Cryptocurrency and blockchain: What accountants need to know

Cryptocurrencies and blockchain are here right now, and accountants need to be clued up about them. That’s the advice from Narayanan Vaidyanathan, head of technology focus at ACCA, who has extensively researched the issue.

At Accountex 2018, he addressed an audience of accountants to talk about initial coin offerings (ICOs), by which funding can be raised for a business outside of the typical and more established initial public offering (IPO).

Speaking to Sage Advice Newsroom about the wider issues surrounding cryptocurrencies and blockchain technology, Narayanan said: “Accountants can’t be like an ostrich with their head in the sand.

“It’s important to engage with them and build up your understanding. It’s also important to understand where the risks are and also where the value is. If your clients are starting to engage with this you can’t ignore it.”

Blockchain 101 – an explanation

Blockchain might sound complicated but actually the technology is framed in terms you will likely already understand. A blockchain is a ledger that’s decentralised and anonymous. In other words, it’s distributed across the internet and is outside of any single control – including governments and companies that might utilise or even create it.

Entire copies of the blockchain are held in multiple locations, which is typically anywhere the ledger is used. This means the ledger can’t be tampered with by an individual because they would have the impossible task of hacking millions (perhaps even billions) of copies of the ledger.

And all legitimate entries within the ledger are cryptographically signed, typically based on the blockchain entries before and after it, which makes fraudulent entries impossible.

The creation of various currencies such as Bitcoin is just one use of blockchain. It uses for securely recording all kinds of information are almost limitless, and governments and financial institutions around the world are among those starting to explore its uses.

From an accountancy point of view, it isn’t hard to see how a company with several regional offices might use a blockchain to record its central ledger to avoid the risk of fraud or mistakes.

A property developer might create the deed for a new build as a blockchain so that it could track ownership or even rental in a fundamentally secure way for the entire lifetime of the building.

Put simply, the only limit for blockchain is the imagination of those want to utiltise it – and also their willingness to trust and explore the technology.

Where are we in the cryptocurrency lifecycle?

It’s with cryptocurrencies that blockchain is getting most of its exposure right now. Although some of the older cryptocurrencies such as Bitcoin have been around for nearly a decade, we’re still very early in the evolution of the technology, said Narayanan.

In recent years, cryptocurrencies began transitioning into becoming accepted tender for goods – everything from coffee to video games – but this is becoming increasingly rare, he continued: “I think those days are behind us because it’s gone up so much in value.

“It’s now become a legitimate stored value for many people. So I think that changes the way you look at it and how it’s going to be taxed, and how it’s going to be potentially seen in the world of reporting and taxation.”

As for how accountants should administer cryptocurrencies when dealing with authorities, Narayanan didn’t have a firm answer because there simply isn’t one yet.

“These are things that are evolving in real-time,” he said. “Authorities around the world – for example HMRC in the UK – are currently mapping this question. They are starting to figure it out and get opinions.”

Considering it in terms of capital gains certainly makes sense, he continued, but organisations such as ACCA continue to work with government departments like HMRC to gain a better understanding.

What are the risks?

When asked if accountants should accept cryptocurrencies like Bitcoin for their fees, Narayanan advised caution.

“There are some inherent risks,” he said. “For example the high volatility, and the fact the anonymous nature of Bitcoin means while you know the target addresses of where the Bitcoins are going, you don’t necessarily know who the beneficial owners who are behind that. And that’s a money laundering and a terrorist financing risk.”

In fact, the fundamentally anonymous nature of cryptocurrencies – and the fact they operate independently of national borders – can create a nightmarish landscape for accountants and the regulators they operate under.

“There will need to be real clarity and further understanding of how those cryptocurrencies have been generated,” said Narayanan. “Including in which jurisdiction they’ve been generated, because these are global funds.

“And I think you also need to be a lot more understanding of where the exchange points have been in acquiring these funds.”

What’s the future for blockchain and cryptocurrency?

“We’ve come from proof of concept, to use cases, to production stage,” said Narayanan, when asked about what’s on the horizon for blockchain technology. “And I think we’re now thinking a lot more about how to sustain it, how to have security embedded into it, and to have something that works ultimately in the public interest as well.”

ICOs are a booming use of blockchain and raised $5.5bn (£4.1bn) of investment capital across 2017. The concept is simple: a business offers their own token or cryptocurrency, just like securities are offered in a traditional IPO. The investor anticipates the token or currency will appreciate in value over time.

Often the ICO offering is purchased with another cryptocurrency and is traded in that fashion too.

As Narayanan explained, ICOs can be anonymous and under-regulated, so the risks are high for everybody involved – not least accountants involved in their administration.

“In a deliberate and unethical way [some ICOs] hide the fact that the token might be usable in other ways,” he said, referring to how some ICOs bypass securities regulation by pretending their tokens have limited applications.

“You might be in a situation where you’ve done something unethical even if you’ve managed to get away with it from a purely legalistic point of view. ICOs come with lots of things that are new considerations for everybody in business, professional accountants included.

“For me, the most important is the ethical dimension. That’s something where the profession needs to be front and centre. But before you even get to that you need the product knowledge.”