By Sean Stein Smith, CPA, DBA, CFE
Cryptoassets have had a volatile 2022, the kind of volatility that most investors do not like. So, as we embark on 2023, it would be helpful to practitioners to gain an understanding of both what happened in 2022 and what it means going forward. With the collapse of Celsius and TerraLabs, the bankruptcy of BlockFi, and the fraudulent collapse of FTX, there is definitely going to be a focus on crypto reporting, compliance, and transparency in 2023.
Here are five things practitioners should watch concerning blockchain and cryptoassets moving forward.
In the wreckage caused by the collapse of FTX, including the fraud charges brought against its former CEO, Samuel Bankman-Fried, there should be no surprise that regulations will be coming to this space. That said, it remains to be seen which specific areas of crypto will be the focus of regulations: stablecoins, nonfungible tokens (NFTs), and traditional crypto such as Bitcoin are all candidates. Either way, the attitude in Washington, D.C., seems to have shifted from a previous wait-and-see approach to one more focused on control and regulation.
The news that the Financial Accounting Standards Board was going to add digital asset accounting to its research and technical agendas was greeted with positive responses by practitioners and investors alike. While certain areas of crypto – notably NFTs and certain stablecoins – will not be covered under the accounting standards that do emerge, the movement toward fair-market-value accounting for cryptoassets should be considered a positive development. Better standards will not fix underlying issues with fraudulent activity, scams, and speculation, but it will establish more transparency in the space.
With the court case Jarrett v. United States having been tossed out of court in October 2022, the future for cryptoasset taxes remains murky. As the IRS continues to tweak and expand the types of virtual assets that should be reported and disclosed on tax returns – and amounting to estimated collections totaling in the billions annually – these issues are going to be a priority for the IRS going forward.
Even with the collapse of FTX continuing to cause chaos in the cryptoasset space, enterprise adoption and development of blockchain-based applications continues. Notably, JPMorgan Chase (whose CEO, Jamie Dimon, notably thinks all crypto are Ponzi schemes), has built out an entire blockchain-based commercial payment system, Onyx, which counts hundreds of banks as members. Additional use cases in health care, education, self-sovereign identity, real estate, and other areas continue to reach the marketplace.
There have been questions and concerns about how best to audit blockchain and cryptoassets ever since these instruments became mainstream around 2016. As 2022 wraps up, the focus around said issues are even more high-profile. With multiple audit firms associated – to various degrees – with FTX, there are multiple questions being asked about what exactly was being performed during these engagements. Proof-of-reserves has been put forward as a possible solution to improving transparency and clarity around crypto exchanges, issuers, and other organizations. That said, there are currently no definitive crypto auditing or accounting standards, but practitioners would be well advised to monitor progress on these issues going forward. Hard questions about the current status of crypto audits will, almost inevitably, lead to better standards and reporting requirements.
Sean Stein Smith, CPA, DBA, CFE, is a professor at the City University of New York – Lehman College and serves on the advisory board of the Wall Street Blockchain Alliance, where he chairs the Accounting Work Group. He can be reached at firstname.lastname@example.org.
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