If you are wondering whether your business should get into cryptoassets, you're in good company. More than 70% of finance professionals worldwide surveyed by Deloitte in 2021 said they considered adopting blockchain and cryptoassets as a potential competitive advantage for their organizations.
Digital assets, or cryptoassets such as bitcoin and ether, are projected to transform global financial markets in the next five to 10 years (see the sidebar "The Rise of Cryptoassets"), but trading or investing in them, or accepting them as payment, poses challenges.
One of the biggest hurdles is that traditional enterprise resource planning (ERP) technology isn't made to account for or track cryptoassets on the books, which presents regulatory and compliance problems.
"It's a total blind spot," said Aaron Jacob, CPA, CGMA, who heads the ERP business at TaxBit, a U.S. accounting and tax software provider for digital assets.
Several forces contribute to this blind spot. Cryptoassets are a new class of assets with unique characteristics. There's some tax guidance, but no authoritative accounting or audit guidelines on how to treat this new class of assets, which most countries do not accept as legal tender. Also, carrying cryptoassets on the books requires customized add-ons to traditional ERP systems and new policies and procedures.
WHY CRYPTOASSETS ARE KRYPTONITE FOR ERP SYTEMS
Cryptoassets' unique characteristics are a challenge for traditional ERP systems, Jacob said. Trying to use traditional ERP systems to handle cryptoassets is like "trying to fit a square peg into a round hole."
Firstly, cryptoassets are tracked to 16 decimals or more. General ledgers in traditional ERP systems can handle up to eight decimals, but legal tender is often rounded to two decimals. How many places a system can track to the right of the decimal point makes a difference with cryptoassets, said Rob Loban, CPA, a senior vice president and head of accounting at BlockFi, a U.S. crypto-based financial services company. "There's real dollar value once you start to go out past six decimals and lots of activity that you need to pick up."
Secondly, the many pieces of information that need tracking to account for cryptoassets quickly overwhelm traditional ERP systems and their ledger technology, Jacob said. To comply with U.S. GAAP, for example, businesses must track the cost basis for the digital assets they're holding, which is the initial purchase price of the asset; the fair value of their holdings, which can change a lot in volatile trading markets that are open around the clock; and the book value for all the individual lots or individual instances of digital assets held. Because digital assets are generally considered intangibles, their book value is their cost basis less any impairment charges experienced since the company owned a specific instance or lot of the digital asset.
"Tracking cost basis, fair value, and book value at scale is very complicated for companies, just given the high volume of activity, and the complexity of lot-level tracking doesn't play well with ERP systems," Jacob said.
Thirdly, traditional ERP systems are built around and tailored to the nuances of traditional assets, such as equities, bonds, and fixed-income investments, and traditional accounting for cash, accounts receivable, and accounts payable, Jacob said. Cryptoassets are on a blockchain. That means they are on a distributed ledger anybody can see, in a decentralized space, he added. "That's very, very different from the world that these legacy systems were built to consider."
Companies that operate in digital asset markets have figured out ways to address these issues.
Founded in 2011, BitPay was one of the first payment processors to enter the cryptoasset market. Today, the U.S.-based company processes transactions worth about $1 billion per year, said CFO Jagruti Solanki, CPA, CGMA. Services BitPay offers include payroll payments in bitcoin; noncustodial wallets to buy, send, and swap cryptoassets; and prepaid debit cards that can be loaded with cryptoassets. The company also helps merchants process payments their customers make in about a dozen types of cryptoassets including stablecoins, and supports more than 100 digital wallets for users to make payments.
Initially, BitPay's ERP system was built with off-the-shelf software from QuickBooks, Solanki said. About seven years ago, the company switched to off-the-shelf software from NetSuite. To accommodate the business's growth, the NetSuite software was customized and automated.
"One of the things that we had to constantly work on in our finance team is to make sure information that goes into our ERP system is complete and accurate," she said. "Making sure that internal controls around all of this process and the risk framework are properly designed, which is a fluid process with constant updates as the business evolves."
BlockFi, founded in 2017, is a U.S.-based fintech startup. The company, which manages about $10 billion in assets, offers crypto-powered financial services for both retail and institutional investors. BlockFi's ERP system consists of traditional Sage Intacct software with a general ledger in U.S. dollars to which customized subledger software is added to handle cryptoassets, Loban said.
"What we're left with is a patchwork of things that work for us," he said. "Getting through all this stuff and building it up and trying to find the right things that are fit for purpose, that's largely growing pains."
CONSIDERATIONS THAT INFORM A DIGITAL ASSET STRATEGY
For those who are considering entering the digital assets market, Jacob, Solanki, and Loban offer the following tips to address the technological challenges of accounting for and tracking cryptoassets:
Start small
If the challenges of digital asset accounting and tracking seem daunting, consider testing the waters before you dive in, Solanki suggested.
Any business selling a service or product in exchange for cryptoassets can engage a crypto payment processor, which accepts digital asset payments from its customers worldwide and converts them into legal currency, such as U.S. dollars or euros. The business is sheltered from the volatility risk should the value of the cryptoassets drop suddenly as well as from any charge-back risk, and from managing the conversion workflow including accounting, tax, and audit impacts, she said. The standard processing fee is 1% of each settlement.
A 2020 study BitPay conducted with consulting firm Forrester suggested that enterprises accepting cryptoassets attract new customers and increase their average order value.
Merchants using BitPay as a crypto payment processor include AT&T and Microsoft, Solanki added.
Another way to test the waters is to use cryptoassets for payroll purposes such as paying employee bonuses and vendors and contractors with cryptoassets. "That's another way where you need not have the crypto on your books, yet you will be able to be involved in the space," she said. Paying payroll in crypto has also been an attractive recruiting strategy.
One business using cryptoassets for payroll purposes is MicroStrategy. The publicly traded software and consulting company, which also invests in digital assets, decided about a year ago to pay its nonemployee directors in bitcoin, according to filings with the SEC.
Involve all your stakeholders
The decision to add cryptoassets to the books requires an investment in technology but also new policies and procedures, all of which requires buy-in from stakeholders inside and outside of the business, Jacob said. "When you're thinking about a solution to implement, you need to make sure that you go through a robust process and identify the right partner to support your business needs today, and into the future."
Key stakeholders include the accounting, tax, treasury, and data security teams, but operations and legal teams may also have to get looped in as well as the business's auditors and investors, he said.
Getting the board involved early in the discussion is crucial, Loban said. "The sooner you can get them used to it and get them in the mindset of 'This is what it is, but I have a solution, and I'm going to report supplemental information,' the better."
One of the board's responsibilities is determining how much risk a business should take on. That includes determining whether the strategic decision to add cryptoassets to the books and invest in technology to account for and track those assets is within its risk appetite.
To explore and plan a digital asset strategy, many organizations find it critical to set up working groups with representatives from each key business function, Jacob said. The working group is responsible for undertaking important readiness and diligence efforts to ensure successful adoption and rollout (see the sidebar "What a Digital Asset Working Group Needs to Research").
Customize for regulatory compliance and controls
Multiple tech startups are developing software for businesses to account for and track cryptoassets. They include Gilded, Lukka, and TaxBit. Some target small or private companies. Some focus on software that is limited in scope, handling just tax or invoicing. Some specialize in enterprise-grade, comprehensive software designed to work with ERP systems of large public multinationals.
The software that helps to account for and track cryptoassets is relatively new and tends to require customization. There's not really much existing infrastructure that you can buy off the shelf, Loban said.
"There are almost an infinite number of use cases in the digital asset space," Jacob said. "You need to see what type of transactions you're doing, the protocols that you use, the exchanges that you operate on, the cryptoassets that you trade in. You need to make sure that you've got coverage for all of your use cases."
But digital asset accounting software that is added to a company's ERP system should provide certain basics, Jacob said. Those basics include user access permissions, segregation of duties for critical functional roles, two-factor authentication and security safeguards, and System and Organization Controls (SOC) 1 and/or SOC 2 testing.
Controls must be robust, he said. They must be able to be programmed, tested, and automated to identify errors and flag potential issues that then can be investigated, reviewed, and prevented from occurring prior to the publication of financial reports.
Look ahead
The software should also provide the business with the flexibility to scale up and handle increased volume as the company's business strategy and products evolve, leading to more types of transactions, he added.
A private company that may become publicly traded will need an accounting and tracking system that provides U.S. GAAP-compliant results and impairment testing, along with lot-level recording and tracking of cost basis, book value, and fair value; supports a rigorous audit process; and can withstand potential scrutiny by the SEC, Jacob said. A company with plans to expand internationally will need a system that can accommodate international along with U.S. accounting rules.
As the digital asset industry evolves and enterprises dive into new ways of treasury management, such as investments in decentralized platforms, it is important to plan ahead for how the software can be customized to accommodate the accounting, tax, and reporting needs, Solanki said. Also, businesses need to be prepared for changes in software logic depending on accounting clarifications that may be published years after the enterprises have engaged in the transactions.
The rise of cryptoassets
The global adoption of cryptoassets is rising rapidly.
Cryptoassets are volatile, and most recent numbers estimate the size of the global market from about $830 million to about $1.5 billion in 2020. Projections also vary. One report projected the market will grow to $1.9 billion in 2028, and another projected it will grow to nearly $5 billion by 2030. The ranges represented compound annual growth rates of 11.1% to 12.8%, respectively.
Despite the uncertainties, 76% of 1,280 respondents in a 2021 Deloitte global survey said they believe digital assets will become a strong alternative to or replacement of legal currencies in the next five to 10 years. They cited more efficient, speedier transaction processes and greater transparency as the top reasons why.
"It's more liquid than any other asset," said Rob Loban, CPA, a senior vice president and head of accounting at BlockFi, a U.S. crypto-based financial services company.
For example, a business customer can instantaneously transfer $500,000 worth of bitcoin internationally on a Saturday, he said. "A bank cannot do that, they cannot transmit, they cannot do anything, and that to me is the game-changer," Loban said.
Cryptoasset services for retail consumers now include ATMs, credit cards, prepaid gift cards, and digital wallets to access their cryptoassets or make payments with them. And cryptoassets are accepted as collateral for some mortgages.
What a digital asset working group needs to research
Before businesses take on cryptoassets, they need to gather information that will assist in planning a digital asset strategy. Aaron Jacob, CPA, CGMA, who heads the ERP business at TaxBit, provided a list of questions for a working group to pursue:
- Which stakeholders need to be involved in digital asset considerations and why?
- What policies can and should exist to drive digital asset adoption and involvement?
- What is the scope of your digital asset strategy, and has that strategy been adequately documented?
- What exchange and execution partners will you work with? What custody partners and wallet services will you use? What protocols and blockchains will you participate in?
- Which functional groups need to be consulted before you can transact in digital assets?
- Do you have the internal expertise and tools necessary to perform critical tax and accounting functions such as lot-level tracking and impairment testing? If not, what thought partners and software providers can you rely on?
About the author
Sabine Vollmer is a senior editor at the Association of International Certified Professional Accountants, representing AICPA & CIMA. To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com or 919-402-4125.
AICPA RESOURCES
Articles
"Cryptoasset Accounting: Tips for Common Scenarios," JofA, Jan. 26, 2022
"Crypto Curious? What to Know Before Accepting Digital Payments," FM magazine, Dec. 1, 2021
"A Take on Cryptoasset Transactions, Investments, and Risk," JofA, Sept. 1, 2021
"Fair Value, Stablecoins Addressed in New AICPA Guidance," JofA, Oct. 8, 2020
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