Blockchain has been touted over the past few years as a potential game-changer for the accounting profession — a distributed, digitized database where transactions can be approved without the need for third-party assurance, and records are immutable because the information is stored in cryptographically sealed blocks of data.
In 2019, however, some of that hype seemed to die down. CPA.com, the AICPA’s technology and business subsidiary, put out an accounting technology version of the Gartner Hype Cycle with blockchain having nearly completed a precipitous fall from the height of inflated expectations into the trough of disillusionment.
So, is blockchain a fad that’s fading away? Far from it. As shown in the graphic below, the next stages on the hype cycle for blockchain are the slope of enlightenment and the plateau of productivity.
There are signs that the accounting profession is entering a new age of enlightenment with blockchain. Whereas prior discussions about blockchain’s potential effect on accounting often focused on live, automated financial transaction approval and recordkeeping potentially eliminating the need for audits, the conversation today has moved to other areas, among them the many opportunities for accounting and assurance work blockchain technology is creating.
To help enlighten accountants on what they need to know now about blockchain, the JofA spoke with Erik Asgeirsson, CPA.com’s president and CEO, and Ron Quaranta, founder and chairman of the Wall Street Blockchain Alliance, a trade association promoting comprehensive adoption of the technology. The AICPA and CPA.com are leading the accounting workgroups for the alliance.
In a conversation recorded at the AICPA/CPA.com Digital CPA Conference in December, Asgeirsson and Quaranta touched on a number of topics, including the IRS’s recent ruling on blockchain accounting and the main takeaways from the Blockchain in Accounting Symposium that the AICPA and CPA.com held in fall 2019.
CPA.com accounting profession megatrends, 2019
What you’ll learn from this episode:
- What stablecoins are, how they differ from crytoassets such as bitcoin, and what kind of accounting challenges they bring.
- Why and how blockchain will create more, not fewer, assurance opportunities for accountants.
- Which aspects of blockchain accountants need to understand — and which ones they don’t.
- The role CPAs may play related to smart contracts and System and Organization Controls (SOC) reporting.
Play the episode below or read the edited transcript:
To comment on this podcast or to suggest an idea for another podcast, contact Jeff Drew, a JofA senior editor, at Jeff.Drew@aicpa-cima.com.
Jeff Drew: Welcome to the Journal of Accountancy Podcast. I’m Jeff Drew, senior editor for technology with the Journal of Accountancy. I am pleased to be joined today by Erik Asgeirsson, the president and CEO of CPA.com, the business and technology subsidiary of the AICPA. And also by Ron Quaranta, who is the chairman and CEO of the Wall Street Blockchain Alliance.
Some in our audience may think that blockchain has been in a bit of a lull. I mean, there was a ton of hype about how it was going to change everything and, you know, change wasn’t instantaneous. You may have heard of the Gartner Hype Cycle. The blockchain has gone from the peak of inflated expectations down to the trough of disillusionment. But it’s maturing, and it may be changing very quickly what you hear, thanks in part to a decision or a release recently by the IRS.
So, gentlemen, where are we on blockchain, and what do CPAs need to know right now?
Ron Quaranta: Great, thank you. So again, thanks to our friends and partners at CPA.com and the AICPA. I’ll agree with your point about kind of the attention of blockchain’s waned a little bit. But I think two really important things are happening. I think for the accounting professional looking at the recent IRS revenue ruling on cryptoassets really elaborated on some of the open questions. I think there are still more questions to be answered by the IRS. But it’s important that the practitioner understand that cryptoassets are A, here to stay. And B, they’re going to have clients that hold them.
So what are the challenges around evaluation and taxation?
I think the other side of that is enterprise adoption of blockchain. When we look at different blockchain examples, and we brought up many times today the Walmart example, tracking food. And when you begin to watch produce and different industry verticals leveraging blockchain technology in production today, all those firms leverage participants in the accounting profession.
How does that get audited? What are the challenges of auditing blockchain interactions? So, to me, I’ll see the uneven evolution, and maybe people aren’t wanting to see Blockchain 101. But going forward, it will be even more critical for the profession to be involved in the conversation.
Erik Asgeirsson: Ron, I agree with a lot of those comments. And Jeff, thanks. It’s great to be here with the Journal of Accountancy. When you think about, just first, when you think about the hype cycle, you know, when it’s at the peak of inflated expectations, that’s when you’ve got the early adopters. Everyone’s trying to understand, you know, what does it mean? What’s the opportunity here? And you’re sorting through things. And actually when it goes down in the trough of disillusionment, it’s actually, that’s the time that you really start working on the use cases that help you cross the chasm and start making productive use of this new technology. And actually, I think that’s beginning to happen.
So, I think we’re at an interesting time. I think the IRS rulings, the 10,000-plus letters that were sent out to many, many firm clients, has definitely woken people up. So I think the lull, it could be ending. And people are saying, “OK, you know, how do I meet this compliance need” and there’s solutions that are in the marketplace. There’s training that needs to be in the marketplace.
So I actually think we’re in a good state, and I think this is excellent that we can, the firms can start working on this initial use case in a much broader way. There’s been firms doing work in the cryptoasset category, but now this is going to make it much wider spread. And I think as they understand how to meet the compliance needs related to cryptotax, they’re going to get a better understanding of cryptoassets, the blockchain category. And in some ways this will be a tipping point for them to go into some of the other areas that Ron just mentioned.
Quaranta: And just to finalize on that a little bit. When you look at, so for example our accounting members in the Wall Street Blockchain Alliance, all of those members now have some level of blockchain and cryptoasset practice within their organization. And it might be a person or a group, but they all understand that they need to answer those questions that their clients are bringing to them about the technology.
Asgeirsson: On that, Jeff and Ron, what I would say is that what it is, it’s probably still like under 10% of firms. So that, there are these firms that are part of the Wall Street Blockchain Alliance and I really appreciate being partners with you on this. Because we’ve been working on framing the discussion of the past couple of years. We’ve made a lot of progress through the different information that we’ve been jointly putting out. We actually just released a recent report on our most current blockchain symposium.
But I think we’re now going to start moving into much higher percentages of firms that are getting their arms around this.
Drew: So, that’s a great segue to the symposium. And I just thought you guys could talk a little bit about some of the work you’ve done overall together. And then also, you know, what was discussed at the symposium. You went through use cases. You discussed some of the IRS issues. Now, the symposium was held before the IRS ruling came out. But there was a lot of discussion. And kind of talk about, what were your main takeaways for our audience from the symposium?
Quaranta: A year or two ago, there was a not insubstantial portion of the audience that had concerns or just didn’t quite understand, what does bitcoin mean? Or what do these cryptoassets mean? How does blockchain impact my profession or my role? In the latest blockchain symposium, it was a much more evolved conversation.
Quaranta: It was, we have clients looking at cryptoassets. We see blockchain solutions for audit. We see, we have concerns about SOC 1 and SOC 2 compliance. So to me, the evolution of the conversation in the profession is that much further along. And in fairness, we speak to a lot of different industry groups. I would argue the accounting profession writ large is moving ahead further in adoption and understanding of the innovation of blockchain and cryptoassets than a lot of other industry groups that we deal with. Which is really telling.
Asgeirsson: I’ll tell you one thing that’s, you know, got a lot of buzz, and it had a lot of buzz right then, was Facebook’s Libra announcement. And we haven’t even talked about that.
But this, the whole, what is probably higher on the hype cycle right now is stablecoins. And you know, Facebook Libra. Their stablecoin and the white paper that they issued, and testimony by Mark Zuckerberg in front of Congress. A lot of good thinking there. Like everything, though, there’s lots of different opinions, but I think that’s great leadership. And you’ve got JP Morgan, you know, their stablecoin. So that’s probably one of the things that is a very, very current topic. And Ron, you’re probably thinking a lot about that.
Drew: And if you could briefly explain for our listeners who don’t exactly know what the difference is between a stablecoin and something like bitcoin.
Quaranta: Sure. So bitcoin is, in its purest form is the basis for cryptocurrency. Bitcoin is a token that is based on the bitcoin blockchain and is a pure cryptocurrency. A stablecoin’s a bit of a different thing. And a stablecoin is designed, the ecosystem’s designed to do one thing: minimize the known volatility of cryptoassets, right? And you can see 10, 20, 30% shifts in some of these prices. And the idea was peg a stable coin or a token to the dollar.
So USDT, for example, is a good example. Libra was meant to be pegged to, when it launches, whenever that may be, a basket of securities or currencies, for example. And some of the challenges multiply when you look at it from the accounting perspective. Meaning, how do you value these? What are the price points and what are the reference data sets that the accounting profession needs to understand?
How do they get transacted? How are they taxed? Matter of fact, one of the things that we’re really proud of was the work we did with AICPA and CPA.com on our stablecoin primer for the accounting professional. To help the accounting profession understand, what’s a commodity token pegged to a barrel of oil? What is a dollar-based token? What is a yuan-based token? So stablecoins are meant to be pegged to an underlying existing fiat currency or asset.
Asgeirsson: And just yeah, so a little bit on the stablecoins there. And this is where a lot of people are looking at blockchain and thinking that it could have a lot of value in just supporting financial transactions. And when you’re doing financial transactions, sometimes you want a stable currency, and one thing which bitcoin, the movements have caused people to have concerns in kind of holding bitcoins, unless they’re speculating.
And in some ways even the, you know, the bitcoin drop was probably a good thing overall for the marketplace. Because you want to get the speculators out, and you want to see what value bitcoin can provide to its different use cases. Just for the audience if anyone owns bitcoins, they’re all, is built off of a blockchain database, just like the stablecoins are. The stablecoins are, they’re tied to these fiat currencies.
Asgeirsson: You could get Ron talking about –
Quaranta: Don’t start me up.
Asgeirsson: You know, you could really confuse the audience. Talk about airdrops and forks and things like that.
Quaranta: Oh yeah.
Asgeirsson: I don’t think we need to go there.
Quaranta: Right. No, no, that’s the next podcast.
Drew: Definitely not right now, that’s not something that’s great just audio, I don’t think. But it does seem like, you know, you brought up the use cases later on for financial transactions and stuff, that was kind of some of the early hype, within accounting. That’s what people were talking about. This could help lead to the audit totally changing or just all live and automated and we’re doing different, you know, the profession’s having to do different things with it.
It seems like now, where the profession needs to be looking is they’ve got to figure out how to handle the accounting part of it. And you know, the IRS ruling is part of that. But a lot of stuff you mentioned, they’ve got to know these terms, so they can have some idea of what their clients are talking about.
Asgeirsson: Yeah, I mean, yes. Like all areas of the practice, you need to specialize, and you need to become knowledgeable and experts in some ways in what you’re supporting your clients with. So I think that is true. But when you start looking at the accounting services, there’s going to be, on the cryptoasset area, there’s going to be solutions that help you do the valuation work. Let me give you an example. These are the use cases that are occurring, where you’ve got a cryptoasset and what happens at times, people donate their assets to not-for-profits.
And some of these cryptoassets have lockups. So then, most not-for-profits, if they get something donated to them that they can sell it quickly, they do, maybe turn it into U.S. dollars or whatever currency. But in this case they can’t, so then they have to do some valuation work. Again, this is going to push firms that are supporting not-for-profits that may not be supporting people doing trades in cryptoassets, but they’ll say, “I have to do valuation for it.”
Again, there’s going to be a solution that we’ll be training. And then you have assurance work. You know, I think in the early stages of blockchain we said this was going to really be massively disruptive because everybody was going to start doing transactions in blockchains. That’s not the case. Because you’re going to have a lot of different, probably permission-based blockchains, private blockchains, where people will potentially do some transaction work or supply chain work.
But it’s just going to require more expertise and making sure things are configured right. And it’s leading actually to more assurance opportunities, not less.
Quaranta: And it gets us to, we’ve had this conversation many times. And I get a lot of accounting practitioners who are new to blockchain say the same thing, which is, “Oh my god, Ron, you just told me audit’s going away,” or whatever it may be. And you and I know, audit’s evolving. The profession’s evolving. And I would argue that the qualitative aspects of audit don’t go away. They become more important.
And now, the accounting and audit professional needing to understand, they don’t need to understand hashing. They don’t need to understand deep cryptography. But they need to understand blockchain use cases. The fact that Walmart shipped produce leveraging a blockchain. The fact that real estate titles will be sitting on blockchain. That’s a spot for the accounting audit professional to understand, “This is an ecosystem I need to keep up on.” And that the tools for that ecosystem are beginning to appear.
So when you look at valuations, I think the Lukka example is a really good example, and the partnership with CPA.com.
Drew: And you know, we’re recording this at the Digital CPA Conference. And I’ve been to every one. And you guys have, CPA.com has been ahead like a year or two on pretty much everybody else on the trends going on. And the last couple of years there has been a huge emphasis on the need for trust and the attestation opportunities that technology is creating in the space. I think on what Ron touched on is a good segue. If you all could kind of talk about those opportunities within the blockchain, blockchain-related opportunities like smart contracts and things that will need to be audited.
Asgeirsson: Well, thanks for being here at Digital CPA. It’s great having you here, and kind of getting a lot of this good information out to the broader profession. The trust opportunity is a key value part of the profession. And there’s never been a better time to give more assurance as you look at data with such things as data analytics you can really apply in the overall integrity of the data.
And going back to blockchain, things like smart contracts, that’s absolutely something where the profession needs to play a role with the SOC standard and give some level of trust that people’s smart contracts are written properly.
Quaranta: Yeah, and as use of the technology evolves, that role of the accountant and the auditor to me gets more important for a couple of reasons. You hit on smart contracts. And that’s not just a legal conversation, right? That’s not just legal clauses. Does the contract do what the parties believe it’s going to do? And who do they trust to check that? And it will fall to the accounting and the audit professional. When you talk about things like interoperability, when we have Walmart leveraging blockchain and all of these other organizations leveraging blockchain, who helps to understand and who do we trust to help understand “Should this be a blockchain that my firm interacts with?”
And the first person I would go to is my accounting professional, my audit professional, to help me understand, “Is this an ecosystem I should be participating in? Is it compliant in the SOC realm the way it should be?” And only with that level of trust will blockchain, which is meant to decentralize trust in a way, be more universally adopted at an enterprise level. We still need trusted professionals to tell us “It makes sense for you to be in this ecosystem.”
Asgeirsson: I thought that was very well said. I think that the third-party assurance need around all these different blockchain ecosystems is going to be critical. It’s going to be critical to adoption in the marketplaces. And it’s an important role that the profession’s going to play, and it’s going to help drive success.
Drew: Yeah, and that’s kind of what I was trying to get to with my question. I don’t think I put it exactly right, throwing attestation in there, you —
Quaranta: You just told us we didn’t answer the question!
Asgeirsson: That’s right.
Drew: No, no, you did, you answered what I intended to ask. But Erik gave me this look like, what in the world are you talking about?
So, which, I’m used to getting that look. That’s OK. But no, Ron touched on it, and I think we’re in a situation with blockchain where we’ve got an article in the JofA and we’ve got a line in there, a quote in there about, from Amanda Wilkie from Boomer Consulting saying that some CPAs may think they’ve dodged the blockchain bullet, but I think what we’re starting to see is it’s more of an opportunity than something scary.
And, you know, the work you guys are doing, you guys bringing in tools to help with some of the technical aspects of, you know, this is all new and it’s stuff they haven’t done before. As you guys say in the white paper you put out, the regulatory environment has not caught up yet. And you can’t rush it, because you’ve got to get it right. But there is a great opportunity there for accountants. So as we close this out, do you have any message for our listeners?
What’s one thing you would tell them on the blockchain space to think about? What should they be doing right now?
Asgeirsson: I think we’ve now moved past this 101 of blockchain that Ron described, people going through these courses to understand how blockchain works. It’s like going through a course to understand what cloud computing is, or even like right now we’re beginning to do that with artificial intelligence. So that, we’ve moved past that.
And now, you need to go into the use case — if it’s, you’re a tax professional and you want to make sure somebody in your office, you have to have somebody in your office able to support the cryptotax compliance need, or the valuation need. Or do you want to do third-party assurance and smart contracts? Or potentially some other assurance work? So I think that, it really, you have to move away from this broad blockchain education to more specific use cases related to your vertical specialty.
Quaranta: Yeah, I’d agree with that. It’s moved beyond, for the profession, the 101. And if you remember the first keynote speaker from yesterday, she talked about time. And how you manage time. One of the things we put forward a lot is, if you haven’t dedicated some portion of time to keeping track of innovation, you’re going to begin to fall behind. And there’s now a full library of information. I mean, CPA.com and the AICPA, for example, across different industry verticals, looking at blockchain. We do likewise for our membership as well. Carve out a little bit of that time to keep up with the curve, because it’s moving fast enough that you need to be keeping up on a regular basis, and it will absolutely evolve the profession.
Asgeirsson: And Jeff, these have been great questions. So I think that you feel the passion here with Ron and I, we do these things. Sometimes we’ll jump across a couple of topics. But thank you. Thank you for leading this.
Quaranta: Thank you, yeah.
Asgeirsson: And I really appreciate the Journal of Accountancy getting this out.
Drew: Well, thank you both for joining us.
Again, this has been Journal of Accountancy Podcast. We thank our guests, Erik Asgiersson with CPA.com and Ron Quaranta with the Wall Street Blockchain Alliance. And I thank you both for taking something that can seem kind of nebulous and scary to accountants who haven’t been following it, and really giving them an idea that it’s starting to come into shape more and more, and it will be something that they can see and understand.
Quaranta: Don’t be afraid.
Jeff Drew: Don’t be afraid, yeah.
Asgeirsson: Thank you.