Blockchain & accounting

Compliments to accountants for their resilience: issues are numerous

Some issues are happening in the current accounting system. Some others are resulting from organizations’ involvement with crypto. They are of different nature.

Issues for the current system are about manual tasks, taxes, interoperability, and analysis

Technical loopholes and manual issues are interconnected

There are two ways to store bookkeeping data: on internal servers or in the cloud. Internal server outages or mistakes have huge consequences. Cloud usage means that there are some costs to take into account and often software to trust. Security is challenging.

Additionally, we receive most invoices by mail or by email. This is sad and sometimes it results in loss of data or discrepancies. Technologies that SMBs use today for invoices are not adapted. If an email can be used to convey any kind of information, it does not make it a scalable financial information network. It does not even make it efficient, only the speed and costs of transfers are removed, not the transmission’s ones. Only some public sector suppliers use a kind of automated electronic invoicing.

Among the consequences of technical imperfections, there are manual tasks. It usually costs USD 5 to USD 15 to process an invoice because of some manual tasks such as:

- For the supplier: entering the invoice in the system, then sending it by email to the client. Then later verifying that he received the payment, and linking it to the invoice.

- For the client: downloading the invoice from an email, then entering it into the software, manually.

- For the client: receiving the invoice per mail, then scanning it to attach it to the software.

- Building a spreadsheet to manage amortizations and entering them for every month in the software.

This lack of automation results in inaccuracies and time-wasting. It also prevents organizations from getting an accurate analysis on time. Businesses’ main goal is not to do proper accounting.

Governments suffer from tax issues, and executives get anxious

It’s better to avoid frauds but sometimes tempting to play within boundaries. CFOs need to feel safe about the accounting principles used and need to be sure to be in line with the rules. Calculating taxes can be so complex that it becomes hard to sleep at night. We are in a need of a simpler way.

For governments and tax offices, it’s also hard to get control, especially over international operations. Some technologies are getting ready though, more on that later.

One of the foundations of concerns in the field is the lack of Interoperability

Invoice data is often duplicated. Obtaining data is often asynchronous. Knowing about data is often reserved for accountants. Those are some of the results of the usage of non-interoperable systems. Isn’t it a matter of worry that most SMBs take 6 months to power yearly financial statements?

The interoperability challenge is not only about systems. There are no universal accounting principles, standards or procedures. They tend to vary from country to country or have regional-only guidance.

Financial analysis complexity restrains businesses from understanding more about their finances

Businesses need to manage and forecast charges and avoid unforeseen expenses. Getting asynchronous analysis slows down the discoveries and is a vital risk for projects.
Same for the management of cash flows. It’s one of the top reasons why businesses fail. With correct reporting, the economy could behave better.

Organizations involved with crypto suffer

Technical knowledge is lacking in the industry

Crowdfunding was already an interesting topic for professional accountants (CPAs). Now that the creations of new tokens are becoming frequent, the discussion is evolving. There are more complexities about identification, geography, and rules. Auditors also struggle to get accustomed to crypto transactions. They get unusual proofs when they need bank statements, for example. Sometimes it’s even impossible to provide something which fits their needs, according to their profession. We can admit that there is room for progress about proof of ownership with blockchain.

Additionally, there are concepts that exist with crypto and didn’t exist in the accountant’s world before. For example, forks are hard to manage for professionals. It’s the duplication of one cryptocurrency into 2 cryptocurrencies (the former one remains and an extra one gets created). To their credit, it never happened before that USD gets transformed into USD plus USD2.

And finally, it’s a new technical environment that successful accounting professionals will have to know and master. They don’t have to know what a database is but they will have to know more about smart contracts. They will have to replace bank statements with good certainty and master the extreme cases of pending transactions, internal transactions, and airdrops. There is a lot to answer, but first, a lot to learn.

Tax offices need to become tech-friendly

There are frauds. There are also inaction and mistakes when people don’t know how to do the job in a proper way.

For crypto accounting, companies have a choice. They can make things as clean as possible with the help of external accountants – who most of the time don’t know more. Or they can decide to focus on their product and spend the minimum time on it. It’s better to make things clean but it takes a lot of time & energy.

As a result, governments have a hard time receiving taxes out of crypto transactions. Indeed the technology environment is not ready because the guidance is unclear.

Sometimes the guidance does not make sense. In some countries, we need to pay taxes on capital gains on the 31st December of the year (as evaluated by the local currency), while 2 days later there could be no more gain because of volatility. Sometimes the rules are clear but it feels like you need to have a Ph.D. to properly calculate taxes.

Compliance is challenging because traditional rules don’t apply anymore

We evoked the subject earlier, it’s hard to follow rules when the rules don’t seem to apply. Indeed experts wrote rules without the current technological progress in mind.

Two important organizations are defining international standards for accounting. The International Accounting Standards Board (IASB) is developing the International Financial Reporting Standards (IFRS). The Financial Accounting Standards Board (FASB) is developing the Generally Accepted Accounting Principles (GAAP). They allow comparing international companies with the same principles.

Despite those standards, there is limited accounting guidance about crypto asset specificities.
According to KPMG crypto assets are intangible assets, under the GAAP principles. California CPAs consider that they “can be reported as anything from a commodity to an investment or even be counted as working capital”.

The classification process is confusing for companies dealing with crypto, their CPAs, and auditors. Not to mention fast-changing legal and political specificities for cryptocurrencies.
One of the consequences is the lack of compliance. Individuals and companies neglect accounting practices.

Additionally, banks refuse basic banking services to crypto companies. Similar stories can be read all over the world, except for some countries. Many crypto projects don’t have a bank and still survive this way. It’s hard for them to get a loan from a bank, but also to be compliant with local rules.

Most banks decided not to onboard companies dealing with cryptocurrencies. Indeed this is a headache for their own compliance. Also because they consider crypto as a disruptive force against their business, or because they don’t believe in its potential.

As a consequence regulatory compliance is lacking from companies. For example, a Foundation in Switzerland needs to provide the CHF capital to a Swiss bank account within weeks after the company’s creation. And it’s impossible without an account.

Regulatory authorities such as Swiss ones tend to become flexible but all countries don’t show the same understanding. The first solution is in the hands of those regulatory organs.

Financial analysis is currently hard despite promises

The basis of accounting is first to get data. Getting data is not user-friendly yet, even when done in an asynchronous way. Individuals and businesses struggle to have an overview of their finances when there is crypto involved.

Indeed, the number of wallets and tools is challenging. Here are examples of tools a company can use:

- A few exchanges such as Kyber, Coinbase, Kraken, Wyre, and Binance

- Browser wallets such as Metamask and Portis

- Mobile wallets such as Jaxx

- A decentralized lending platform such as MarkerDAO and Compound

- An invoicing system such as Request Invoicing App

- A multi-signature wallet like Gnosis team safe

- A physical wallet such as Ledger

The challenge is to use decentralized tools in a centralized business process framework.

Moreover, bookkeeping software doesn’t allow custom currencies, even though they announce being innovative with blockchain technology. For example, hundreds of Xero users are asking Xero for crypto flexibility here. And currently, those users tend to use some FIAT currencies they don’t expect to use, and manually input exchange rates every time there is an invoice or payment.

It’s paradoxical to have difficulties at a particular point where it will become easier in the future. Indeed blockchain technology aims to allow real-time dashboards. Timing-wise, it looks like current software providers and blockchain technologies are not aligned yet.

Short term solutions to the current context

Existing solutions for individuals and businesses to tackle current problems

On the tax issue

Determining the fair value of crypto assets is possible. There is enough guidance to find a few possible approaches. The individuals or businesses usually interpret the options themselves and choose the one which makes more sense. Most countries apply different tax rates on cryptocurrency gains, depending on whether there has been a trading activity or not. If there has been one trade in the year, it’s not a trading activity. When there are 1000 trades in the year we could say it is. People interpret themselves.

For accounting under GAAP or IFRS, the guidance gives a few different options. We can consider the crypto as a commodity, as an investment, as inventory, or as intangible assets. Based on the past and expected usages the persons apply to the one which makes sense.

On the banking issue

Crypto companies become creative to live without banks. There are solutions that allow running a business anyway. It takes more time but it’s also fun to take part in the development of innovative solutions. For example, there are decentralized loan solutions open for anyone on the blockchain. MakerDao and Compound have been working well.

It’s also possible to pay lawyers, accountants, and employees in crypto assets. With volatility, there are more challenges, that’s why stable coins such as DAI are getting traction. The DAI’s value always remains close to USD 1. Businesses can transfer USD value in seconds, all over the world, for a few cents.

Last but not least, getting paid in crypto is easy. Many websites & businesses get paid in crypto. Among them, dozens of merchants use Wooreq and Reqify to create invoices and also receive cryptocurrencies as payment.

On the compliance issue

Over the last few years, a few crypto companies have established or have moved their legal structures to the Isle of Man, Switzerland, Gibraltar, Caimans Islands. There, regulations give more clarity and more sense of being within the law. That’s a paradox. Other governments have reacted since. Guidance is getting clearer for the setting up of companies.

The holders of crypto assets need to interpret the rules and apply the ones which make the most sense. In most cases, the CFOs will get in touch with specialists. Together they will look at options and interact so that there is a good understanding of the asset’s properties, and they will choose between a few options. This is more a decision to take than a rule to follow. In other terms, we apply an approach based on the principles that we choose.

On the knowledge issue

Accounting professionals tend to become friendly with smart contracts. First, the accountant needs a bank statement, and he can get a view on the blockchain via etherscan.io for example for Ethereum transactions. This could be ok for him but that’s unusual. Second, he can see on the website that there are ETH transactions, ERC20 transactions, and internal transactions. ETH is about Ether movements, ERC20 corresponds to the currencies built on top of Ethereum, and internal transactions correspond to interactions with smart contracts. Sometimes they mean that there has been a movement in a multi-signature wallet. Sometimes they mean that there is a movement with a decentralized application, like a decentralized loan service, or an invoicing tool. The accounting schools did not teach them how to interpret this technology. Getting accustomed to online tools is a good way to start mastering the environment.

Those tax, banking, compliance, and knowledge problems are opportunities for businesses to catch.

Initiatives from startups and big corporations

Many startups already have traction working on accounting technologies for cryptocurrencies:
Softledger.com, lukka.tech, cryptio.co, lumina.app, and cointracking.info are providing crypto assets tracking and accounting.

Big actors also try to provide solutions, such as PwC which built a way to centralize information about funds. Their tool uses APIs to get information on different blockchains and exchanges.

Some large scale changes are coming

It’s not always the technology that makes the users shift their needs. Sometimes it’s the users shifting their needs that drive tech changes.

Positive changes are happening thanks to technology

- Blockchain technology: By nature, blockchain is an accounting technology. As said by Deloitte: “Blockchain technology is fundamentally an accounting technology”.

- E-invoicing and Peppol network: E-invoicing is an exchange network where we replace the exchange of financial documents with the direct exchange of financial data. Thus automating most following steps. Peppol is an e-procurement platform with standards that aim to help EU countries exchange financial information.

- The Request Network is a technology to have invoices’ data on the blockchain. It’s one of the long-term solutions, scalable and working today, but only with a few currencies. In concrete details, there is already a library and an API allowing startups to build on top of this technology. Request Invoicing App uses the Request network technology to allow tracking and transaction reports for the accounting of (crypto) invoices. This setup also allows interoperability with bookkeeping software such as Quickbooks and Xero. It’s possible to synchronize wallets and exchanges to build real-time dashboards.

Such technologies are ways to allow automated transactions, real-time accounting, and real-time audits. Entrepreneurs and executives will be able to automate and watch their finances in real-time. Same for industries and governments.

Parallel changes are happening in mindset

There is a kind of spiritual change in favor of interoperability with a common underlying technology.

The move from competition to cooperation can benefit users thanks to:

- Interoperability between systems (different proprietary systems)

- Interoperability between companies (invoices on the blockchain)

- Interoperability between countries

And interoperability will simplify reconciliation processes, thus avoiding mistakes.

Additionally, a change in transparency is happening. Governments, cities, NGOs, and companies are starting to become transparent. The current technology trends are of great help and it just started.

Next steps: The future is coming

The future of accounting is going to be automated. Real-time dashboards and real-time accounting already start to pop up. Real-time audits are expected within a few years. And real-time predictions would empower the businesses.

One of the reasons why accounting exists is because of taxes. The type of fraud existing today will decrease. Tax calculation and payments will happen in real-time. Their automation could drive the rates down.

The internet of things, DAOs, Robotics, AI, VR, and AR will power objects which send each other invoices and payments. Blockchain-based technology will automate their accounting.

In summary, the accounting issues are numerous, there are promising solutions but the transition brings a great load of new problems. We need to remain careful anyway. The technology is evolving, we are only able to imagine a small fraction of the solutions it will bring and questions it will ask.

What's next?

👉 Accounting for a company involved with crypto: what should I know?

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