From the Nov/Dec 2019 issue of New Jersey CPA magazine (njcpa.org/newjerseycpa)
By Dr. Sean Stein Smith, CPA, Lehman College
Blockchain and cryptocurrencies continue to dominate the headlines with the launch of blockchain and crypto products at mainstream organizations such as JP Morgan and Facebook. From a currency perspective, there also seems to be a shift toward greater acceptance of various cryptocurrencies and cryptoassets as a medium of exchange. That said, and even as more institutional forces adopt and integrate both blockchain and cryptoasset into core operations, there remains ambiguity as to the accounting treatment of these assets. Accounting standards aside, which are substantial enough to fill an entire article, the following are several other emerging issues that CPAs need to be aware of.
Governance of blockchains and cryptoassets
The concept of corporate governance may seem like an unusual topic to bring up in a CPA article, but by peeling back the layers it begins to make a little more sense. The bitcoin blockchain was developed as a completely decentralized model of conducting financial transactions outside of the traditional financial system, but that is changing. As more newcomers enter the marketplace — Gemini Dollar, Paxos Standard and Libra, to name a few — these cryptoassets are governed by either the issuing firm or a consortium of organizations. There are several questions that need to be asked, especially if CPAs have clients that are investing funds or even doing business with other firms that are investing funds into these more centralized cryptoassets, including the following:
- Are there any restrictions connected to who, or what kind of entities, can invest in these assets?
- What are the reporting implications if there is a fork (more on that later) that occurs connected to the cryptoasset?
- Who is deciding whether or not the first two items even occur?
Blockchain is often referred to as an immutable record, and while tamper resistant is more accurate, the perception remains that implementing a blockchain-based solution guarantees that the information is secure from hackers and other unethical actors. This simply is not the case; every single blockchain is different and needs to be analyzed as a unique combination of software, hardware and people. There is always the potential for errors, unethical behavior or cybercriminals to take advantage of both individuals and firms that are not prepared to correctly integrate these emerging technologies into existing infrastructure. Compounding this risk, and potential opportunity for forward-thinking practitioners, is the reality that in many cases there is no recourse or specific insurance coverage offered to protect against blockchain or crypto-related hacks. The best course of action for CPAs to take is to 1) understand the specific blockchain and cryptoassets that are being implemented, and 2) document the steps that have been taken to securely integrate these new tools into the existing infrastructure.
It is clearly a positive that the accounting profession’s awareness and knowledge level of blockchain and cryptocurrencies continues to increase; blockchain and cryptoassets seem to be increasingly entrenched in the financial system. However, it can be a negative for almost the same reason. As more and more practitioners feel they understand and are comfortable with this technology, a sense of complacency can begin to seep into the marketplace. As recent developments have shown, this still relatively young ecosystem (only since 2008) continues to evolve and develop at an accelerating rate. New components and iterations seem to make headlines every day, including:
- Different types of blockchains
- An array of different cryptocurrencies built for different purposes
- New types of controls for legacy and succession planning around blockchain
- The continuing implementation of multi-sig wallets to grant access to blockchain information
- Increasing regulatory attention on every aspect of the space
It is impossible to summarize all of the emerging trends in such a broad and fast-moving space such as blockchain, but the key takeaway is that CPAs need to remain aware of just how quickly this space continues to change and what this may mean for practitioners going forward.
Dr. Sean Stein Smith, CPA, CFE, CGMA, CMA, is a professor at the City University of New York – Lehman College. He is the leader of the NJCPA Emerging Technologies Interest Group and serves on the Advisory Board of the Wall Street Blockchain Alliance, where he co-chairs the Accounting Work Group. Sean can be reached at firstname.lastname@example.org or on Twitter at @seansteinsmith.