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By Sean Stein Smith, CPA, DBA

Since bursting into the mainstream, cryptocurrencies such as bitcoin have become a part of every forward-thinking accounting conversation since they present unprecedented challenges in the areas of audit and attestation, tax, advisory services, and reporting. Now is an opportune time to take a look at what CPAs will need to consider moving forward. While not intended to be an all-inclusive listing, this blog does highlight a few trends and topics that will be important for professionals to be able to articulate and discuss moving forward.

Shift Toward Centralization

Arguably the biggest development in the cryptocurrency or cryptoasset system is the shift from a decentralized and open source model of operating – via bitcoin among others – to iterations that are more centralized and regulated. Regardless of whether or not an individual or institution is a proponent of increased oversight of the cryptoasset space, it does appear that this trend is underway. Even a cursory review of headlines in this field will reveal a focus on the growing number of consortium blockchain models. This move toward a more centralized model of how organizations operate in this space is mirrored by the increasing interest and engagement of regulators. Agencies including, but not limited to, the IRS, Securities and Exchange Commission, and even the Federal Reserve are discussing, analyzing, and issuing statements linked to blockchain and cryptocurrency. Definitive accounting and reporting guidance still remain a work in progress, but this shift toward increased engagement on the side of regulators should not be ignored.

A related theme that should be part of the accounting conversation and analysis moving forward is the potential impact that “stablecoins” will have, from both a use case and regulatory perspective. Without diving too much into the operational details of stablecoins, the primary selling point of many of these cryptoassets is the price stability and reduced volatility they bring to the table. While possibly welcomed by merchants and consumers seeking to use cryptocurrencies as fiat alternatives, there are several considerations that require further analysis. Is the stabilization able to be verified, audited, confirmed, or otherwise reviewed by external auditors, creditors, and regulators? A simple example may be if a stablecoin is pegged on a 1:1 basis with the Euro, are the records of the banks holding those euro assets available to be examined, audited, and otherwise confirmed? This seemingly simple question is critically important. Second, how is the stabilization actually achieved; and as a corollary to that question, how much does that stabilization cost in terms of time, personnel, and financial resources? Since many of the stablecoins entering the marketplace are issued by an individual institution, or a consortium of institutions, the financial effects of stabilizing various cryptoassets is worth analyzing in more detail.

Governance

Given the fact that the cryptoasset space continues to shift toward those that are issued and governed by specific institutions versus a decentralized network of programmers and developers, the question of exactly how these networks are governed and maintained is becoming more important. In the case of a blockchain consortium, many of which are under development and being launched as a potential first step toward industry standardization, the importance of controls and control procedures are critical to the viability of the network. Specifically, since the very nature of blockchain-based cryptoassets is to store and transmit data between network members, the controls and control policies in place among different members could become a potential liability or point of concern for the other institutions involved. The concern also applies to the use of blockchain technology to store not just cryptoasset data, but also information such as health care histories, property records, and other sensitive data sets.

Implication of Stablecoins

The rise of stablecoins represents perhaps the most substantive attempt and pivot within the cryptoasset space to help encourage increased mainstream adoption. Many of the headwinds linked to decentralized cryptocurrencies – such as price volatility, regulatory uncertainty, and a lack of guidance from and accounting and financial reporting perspective – could at the very least be partially, according to proponents, resolved via more stable cryptoassets. The aspect of reduced price volatility may, on the surface, seem like a relatively straight forward and simple attribute of a stablecoin, but unpacking this single point leads to a much more comprehensive understanding of just how important it is. From a regulatory and taxation perspective, reduced price volatility could lead to the resolution of two large outstanding issues in the cryptoasset landscape. The creation of crypto-based exchange traded funds has continued to be hamstrung due to the price volatility of the underlying assets, and has been highlighted by the price volatility linked to bitcoin, which still accounts for well over 50% of total cryptoasset market capitalization. Building on this increased clarity and resolution, the conversation around how cryptoassets are taxed and reported may also be at least partially resolved due to the lower price action and volatility. The IRS, perhaps anticipating an increased adoption and use of stable cryptoassets, has begun to step up monitoring and enforcement connected to crypto taxation. While these notices and letters were connected to tax enforcement, it does seem to indicate that regulators are anticipating increased adoption by the financial community. Building on the increased number of stablecoins that continue to enter the marketplace, and the fact that many of these are controlled and governed by a specific institution, these cryptoassets raise many of the issues linked to governance and centralization previously mentioned.

Looking Forward

Given how quickly the conversation connected to cryptoassets continues to evolve, it seems reasonable that CPAs and other accounting professionals should be able to discus, articulate, and communicate the array of issues connected to this system. No matter what specific role, be it connected to tax, audit, or advisory services, there are questions and considerations that need to be taken into account as cryptoassets continue to become integrated into business operations. Concerns linked to internal controls, custody over blockchain information, private key custody information, and dealing with interoperability represent additional areas that need to be addressed as the accounting conversation connected to blockchain-based cryptoassets continues to evolve.

There will be headwinds and obstacles connected to cryptoassets adoption, including the inevitable control, custody, and disclosure errors that often accompany emerging technologies, but these headwinds will also create opportunities for proactive individuals and firms. No matter what specifics ultimately emerge, it will be an interesting and dynamic ride going forward.

Sean Stein Smith, CPA, DBA, is a professor at the City University of New York – Lehman College, a 2019 visiting research fellow at the American Institute of Economic Research, and the chair of NJCPA’s Emerging Technologies Interest Group. He can be reached at drseansteinsmith@gmail.com or on Twitter @seansteinsmith.

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