We support Web3 businesses with their accounting, reporting and data analytic processes for fiat and crypto transactions, solving for an increasing number of blockchain accounting challenges.
We support Web3 businesses with their accounting, reporting and data analytic processes for fiat and crypto transactions, solving for an increasing number of blockchain accounting challenges.
Here are our top 10 crypto accounting issues that we have observed, in no particular order of importance or difficulty.
Digital assets are traded and stored in multiple locations, from centralised to decentralised exchanges, hot and cold wallets, custodians and walled gardens, often with incomplete and inaccurate transactional records.
Whereas mainstream accounting software like Xero or QuickBooks provide bank feeds via APIs with a seamless synchronisation process, the same processes for aggregating and normalising blockchain data across multi-chains and locations is still relatively immature or non-existent.
Using explorers to read blockchains to test and verify transactions across wallet addresses can be convoluted, and creates a learning barrier for accountants and non-technical professionals.
Despite being designed to be an immutable source of truth, accountants and auditors do not yet have full confidence in performing their roles when dealing with blockchain and crypto assets.
The compromise is often downloading CSV files from multiple sources and manually manipulating data in spread sheets. Unfortunately these are prone to human errors and workings that can be near impossible to understand for the next person reviewing it.
As accountants who have dealt with cryptocurrencies can attest, many exchanges do not provide accurate and complete data. Even the top exchange Binance will only provide 1 year of data with limits on how many statements can be generated.
As the blockchain world continues to develop at breakneck speed, new products and services are being announced all the time often without a deeper review of the financial processes needed to support them.
Here are just a few examples of buzzwords/ terminology from the past few months.
Each new product or service may represent very exciting technological breakthroughs, but from a finance and accounting perspective the accounting treatments need to be dissected and understood by accountants and auditors alike.
There is always something new for accountants to learn and debate in this space, with accounting standards years away from being updated (and once they are, they will likely be out of date again).
To create a further complexities impacting accounting, tax and regulatory considerations, these new blockchain products and services are almost always cross border and multi jurisdictional by virtue of being “decentralised”, opening up multiple new Pandora’s boxes of issues.
Digital assets are programmable and the creation of smart contracts can generate exponentially more transactional volume than traditional businesses and assets.
Such high volumes require custom built reconciliation engines and process flows to be designed and developed to be scalable.
We can hire people to match and click, but this is a dull job very few people want to do for long and is not practical for the Web3 world.
Traditional financial systems were never built for cryptocurrencies. They are outdated, slow, costly to maintain, and everything else negative that fintechs want to disrupt.
Here are a few simple but crippling examples.
Most traditional fiat accounting software use 2 decimal places for entry and reporting, and 4 or more decimal places for FX rates.
However bitcoin goes to 8 decimal places and Ethereum (and many coins based on Ethereum) have 18 decimal places.
The hack for many is to again use off platform spread sheet calculations and manually journal transactions back into accounting software, adding more work and scope for errors or manipulations.
Under existing accounting standards, centralised digital asset exchanges have to show tokens as inventory or stock-keeping units (SKUs).
Many legacy accounting systems have upper limits to the number of SKUs and are impractical for exchanges handling thousands of tokens.
This is a serious limitation for accountants managing the books for crypto exchanges, ICOs, blockchain gaming, and so on.
Most traditional accounting software will support multiple fiat currencies and FX feeds, but very few cryptocurrencies. This makes it difficult to record crypto assets, liabilities, income and expenses when the presentation and reporting currency is still dominated by USD.
For example, QuickBooks Online only supports BTC, ETH and XRP.
When a company decides to accept a new cryptocurrency, they have to compromise by using a dummy currency to manually account for and revalue transactions back into a fiat currency.
Transactions on blockchains incur multiple fees which can vary based on usage and demand. For example, gas fees can appear as separate transactions to trade fees embedded trades.
Each blockchain and exchange, broker, custodian, or counter-party may have nuisances in the way they handle fees, which may be small on an individual trade level but can quickly become a material cost to businesses and traders.
Unfortunately accountants will often have to compromise and reverse engineer fee calculations by assuming these are equal to the differences between opening and closing balances.
Current accounting standards were not drafted with cryptocurrencies in mind, and accounting bodies are slow to issue guidance which can keep pace with technological developments.
Various dated accounting standards are often referred to with respect to cryptocurrencies as:
There are many practical considerations for discussions on how holdings of cryptocurrencies and other digital assets should be disclosed.
For example, Tesla accounts for its Bitcoin holdings as intangible assets as per the American Institute of CPAs’s non-binding guidance issued in December 2019.
This means the asset is initially booked at cost and impaired if the price of Bitcoin falls, but not marked back up to market if Bitcoin increases in price. This is clearly not useful for attaining a true and fair view of a company’s balance sheet.
*The Tesla example above has evolved since late 2023 via a FASB update. *The new rules require crypto assets that meet certain criteria to be measured at fair value each reporting period with changes in fair value recognised in net income, meaning if Bitcoin increases in price then this can be captured.
Treating cryptocurrencies inventories, cash or financial instruments raises many questions too, due in large to their high price volatility.
The industry continues to wait for clarity on how to account for, value and report on digital assets.
There is much subjectivity in crypto accounting as a result of both the lack of updates in accounting standards, and regulatory clarity and enforcement, .
Cryptocurrency regulations around the world can also be contradictory or contain regulatory arbitrage opportunities, meaning businesses do move around to avoid stricter regimes. Countries can also ban cryptocurrencies at short notice.
Unregulated OTC, P2P or De-Fi transactions may not even provide any audit trail at all.
These conditions additional create legal uncertainty which can lead to subjectivity in accounting.
The valuation of many less liquid cryptocurrencies at a given point in time is a challenge.
In traditional finance, there are trusted sources such as Bloomberg which are used to mark to market assets.
Sources like Coinmarketcap do exist but reliable and live data are not complete or available for many digital assets. Prices can differ from one source to another depending on regions and time zones, given crypto markets trade 24/7 with no cutoff.
Cryptocurrencies are quotes in pairs of two assets that can be traded with each other. For example, BTC/USDT, where USDT is a the tether stable-coin.
However if you want to trade using non-USD fiat like SGD, then you may need to switch this into USD fist, then USDT, for example.
It is difficult to accurately account for this triangular transaction because the final cryptocurrency rate in SGD will differ from the actual purchase price paid in USDT, which itself is not a true 1:1 peg to USD after fees and possible price slippages.
Due to the inherent limitations or for better pricing, a single transaction can also be split into many smaller transactions. In such cases it can be impractical to record all transactions to match with blockchain explorer data.
There are not many qualified accountants with years of experience in blockchain and crypto accounting, capable of bridging the gap between existing accounting practices and new technologies which push their limits.
Aggregating, consolidating and accurately importing transactions into legacy accounting systems require a level of patience, experience and manual work.
Considering the above, companies dealing with digital assets should give a lot of thought to their accounting and financial reporting processes to find a balance between the needs of their business, the accuracy of the accounts, the time taken to prepare them, and the resources involved.
Here at CrunchSpark we have experience to help our clients in many areas to get them started on the right footing.
Book a free consultation with us to discuss your crypto accounting challenges and requirements.
