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Should accountants worry about cryptocurrencies?

Author: ICAEW Insights

Published: 04 Apr 2022

Cryptocurrencies are on the rise – but are they friends or foes for accountants? We present complementary views from business and scholarly perspectives.

The crypto entrepreneur’s view: Mark Basa, Global Brand And Business Manager, HOKK Finance

What sort of impact will cryptocurrencies have on accountants’ lives as they strive to account for their clients’ holdings?

That depends on local laws. If a country considers any profit as earnings – even if a cryptocurrency doesn’t have enough liquidity for its owner to withdraw – that could lead clients to go more underground and conceal what they have. Accountants would then be faced with clients withholding their earnings to avoid being forced to pay tax on unrealised assets that have no value.

Will cryptocurrencies make accountants’ work more efficient, or more complex?

It could make earnings a lot simpler to track when it comes to using the public, distributed ledger that typically underpins a cryptocurrency.

However, let’s say you have a client who trades crypto across multiple exchanges and decentralised wallets. Everything is visible on the ledger – but you also need to track gas fees (a crypto term for transaction fees), plus fluctuations in the currency’s value. Crypto holdings can be extremely volatile – especially if a client isn’t converting their profits to a stablecoin such as USDC as they go.

Should accountants advise their clients on any special risks and dangers as cryptocurrency use becomes more widespread? Or will very little change, and accountants will still follow traditional practices?

There are significant potential risks, but they would stem mainly from accountants not understanding the security issues around mishandling crypto.

I know an accounting firm that was paid for its services in Ethereum (ETH) by a client that happened to be a crypto company. The financial director of the accounting firm asked the client to pay with a crypto wallet. However, the FD failed to disclose that the receiving address was on his 24-year-old son’s wallet – which was accessible via the son’s iPhone.

Complicating matters somewhat, the young man was buying NFTs via the wallet on his phone, and was eventually the victim of a phishing hack through a major NFT marketplace. Money was stolen. Misreading the situation, the FD rang the client, demanding to know whether they’d somehow reversed the transaction – which is impossible, by the way – before the client was able to use the public ledger to show that the FD’s son had carelessly used the same wallet that received clients’ monies to purchase NFTs.

When the client asked why the firm hadn’t exchanged the ETH sum to USD as soon as the payment had landed – rather than holding the ETH for 12 days – the FD explained: “We wanted to play with the market.” That’s a clear conflict of interest.

Such accounting firms have a huge lack of understanding of crypto. Yet they want new business – so they will try to show that they’re market leaders by accepting and dealing in crypto, too. Incidentally, the same firm now plans to start holding and storing millions of dollars in crypto for new clients. I wonder how that’s going to turn out without proper training and education.

If accountants want to be competitive on crypto while demonstrating best practices, they need to preserve their traditions while adopting new technologies such as blockchain. There is no stopping crypto – it’s either learn and help your clients with their crypto portfolios, or get left behind. There’s a world of money to be made for accountants who are prepared to understand crypto, how to store it safely and how to maximise savings for clients.

The academic’s view: Ross Thompson, accountancy and finance lecturer, Arden University

What sort of impact will cryptocurrencies have on accountants’ lives as they strive to account for their clients’ holdings?

The Bank of England (BoE) doesn’t consider cryptocurrencies such as Bitcoin to be money in the traditional sense. Instead, they are viewed as property. The BoE and Financial Conduct Authority (FCA) both have guidelines for the use of cryptocurrencies in that context, but they’re quite vague.

In June last year, the FCA shifted the crypto and blockchain landscape by bringing crypto-based exchanges and derivatives investments into its orbit. However, those measures focused on organisations – they didn’t clarify for individuals the legal ramifications of owning and using cryptocurrencies.

As such, it may get rather confusing for accountants.

This is mainly because cryptocurrencies have no accounting standard in play to offer guidance. Even though crypto is a form of digital money, it is not accounted as cash or fiat currency because of its volatile nature.

Accountants therefore have no alternative but to refer to existing standards – and given crypto’s unique nature, that presents many issues. In light of the bad press cryptocurrencies have received around fraudulent activity, standards are urgently required. Industry voices have called for regulatory boards to provide more guidance, and perhaps once that’s issued, things could become easier and simpler.

Will cryptocurrencies make accountants’ work more efficient, or more complex?

Blockchain – the software behind cryptocurrencies – has the potential to revolutionise accounting, financial transactions and businesses. The transparency and speed of blockchain can make transactions – which often include copious amounts of paperwork, not to mention potential fraud and errors in public records – more efficient, safer and easier.

On that basis, blockchain has the scope to deliver many benefits for accountants, particularly in the fields of data reliability and financial statement audits.

Traditional accounting maintains and stores records in a centralised location – typically the database of an accounting software application. That model is based on a double-entry accounting system, whereby only the accountant or auditor has access to the ledger.

Blockchain, meanwhile, relies on a decentralised system. Data is accessible to all relevant parties via a triple-entry bookkeeping model – and in order to change any information, everyone’s permission is required. That enables the system to be more secure and trustworthy.

Could the role of auditor or bookkeeper become extinct, or change to absorb the shifts towards blockchain? Upskilling will be vital here – particularly to address the technological demands. For example, it is likely that blockchain will prompt auditors to shift from an analytical capacity to more of a programming and platform-designing role.

That said, scalability of the tech at an acceptable cost is a concern – and it may take a while before blockchain is fully adopted into the accounting profession.

Should accountants advise their clients on any special risks and dangers as cryptocurrency use becomes more widespread? Or will very little change, and accountants will still follow traditional practices?

Until we receive more regulatory guidance, it is hard to assess how much will change. There are general risks – for example, cryptocurrencies’ volatile nature means that losses may occur, even if only temporarily. That would set the stage not just for an unfavourable accounting treatment of crypto-focused clients, but the potential for creating misleading information for readers of financial statements.

Counterparty risks in transactions involving cryptocurrencies – including loss of currency value, or transactions being associated with illicit activity or cyber theft – are still a concern. On top of that, there are reputational and sunk cost risks, plus instability around initial coin offerings, all of which impact cryptocurrency use. We may have to wait until use is more widespread before we receive stronger regulatory guidance.

Future of the finance function

Transformation within the finance function has been accelerated over the past couple of years. How is the role of the finance function changing? What technology is facilitating that change? And what skills are most in demand?

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