Web3 Deposit and Withdrawal Essentials: Compliance Platform, KYC, and Tax Obligations

How to choose safe and reliable deposit channels, and comprehensively control risks before, during, and after transactions, is a question that every Web3 investor must consider.

Written by: FinTax

Despite the increasing maturity of cryptocurrency payment technology, the exchange between fiat currency and cryptocurrency (i.e., "deposit") remains a core aspect that Web3 investors cannot avoid. Since cryptocurrencies have not yet become mainstream payment tools, if the cryptocurrency assets in investors' wallets or exchange accounts cannot be smoothly converted into fiat currency, their value can only be limited to specific scenarios. However, deposits are directly related to the security of funds, and in a situation where risks such as account freezing and fraud are pervasive, how to choose a safe and reliable deposit channel and comprehensively prevent risks before, during, and after the transaction is a question that every Web3 investor must consider.

1. Compliant Platform: The Preferred Path for Safe Deposits and Withdrawals

1.1 Why choose a compliant platform

Among the numerous deposit channels, compliant platforms have become the preferred choice for investors due to their security and reliability, and they have the following advantages:

(1) Regulatory endorsement: Compliant platforms typically 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 both a constraint on the platform and a guarantee of its credibility.

(2) Anti-Money Laundering Measures: Compliant platforms must adhere to Anti-Money Laundering (AML) regulations and implement strict fund screening mechanisms to reduce the risk of user accounts being frozen due to the inflow of illicit funds.

(3) Transparent banking cooperation: Compliant platforms typically disclose information about their partner banks, allowing for public oversight, while conducting strict reviews of the banks' 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 to avoid becoming a transit point for money laundering or fraud.

Of course, due to the requirements of compliance regulation, investors are inevitably required to undergo KYC certification when setting up accounts on compliant platforms and performing withdrawal operations, and to wait for a certain review period. Although this brings some inconvenience to investors, it can also be seen as a compromise between the overall security of the platform and the convenience of the users themselves, which is more beneficial than detrimental in the long run.

Outside of compliant platforms, there are often KOLs on platforms like X and Telegram claiming to have channels for withdrawals, and their pages are not short of 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 the withdrawal from compliant platforms, this KOL private contact P2P model carries a higher risk—KOL guarantees with their own credibility and reputation, lacking third-party supervision. When investors transfer cryptocurrency assets from their wallets to KOL's wallet, they can only rely on KOL's credit to exchange for fiat. Once there is an issue with KOL's capital chain, investors may not be able to notice in time, or it may be difficult to recover their assets. In contrast, compliant platforms are subject to the supervision of national and regional regulatory bodies, and they often have strong financial backing, making them clearly superior to P2P withdrawal channels in terms of both security and protection. Therefore, currently, compliant platforms remain the preferred method of deposit and withdrawal for the vast majority of crypto investors.

1.2 How to Identify Compliant Platforms

After understanding the advantages of compliant platforms for withdrawals, how should one identify and select compliant platforms? Currently, there are already a certain number of licensed platforms and companies engaged in deposit and withdrawal services, and some platforms have even applied for financial licenses from remote regions, remote countries, or small nations, competing for customers in this market. The multitude of platforms often dazzles investors. In fact, identifying compliant platforms can be done in the following four steps: check licenses, review KYC, audit custodians, and observe signals.

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

(2) Check KYC. Regular platforms usually specify the KYC, user identity verification processes, and privacy policies. If you encounter a platform that does not require KYC or certification, then such platforms are likely to carry significant risks.

(3) Custody Review. Fund custody is transparent. Some legitimate and compliant platforms will disclose the names of cooperating banks and custodians, which provides a basis for investors and users to verify whether the platform is reliable.

(4) Observe signals. There are also some relatively dangerous signals that allow users to quickly identify risks. For example, some platforms may require users to transfer their USDT to personal accounts, and some third-party intermediaries promote ways to bypass risk controls with high rebates. These signals generally suggest 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 platform disputes? First, users should insist on keeping various transaction vouchers in their daily use and trading, leaving traces of their activities to facilitate evidence gathering 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 the ticket number, communication time, and content. Finally, when the official dispute resolution process within the platform cannot meet their demands, users can also submit disputes to the corresponding regulatory agency for complaints, which is another reflection of the advantages of compliant platforms.

2. KYC: The "firewall" of a compliant platform

KYC, which stands for "Know Your Customer," is a widely used procedure and practice in fields such as financial services, business transactions, and cybersecurity. It is primarily used to verify customer identity, assess customer risk, and ensure the legality and security of transactions to prevent financial crimes and fraud. KYC is the most important concept in the compliant deposit and withdrawal process, and it is one of the procedures that the majority of compliant platforms require for user authentication. The importance of KYC for compliant platforms is reflected in two aspects: from a regulatory perspective, the existence of KYC measures is a crucial basis for regulatory agencies to determine 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 imposed a hefty fine on a leading exchange for such reasons. From the platform operation perspective, KYC is also a risk control measure that can prevent the inflow of illegal funds related to black market activities and terrorism financing into the platform, thereby avoiding user accounts being frozen.

The risk of information leakage during the KYC process has raised concerns among some investors. However, the principle of collecting user information "to the minimum extent" has become the primary guideline followed by most compliant platforms during the information collection process. Regulations in various jurisdictions, represented by the EU's GDPR, also impose regulatory requirements on platforms for handling user data. In addition, compliant platforms such as OSL Pay adopt technical measures like end-to-end encryption internally to ensure the security of platform users' information: under end-to-end encryption, all information, including users' identification documents and facial data, is encrypted during transmission and storage, making it impossible for hackers to access the original information; de-tagging processing separates users' identity information from transaction records, reducing the risk of data leakage. In terms of management processes, platforms also implement control measures regarding permissions—staff unrelated to KYC users within the platform do not have the authority to view the 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. For compliant platforms, maintaining user information security aligns with the interests of the platform; while obtaining user information for KYC certification, platforms also take various measures to ensure that this private information is not leaked.

3. Taxation: Compliance Obligations After Withdrawal

3.1 Why do we need to pay taxes

After investors withdraw funds through compliant platforms, questions such as whether they need to pay taxes and how to pay taxes arise. Theoretically, no matter what type of investor it is, they need to address the tax compliance issues of their country and region. In practice, tax authorities can often obtain tax-related information about tax residents through various channels. For example, when investors withdraw funds from a compliant platform, they usually receive cryptocurrency in a bank account under their name. If the bank is within the CRS framework, when the user receives fiat currency, the bank or other relevant financial institutions will return information such as account balances back to the tax resident's country, and the tax authority in the tax resident's country may inquire about the source and method of the sudden increase in deposits in the account. Since the vast majority of investors belong to at least one tax resident country, it is almost unavoidable to face tax authority investigations and bear tax obligations. The notion that "trading cryptocurrencies does not require paying taxes" is not valid; decentralization does not mean tax obligations can be ignored. To protect their own rights, Web3 investors can not only establish an awareness of proactive tax payment and active response, but also retain as many proof documents and transaction records related to Web3 earnings and losses as possible, to respond to potential inquiries from tax authorities.

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

Discussing the possible tax issues related to compliance withdrawals ultimately returns to the tax nature of cryptocurrencies. Although regulations vary by country, cryptocurrencies are classified as a separate asset class in most cases. Therefore, the types of taxes involved with cryptocurrencies are mainly related to how they are obtained and accumulated. The following will briefly analyze the types of taxes that tax residents in Hong Kong and Singapore may need to pay after compliance withdrawals.

Hong Kong is a typical territorial tax jurisdiction, taxing only the 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 levies capital gains tax on commercial activities and does not tax individual investors. For overseas income, Hong Kong has also established an offshore exemption mechanism. Tax matters related to cryptocurrencies are specifically regulated by the Hong Kong Inland Revenue Department (IRD) to guide residents on tax payment. Additionally, according to the IRD's "Interpretation and Practice Notes No. 39 (Revised)" (DIPN 39), cryptocurrencies are classified into three categories: payment tokens, security tokens, and utility tokens, each with different tax treatment. 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 generally also subject to tax.

Therefore, when Web3 investors in Hong Kong withdraw funds through compliant platforms, they need to distinguish the behavior of obtaining income for tax purposes: if it belongs to commercial operations (such as long-term, continuous mining), then the income obtained may be subject to profits tax; if the relevant income can be successfully classified under capital gains tax, then it is exempt from tax; if individuals receive compensation, such as receiving a salary in USDT, then there will still be an obligation to pay salaries tax after the withdrawal. As for the tax system in Singapore, it is basically similar to that of Hong Kong, which does not levy capital gains tax on individual investors and taxes business operations, etc., so the tax obligations upon withdrawal are also quite similar, which will not be elaborated further. It can be said that cryptocurrency assets themselves do not have a direct correlation with taxes, and most countries do not specifically establish new tax categories; how to pay taxes after compliant withdrawals largely depends on which existing taxable income category the relevant income is more closely aligned with.

It is important to note that if an investor's earnings come from business activities such as commercial mining, special attention should also be paid to the total deductions of costs, as the business operations involved in each type of tax differ, and the way costs are incurred and deductible also varies. Taking the Hong Kong area as an example, the 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 all be deducted from pre-tax profits under certain conditions. If the investor ultimately cannot enjoy capital gains tax exemption, they can also consider whether they can benefit from Hong Kong's offshore exemption. However, if claiming the offshore exemption, investors may also need to deal with official follow-up inquiries to prove the reasonableness of the tax exemption claims.