The current state of accounting for crypto

While the current boom in DeFi is grabbing the headlines in the crypto sector and beyond, one thing remains from the heady years of the ICO and bitcoin bull years of 2017-18, the need for fit-for-purpose accountancy which can meet the challenges in 2020 faced by crypto businesses created by their customers and financial regulators. In such a new sector as crypto, which includes both cryptocurrencies and assets, part of the challenge for accounting professionals is ensuring the systems they put in place meet commonly agreed standards.

Regarding crypto assets, according to International Financial Reporting Standards (IFRS) the bible for accountants worldwide, there is no direct guidance on crypto accounting and a lack of industry best practice. Which in short means how crypto assets are managed for accounting purposes potentially could come under a range of accounting standards. To complicate matters further, the crypto business’s reason for holding such assets is also a determining factor in which accounting approach is the correct one to use. In other words crypto is unique in that it does not fit into any existing asset class previously defined by accounting standards.

Similarly, with cryptocurrency this range of classifications and how they are measured for accounting purposes, accountants need to both understand the nature of the cryptocurrency in question, as well as the reason for the business holding that particular asset. In other words, if you are a crypto exchange for example, it’s particularly important to get this approach right from the outset to ensure consistent application of accounting policies.

The current state of accounting for crypto

On a practical level, putting aside the accounting standards issues, there are a number of common account challenges ranging from recording a multitude of transaction types from air drops to hard folks, to determining the fair market value for assets, to determine the tax implications for customers and for the business itself. To manage such a complex range of data is obviously a key driver behind the development of crypto-specific accounting software, to help simply the accounting process for crypto-centric businesses, and individuals. As with all business software solutions, it’s worth considering not just the overall cost, and functionality, but also the level of customer support available.

A key advantage of Crypkit is that it’s built from the outset to enable crypto businesses to manage their accounting, rather than a bolt on to an existing accounting system. Including both fiat and crypto, it not only tracks DeFi protocols, it is also powerful enough to provide correct tracking of the required data across exchanges, blockchains, DEXes and other DeFi platforms. And as a system built with crypto customers in mind from the outset, it can deliver correct tracking of various smart contracts and systems of smart contracts too. In comparison many of the ‘usual suspects’ including accounting platforms such as Xero, while they offer integrations available through services like Zapier, they don’t have the power and flexibility to manage crypto businesses in such an integrated crypto accounting platform. As Steven Borg, VP Finance at Gnosis, a recent client said following onboarding: “When I first connected our crypto wallets and exchanges to Crypkit, I quickly appreciated how logical and well structured Crypkit is. I could find every data point exactly where I´d expect it. All our analytical and accounting information is just one click away”. It’s also worth noting that the custom changes made to accommodate Gnosis, speak to the level of customer service crypto businesses require to meet their specific accounting needs, faced with unexpected accounting needs arising from new regulations.

The future for accounting for crypto?

So what does the near future look like for crypto accounting, what needs to change or is likely to change in this dynamic sector, faced by new ventures such as Facebook’s Libra and the first central bank digital currencies (CBDC) coming on stream? Clearly setting aside the importance of robust crypto-platforms such as Crypkit, there needs to be clarification around accounting rules and regulations. This ranges from cryptocurrency taxation for both exchanges and traders, through to establishing best practices working with national and global accounting bodies to ensure training is part of standard accountancy qualification going into the future.

The uncertainty while regulatory bodies are still deciding how to deal with crypto assets and currency is one factor holding back mainstream adoption. But it’s also clear, for example looking at the report from PwC in December 2019, that attitudes are starting to change as the world changes to meet the twin shocks of COVID-19 and the resulting recession. “At issue is how to recognise, measure and disclose activities associated with the issuances of, and the investment in, the various types of cryptographic assets. Since there are no accounting standards that specifically address cryptographic assets, one must look at the existing IFRS and apply a principles-based approach.”

Leading the industry with its standalone solution Crypkit demonstrates that accounting technology will need to possess the necessary flexibility and performance, in its software architecture and customisation, to meet the changing landscape of rules and to deliver best practice accounting. Accounting is the key to adoption of digital currency and assets amongst mainstream businesses and to enable crypto businesses to meet the demands of regulators and customers, whether global businesses or individual crypto users.

Bringing the story of crypto compliance alive

Bitcoin of America

Using my journalistic skills I was able to turn the dry subject of financial compliance for crypto business Bitcoin of America, into a compelling story about how it worked with the FBI and its bank to overcome the obstacles.

Creating the article allowed me to combine the recent news of successfully working with the FBI to return half a million dollars to fraud victims, with an earlier story about having their bitcoin ATMs destroyed.

Key to connecting the article elements was an interview with Bitcoin of America’s attorney William Suriano, which allowed me to flesh out the details, for example adding that the $496K fraud victims’ restitution actually strengthened Bitcoin of America’s relationship with their bank. Plus through the interview Suriano shared an early lesson, when they made the mistake of selling bitcoin to a customer who then revoked their wire transfer, to show how the business has developed its systems to meet compliance requirements and in learning from experience as a crypto exchange, as well as a bitcoin ATM provider.

Through online research I was able to update the story first told in the crypto press when Bitcoin of America had around 20 of its bitcoin ATMs smashed, leading to a lawsuit in late 2016. “It seemed like the 1920s in Chicago that people would run around and smash competitors’ bitcoin machines just to pay in some kind of competitive advantage and get into a location across the street,” Suriano explains.

Fast forward to 2020 the article took the initiative in reporting the conclusion to the ATM attack. Firstly, with a successful $196,000 court judgement for Bitcoin of America. And in the words of Suriano it “created a pathway for others in the business who know if it were to happen to them that there is a way they can do something,” their successful legal action boosting their reputation in the industry as a whole.

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