptocurrencies more complicated, which undoubtedly poses a challenge to the SOW system. Unlike fixed salary income, the value of digital currencies may fluctuate rapidly, making it difficult to prove the legitimacy and stability of income through traditional tax declarations. In addition, some cryptocurrency transactions may involve cross-border transfers, which further increases the difficulty of compliance because different countries have different regulatory policies on cryptocurrencies.
4.4 Cryptocurrency tax system is complex
The issue of tax reporting and tax evasion further exacerbates the impact of cryptocurrency on the SOW system. The fact that users did not pay taxes in the post suggests that cryptocurrency holders sometimes ignore the fact that they need to pay taxes on the proceeds of their transactions. Due to the lack of comprehensive regulation of cryptocurrencies by tax authorities, crypto assets are sometimes used to evade tax responsibilities, which runs counter to the core goal of the SOW (i.e. ensuring that all funds are from legal sources).
5. Recommendations for Proving the Origin of Crypto Assets
When cryptocurrency becomes the main source of income, holders need to pay special attention to transparency and compliance in asset proof. During this period, detailed transaction records need to be kept to ensure that the transaction history files provided by all cryptocurrency exchanges can fully display account details and transaction times. At the same time, it is recommended to convert crypto asset profits into legal currency and withdraw them to personal bank accounts regularly to establish a clear path for fund flow, which is convenient for providing clear evidence during fund review. In addition, due to the large price fluctuations of cryptocurrency, it is recommended to denominate assets in legal currency when declaring assets, and ensure that the time points in the transaction records are consistent with price fluctuations.
Compliance with tax declaration is also an important part that cannot be ignored. Even if the tax regulations on cryptocurrencies in some countries are not yet perfect, holders should take the initiative to declare trading income to tax authorities to avoid future compliance risks. To reduce potential audit risks, try to choose legal and regulated trading platforms for trading, and keep an eye on changes in global regulatory policies.
6. Conclusion
With the rapid development and popularity of cryptocurrencies, the traditional asset origin proof system is facing new challenges. In digital asset transactions, the characteristics of decentralization, anonymity, and cross-border flows make supervision and compliance more complicated. However, through legal trading platforms, transparent transaction records, and active tax declarations, holders can still effectively prove the legitimacy of assets and reduce compliance risks. In the future, as the global regulatory framework for cryptocurrencies gradually improves, we believe that the SOW system will continue to adapt to this emerging field and provide stronger guarantees to ensure the stability and security of the global financial system.
