Deposit and Withdrawal Knowledge: How to Choose a Compliance Platform, How to View KYC and Taxation

Original author: FinTax

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Despite the increasing maturity of cryptocurrency payment technology, the exchange between fiat currency and cryptocurrency (i.e., “in and out funds”) remains a core aspect that Web3 investors cannot avoid. Since cryptocurrencies have not yet become mainstream payment tools, if the crypto assets in investors’ wallets or exchange accounts cannot be smoothly converted into fiat currency, their value can only be limited to specific scenarios. However, the in and out funds are directly related to the safety of funds. In a situation where risks such as account freezing and fraud are omnipresent, how to choose safe and reliable in and out fund channels and implement comprehensive risk prevention before, during, and after transactions is a question that every Web3 investor must consider.

1. Compliant platform: The preferred path for secure deposit and withdrawal.

1.1 Why Choose a Compliant Platform

Among the many deposit and withdrawal channels, compliant platforms have become the preferred choice for investors due to their security and reliability. They have the following advantages:

(1) Regulatory Endorsement: Compliant platforms usually hold licenses such as MSB (Money Services Business) or VASP (Virtual Asset Service Provider), indicating that they have passed regulatory scrutiny and are under ongoing supervision. This serves as a constraint on the platform and provides assurance for its credibility.

(2) Anti-money laundering measures: Compliant platforms must adhere to anti-money laundering (AML) regulations and establish stringent fund screening mechanisms to reduce the risk of user accounts being frozen due to the influx of illicit funds.

(3) Transparent banking cooperation: Compliant platforms typically disclose information about partner banks, accept public supervision, and conduct strict reviews of bank qualifications and security measures to ensure the safety of fund custody.

(4) Risk Management: The compliance platform intercepts illegal funds through technical means and internal risk control systems, preventing it from becoming a transit station for money laundering or fraud.

Of course, due to regulatory compliance requirements, investors are inevitably required to undergo KYC verification when setting up accounts and conducting withdrawal operations on compliant platforms, and wait for a certain review period. Although this brings some inconvenience to investors, it can also be seen as a mutual compromise between the overall security of the platform and the convenience of the users themselves, with long-term benefits outweighing the drawbacks.

Outside of compliant platforms, KOLs on platforms like X and Telegram often claim to have channels for cashing out, and their pages frequently showcase examples of investors successfully withdrawing funds. However, it is important to note that the withdrawal channels provided by these KOLs are closer to over-the-counter trading and essentially belong to a P2P model. Compared to cashing out on compliant platforms, this KOL’s private contact P2P model carries higher risks — KOLs guarantee transactions based on their own reputation and credibility, lacking third-party supervision. When investors transfer their crypto assets from their wallets to the KOL’s wallet, they can only rely on the KOL to convert it to fiat currency based on trust. If there is a problem with the KOL’s funding chain and investors cannot detect it in time, they may find it difficult to recover their assets. In contrast, compliant platforms are under the supervision of regulatory bodies from various countries and regions, and usually have strong financial backing, making them evidently superior in terms of security and protection compared to the cash-out channels of P2P models. Therefore, for now, compliant platforms remain the preferred method for the vast majority of crypto investors for input and output of funds.

1.2 How to Identify Compliant Platforms

After understanding the advantages of withdrawing funds from a compliant platform, how should one identify and select a compliant platform? Currently, there are a certain number of licensed platforms and companies engaged in deposit and withdrawal services, and some platforms have even applied for financial licenses in remote areas, distant countries, or small nations, entering this market to compete for customers. The abundance of platforms often dazzles investors. In fact, identifying a compliant platform can be done in the following four steps: check the license, look at KYC, audit the custody, and observe the signals.

(1) Check the license. Legitimate platforms operate with licenses, and the related information is generally published on the official website of the platform. If the official website does not display this information, investors can first identify the local regulatory authority and then verify it on the relevant regulatory website.

(2) Look at KYC. Regular platforms generally clearly state the KYC, user identity verification process, and privacy policy. If you encounter a platform that has no KYC or verification, such a platform is likely to have very high risks.

(3) Custody Review. Fund custody is transparent. Some legal and compliant platforms disclose the names of cooperating banks and custodians, which provides investors and users with a basis for assessing the reliability of the platform.

(4) Observe signals. There are also some relatively dangerous signals that can help users quickly identify issues, such as some platforms requiring users to transfer their USDT to personal accounts, and some third-party intermediaries promoting ways to bypass risk controls with high returns, etc. These signals generally imply that the platform or service provider may not be compliant.

1.3 How to Handle Disputes with the Platform

Regardless of the method used for withdrawal, investors cannot completely avoid the risk of disputes. Although the probability of disputes arising from compliant platforms is lower than that of other channels, this probability can never be zero. So, how should ordinary investors handle disputes with the platform? First, users should insist on retaining various transaction vouchers in their daily use and transactions to leave evidence of their activities, making it easier to provide proof in case of disputes; second, in terms of rights protection communication, users should also save communication records with customer service in the form of screenshots, recordings, etc., especially noting down the ticket number, communication time, content, and other relevant information. Finally, when the official dispute resolution process within the platform cannot meet their demands, users can also submit disputes to the corresponding regulatory agencies for complaints, which further demonstrates the advantages of compliant platforms.

2. KYC: The “firewall” of a compliant platform

KYC, or “Know Your Customer”, is a widely used procedure and practice in fields such as financial services, commercial transactions, and cybersecurity, mainly used to verify customer identity, assess customer risk, and ensure the legality and security of transactions, preventing financial crimes and fraud. KYC is the most important concept in the compliance process for deposits and withdrawals, and it is also one of the procedures that the vast majority of compliant platforms need to certify their users. The importance of KYC to compliant platforms is reflected in two aspects: from a regulatory perspective, whether or not there are KYC measures is an important basis for regulatory agencies to judge whether a platform is compliant. Currently, major global regulatory agencies have included virtual asset service providers in the anti-money laundering regulatory framework. If a platform fails to fulfill its anti-money laundering obligations, it may face severe penalties from regulatory authorities. Previously, the U.S. SEC issued hefty fines to a major exchange for such reasons. From the perspective of platform operations, KYC is also a risk prevention measure that can prevent the inflow of illegal funds related to black market activities and terrorist financing into the platform, avoiding the freezing of user accounts.

The risk of information leakage during the KYC process has raised concerns among some investors. However, the principle of “minimum” collection of user information has become the primary guideline followed by most compliant platforms in the information gathering process. Regulations from various jurisdictions, represented by the EU GDPR legislation, also impose regulatory requirements on platforms for handling user data. In addition, compliant platforms like OSL Pay implement internal technical measures such as end-to-end encryption to ensure the security of users’ information: under end-to-end encryption, whether it’s user identification documents or facial data, all information is encrypted during transmission and storage, meaning that even if hackers invade, they cannot see the original information; de-identification processing separates users’ identity information from transaction records, reducing the risk of data leakage. In terms of management processes, platforms will also establish control over permissions—staff within the platform who are unrelated to KYC users do not have the authority to view collected user data, achieving internal user data isolation. Finally, compliant platforms also check the legality and compliance of their data storage through third-party audits and other measures. For compliant platforms, maintaining the security of user information aligns with the platform’s interests; while obtaining user information for KYC verification, platforms also take various measures to ensure that this private information is not leaked.

3. Taxation: Compliance obligations after withdrawal

3.1 Why is it necessary to pay taxes

When investors withdraw funds through compliant platforms, questions such as whether taxes are required and how to pay them arise. Theoretically speaking, regardless of the type of investor, everyone needs to deal with the tax compliance issues of their respective countries and regions. In practice, tax authorities can often obtain tax-related information about tax residents through various channels. For example, when investors withdraw funds from compliant platforms, they generally receive cryptocurrency in their own bank accounts. If that bank falls within the CRS framework, when users receive fiat currency, the bank or other relevant financial institutions will report information such as account balances back to the tax residence country, which may prompt the tax authority of that country to inquire about the source and method of the suddenly increased deposits. Since the vast majority of investors belong to at least one tax residence country, it is nearly unavoidable to undergo investigations by tax authorities and bear tax obligations. The notion that “trading cryptocurrencies does not require taxation” is not valid; decentralization does not mean the elimination of tax obligations. To protect their rights, Web3 investors can not only cultivate a proactive mindset towards taxation and actively respond, but they should also retain as many documents and transaction records related to Web3 income and losses as possible to address potential inquiries from tax authorities.

3.2 What taxes may be involved: Taking Hong Kong and Singapore as examples

Discussing the potential tax issues involved after compliant withdrawals fundamentally goes back to the tax nature of cryptocurrencies. Although regulations vary from country to country, cryptocurrencies are classified as a separate asset class in most cases. Therefore, the types of taxes involved with cryptocurrencies are primarily related to the methods of acquisition and accumulation. The following will briefly analyze the types of taxes that tax residents in Hong Kong and Singapore may need to pay after compliant withdrawals.

Hong Kong is a typical territorial tax jurisdiction, taxing only income sourced from Hong Kong. This principle applies to the vast majority of tax types, including profits tax and salaries tax. Unlike most countries and regions, Hong Kong only imposes capital gains tax on commercial activities, and does not tax individual investors. For overseas income, Hong Kong has also established an offshore exemption mechanism. The tax matters related to cryptocurrencies are governed by specific regulations issued by the Hong Kong Inland Revenue Department (hereinafter referred to as IRD) to guide residents in tax compliance. Furthermore, according to the IRD’s “Interpretation and Guidelines on Taxation Ordinance No. 39 (Revised)” (DIPN 39), cryptocurrencies are classified into three categories: payment tokens, security tokens, and utility tokens, with each category having different tax treatment methods. For example, if security tokens are issued, the income is generally considered capital in nature; if utility tokens are issued and the source of income is in Hong Kong, it is also generally subject to tax.

Therefore, when Web3 investors in Hong Kong withdraw funds through compliant platforms, they need to distinguish the behavior of obtaining profits for tax purposes: if it falls under business operations (such as long-term, continuous mining), then the profits earned may be subject to profits tax; if the related profits can be successfully categorized under capital gains tax, then no tax is required; if individuals receive compensation, such as being paid in USDT wages, then there will still be a payroll tax obligation after the withdrawal. As for Singapore’s tax system, it is fundamentally similar to Hong Kong’s, meaning that capital gains tax is not levied on individual investors, and business activities are taxed, etc., so the tax obligations upon withdrawal are also quite similar, and will not be elaborated further. It can be said that cryptocurrency assets themselves do not have a direct correlation with taxes; most countries do not establish new tax categories specifically for them, and how to pay taxes after compliant withdrawals largely depends on which existing taxable income type the related profits are closer to.

It is important to note that if an investor’s income comes from business activities such as commercial mining, special attention should be given to the total deduction of costs, as the types of taxes involved vary with different business operations, and the way costs are incurred and deductible also differs. Taking Hong Kong as an example, income generated from mining is generally regarded as business income rather than capital gains. In this case, costs related to this mining business, such as electricity costs, personnel costs, office costs, server costs, etc., can be deducted from taxable profits under certain conditions, before tax. If the investor ultimately cannot enjoy capital gains tax exemption, they may also consider whether they can benefit from Hong Kong’s offshore exemption. However, if claiming offshore exemption, the investor may also need to deal with official follow-up inquiries to prove the reasonableness of the tax exemption claim.