Explaining stablecoin risks and the need for reporting criteria

On March 5, the AICPA published a comprehensive set of criteria for reporting on the digital assets known as stablecoins. The criteria are designed to address “the need for consistency, transparency, and trust in the stablecoin environment.”

Jay Schulman, CPA, is a principal at RSM, and he’s focused, in his job and his role on AICPA committees, on digital assets.

In this episode of the Journal of Accountancy podcast, Schulman explains areas of focus for the AICPA’s Digital Assets Working Group and the group’s attestation subcommittee. That work includes the stablecoin criteria.

Resources:

• Accounting for and Auditing of Digital Assets (practice aid)
• Blockchain Universal Glossary
• Stablecoin Reporting and Assurance landing page

What you’ll learn from this episode:

• Schulman’s explanation of the difference between bitcoin and stablecoins.
• The reasons that an AICPA committee and subcommittee on attestation are focused on stablecoins.
• Examples that remind Schulman of how different generations view money.
• Why Schulman refers to the criteria as “transparency-oriented.”
• The resources Schulman recommends related to stablecoins and the priorities of the Digital Assets Working Group.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Hello, listeners. We’re glad to have you back for another episode of the Journal of Accountancy podcast. I’m Neil Amato, a news editor with the JofA and the host of the show. I’m joined today by Jay Schulman. He is a principal at the firm RSM and national leader of the firm’s Blockchain and Digital Assets Practice, also a member and leader of numerous committees related to this topic and others affiliated with the AICPA.

Jay and I are talking about digital assets, specifically the digital asset known as stablecoins and some new reporting criteria issued by the AICPA on that topic. First, Jay, glad to have you on the podcast. Thank you for being here.

Jay Schulman: Thank you for having me.

Amato: I’ll start with this question. What are stablecoins?

Schulman: I have this joke when people ask me, “What is bitcoin backed by?” I joke that it’s the figment of your imagination. It’s not backed by anything. Stablecoins are colossally different to think about it in a completely different way. They’re actually backed by something. For the most part, they’re backed by U.S. dollars, although they could be backed by euros or any other currency for that matter. Each token that exists represents $1 that sits in a bank. You can very quickly see why this is such a big deal to auditors and accountants and everybody in this industry as we look at this difference between tokens and dollars and making sure that when I hold a token that there’s really $1 sitting in a bank account.

Amato: I think that’s a good explanation. Appreciate it. You can see why there is, I guess, fear, concern about bitcoin and what its imaginary backing is. Stablecoins do exactly sound more stable. But, I guess their importance today and then also their risks, would you like to go over a few of those?

Schulman: I mean, the use case here, which is really gaining steam in the marketplace is a digital version of the dollar. It enables me to move money all around the world. I also say that blockchain has no geographic boundaries, and so it makes moving money very easy and quick. That’s the benefit, that I can do a lot of things that are typically full of friction in the typical banking system. The risks are exactly that. When you remove friction, sometimes that friction in the banking system is there to protect us all. The idea that I can move money really, really fast, that changes the dynamic for a lot of people working in the space.

The biggest risk that we are trying to look at here in the AICPA working group and the criteria that we’ll talk about is the concept of redeemability. If I hold these tokens, can I get my money back? The best example to think about is you walk into a casino and you put a $100 bill down, you get some chips, and you go play a whole bunch of games in the casino. The question we’re answering is when you walk back to that teller and hand over your chips, we want to make sure that there’s money in the bank that, in fact, you can redeem those chips for the U.S. dollars that you’re owed. That’s the question where they’re answering. That’s a big risk in this ecosystem, making sure that that money is really there.

Amato: We mentioned a few types of digital assets. There are many out there. Why is the AICPA’s attestation subgroup focused on stablecoins specifically?

Schulman: One word: reconciliation. This is fascinating for me to think about. We look at a blockchain, Blockchains are incredibly transparent. I often say that it’s like looking at a bank and being able to see every transaction and every account at the bank, but you just don’t know whose bank accounts they are. When I hold a token for a stablecoin, for example, everybody can see that I hold that token, and that’s incredibly powerful.

On one side of our ledger, you can imagine this incredibly transparent ecosystem where we can see where all the tokens are and who holds them. On the other side of the ecosystem, we have banks that are holding U.S. dollars. They could be holding treasuries, a lot of cash and cash equivalents. And so there’s a real need in the marketplace to make sure that those two sides of the ledger actually reconcile — the on-chain world that’s incredibly transparent and the off-chain world that not everybody can see bank statements and things like that. And so there’s a need on a monthly basis to show that both sides of those ledgers actually reconcile.

Amato: I think you’ve started to touch on it. But how stablecoins affect CPAs work, and I guess, in particular, what are some of the skills that are needed to perform engagements related to stablecoins?

Schulman: I want to take a second here to think about those in college, those thinking about where they want to end up in their career. Frankly, Neil, I’m old. When I graduated college and you looked at students exiting the business school, they were all enamored with the internet, and they kind of left the roots of business to go tackle the internet and, for the most part, that worked out really well for them.

But the internet isn’t as anchored to the work of a CPA and isn’t anchored as much to financial transactions that blockchain is. Blockchain, while we can all agree that it’s a technology, really is tied very tightly to the financial transaction and, therefore, to what we all do here in the world of auditing and accounting and taxes and everything that goes along. To work in this space is really interesting in that you need to know everything you need to know for basic accounting, and you need to know how a blockchain works and functions and combine those two together.

As I think about a lot of students who are really excited about blockchain — and every time I’m on campus, it’s amazing how excited people are at the technology — I’d hate to see them jump to go work at a technology company when there’s a real need for people when performing the type of work that’s addressed in the criteria to have both of these skill sets. You have to understand how blockchains work, and you have to understand the fundamentals of auditing and accounting. There’s a way that I don’t think we saw on the internet, where I can’t go be an accountant and go to deal with the exciting parts of the internet that I think is very different in the space, and I hope people recognize that mirroring these two skill sets together is going to be really necessary as we move forward over the next 10 years.

Amato: I think if we could veer off a little bit into the pipeline discussion, what is it that the students that you get in front of you like to hear about when it comes to blockchain and all this technology that’s out there?

Schulman: I think my perception is they view money very differently than I viewed money when I was in college. When we talked about money, usually people put their hand in their pocket and pulled out these green pieces of paper that had ones and fives and tens on them. They’ve grown up in a world where money is very digital. Certainly PayPal and Venmo is a good example of that digital money, but we also can’t forget about in-game money that exists in a lot of these games that we play that you and I might not say it’s real, but to a lot of people that play these games of all ages, but especially this age group that’s in college now, that’s money, too.

To jump back to my silly example of “What’s bitcoin backed by? The figment of your imagination” — to an 18- to 24-year-old, in fact, that isn’t something they think about.

The idea of digital money is very native to them, and so it’s very exciting to think about the future of financial services, the future of financial transactions being as digital as they’ve grown up to be. One very quick story that one of my co-workers talks about that’s resonated with me a bunch is every time his sons get in the car, he asked them if they have real dollars in their pocket, and they don’t, so he gives them a couple $20s because how could you walk around without real money? Yet, a year later, these kids go to their dad and say, “Dad, I still have all this money in my dresser drawer. What do you want me to do with it?”

It was this really eye-opening experience of, on one hand, I think he was really proud that his kids saved up all this money. On the other hand, it was like, why are you not spending these dollars? I think that goes to a very digitally native financial experience that, I’m on the upper end of my 40s, that somebody like me didn’t grow up with. I think we all have to take a step back and really think about how different generations experience money. That’s why blockchain and digital assets and things like stablecoins aren’t that big of a leap here. It’s a very digitally native experience.

Amato: I’ve had the same experience with some younger people I know, who their idea of a gift at a birthday or holiday, is “Oh wait, you’re giving me something on paper. What? I have to use a bank for that. How about just Venmo?”

Schulman: If we think about what the next 10 years are going to look like in financial services and that impact on the CPA is counting petty cash, to be super silly, that’s not going to be the main skill set. A lot of the skill sets are going to be very digital, probably even more so than we are today. As it relates to those financial transactions, and certainly I’m biased here, I believe those are going to be on a blockchain.

Amato: We’re recording late in 2024 for publication of this episode in early 2025. I understand a framework for stablecoin reporting criteria is being published. What are some of those key criteria and their importance?

Schulman: Absolutely. I think one of our principles here, speaking about when we’re recording and when this will be published, there aren’t a lot of rules and regulations that dictate how a stablecoin in particular should operate, and there’s bills going through Congress, and there’s always a rumor that a bill could pass, so just to bring that up, just in case something like that does happen. But there’s not a lot of rules, and so we created the criteria not as a way to dictate how stablecoins could operate, but really to create transparency so that everybody could see and understand how they operate.

It’s a very transparency-oriented set of criteria that talk about, back to the really interesting dynamic of reconciliation, talk about how the tokens are issued, how the reserve assets, the U.S. dollars or any other fiat currency, are held, and then goes through that reconciliation process to show that there are more dollars than there are tokens. Of course, you can always have more money in the bank than you have tokens that are issued, but you never want to be in a situation where you don’t have as much money as you have tokens being issued. That’s really the set of criteria. There’s seven or eight major points in the criteria to follow. But again, it’s not dictating how you do it. It’s dictating how you show transparency, how you report on it.

It is all based on, and very key for anybody who is working in the space or potentially issuing a stablecoin, it’s based on your terms and conditions. What we’re really saying is, hey, we say as a stablecoin issuer that we’re doing this in our terms and conditions, and then the auditor uses a set of criteria and the terms and conditions to then create that transparency around how that stablecoin is operating.

Amato: In this episode’s show notes, we will link to the pertinent resources that have been mentioned here in this discussion. Beyond stablecoin criteria, what other projects is the AICPA attestation subgroup working on?

Schulman: We are thinking about a lot of different things, so everything I’m saying here are potential ideas. I think the important note as I think about everything that we’re doing across all of the digital asset working groups of the AICPA, and it’s a comment that I specifically made to the FASB, too, is that this is not a static industry, and we can’t just make a practice aid. We can’t just make a set of criteria and move on and say, “Hey, we’ve done our job.”

The innovation here is constant and ongoing. If I sound noncommittal, a lot of that is because things that look like they are going to grow really rapidly today don’t, and there are other things that are going to go really rapidly that we didn’t anticipate.

And we’re really trying to match the market needs for the guidance that we have to offer. But I think the part to think about is that this is generically called an asset-backed token. The asset we’re talking about is the U.S. dollar. There are asset-backed tokens that back things like gold, and so each token is equal to one troy ounce of gold. But there could be every financial type of asset you can put on a blockchain and we’re starting to see bonds on a blockchain. Certainly there are a lot of people in the equity space thinking about how to put stock on a blockchain.

We’re certainly looking at all of those real-world assets that you can put on top of a blockchain, the question really is stablecoins are very prolific and in fact, in 2025, we’ll see more stablecoins get issued. The question, I think on the table for the working group is, where is our time best spent to address the needs of the people using these types of tokens? Then, of course, the auditors who ultimately have to audit those types of tokens.

Amato: Thank you, Jay, for the education today and also that comment about the importance of flexibility and how it’s not just put out a document and then you’re done. Anything else you’d like to add in closing?

Schulman: If you’re interested in the space, the AICPA has a massive amount of resources, and I’m sure that you will link in the show notes to the practice aid and a whole bunch of those resources. There is a lot that we have to offer in the Digital Assets Working Group, and I greatly encourage you to read through it.

Especially students who sometimes don’t find an Accounting 101 as exciting, there’s a lot of connectivity to some of these basic accounting principles and what we have in the practice aid. I’ll just give you one thing that I still giggle at is through this process in our working group, somebody asked the question, “How do you define a cash or cash equivalent?” In these working groups, we have some of the brightest minds in accounting. We have resources from the AICPA that know the ins and outs of every single document that’s ever issued. I will tell you, it’s hard to find the definition of cash and cash equivalents.

What’s so exciting to me, what I think students will find so valuable is a lot of this work really comes down to that base layer of things that we don’t really think about. We don’t think about the definition of a cash equivalent, and it gets really important when you work in this space. I think that’s one of the things that’s most interesting to me and will be very interesting to professors and students and everybody learning as they go along here.

Amato: We are all still learning, that’s for sure. Jay Schulman, thank you very much.

Schulman: Thank you, appreciate it.