Cryptocurrency in accounting webinar: Your questions answered

This week I presented our webinar Tech Essentials: Cryptocurrency, introducing the key concepts of how bitcoin and other cryptocurrencies work and how accountants should approach them from the perspective of accounting treatment, audit, tax, and anti money laundering.

The recording of the live webinar is available for Tech Faculty members at the link above.  However, we had too many questions to answer in the time allotted, so in this blog post I'll be going over all the questions we received and providing some answers.

Every trade is recorded in the blockchain. However, I've read that cryptocurrencies are popular tools for hiding criminal proceeds. Why can't these be traced to find the criminal?

Bitcoin and most other cryptocurrencies are pseudonymous - that is, while a wallet will have a consistent name for all its transactions, this name isn't tied to a specific real-world individual.  This means that users (criminals included) can hide their identities, and could also register multiple wallets to further obfuscate their identity.  There are also services called mixers or tumblers, which combine transactions from several users and bounce them around a large number of intermediate transactions in order to further disguise the underlying activity.  Nonetheless, these public records do mean that it might be possible to identify the actors in question.

Is the tax webinar available online for people who missed it?

Yes, the detailed tax treatment webinar we did with eToro is available here.

Are the slides available to download as I can't see them in the resources?

The slides for this webinar were not in the resources but we will get them added to the recording.

Do you think there shall be government legislation coming up to control this? Is it really possible to legislate it?

I think that there are some areas where government could do more to protect investors.  In particular, recent work on the regulatory perimeter identified Initial Coin Offerings (ICOs) as outside the scope of regulation; I believe that these are marketed and described to potential buyers in similar terms to regulated Initial Public Offerings, and many are either unsustainable or outright fraudulent.  More generally cryptocurrencies are on government's radar for possible issues such as tax evasion; while controlling the ledgers themselves is hard or nearly impossible, it is still very possible for government to legislate on the companies and individuals in the cryptocurrency's ecosystem to, for example, introduce identity requirements.

Is there any advice on going concern issues if an organisation has a large amount of its funds in a cryptocurrency, given the ease with which they can be lost as you mentioned earlier how do we value cryptocurrencies? How do we translate in financial statement at what rate? Spot or average or closing?

While there are cases of cryptocurrencies becoming lost, this isn't particular easy or common.  The difficulty is more that, unlike bank deposit funds or similar, loss of a password (private key) to a cryptoasset is final - there is no administrator who can reset your password and help you regain access; hence these kinds of losses are effectively as permanent as if the assets had been destroyed.

A large cryptocurrency balance might be more of a material risk if the entity is significantly exposed to fluctuations in the value of that cryptocurrency, and if an adverse change in the valuation would make them insolvent.  This is a reasonable concern to investigate if a client has a significant cryptocurrency holding.

What do you think the implications of stable coins or coins linked to fiat currencies will have on the accounting treatment of cryptocurrencies?

The so-called stablecoins are ones which attempt to stabilise their value, usually by linking to a fiat (central bank-issued) currency or other more traditional financial asset.  Currently there are some questions around these; for example, the largest, Tether, has not been able to obtain an audit to prove its claims to be 100% US dollar-backed.  However, if cryptoassets are to cross the line and possibly be considered for cash equivalents treatment, then something like a fiat backing would probably be necessary; if for example a national central bank issued an official, legal tender cryptocurrency.  However there are no immediate prospects of anything like this.

You can read more about cryptocurrency on our hub page.