By now, we all have a working familiarity with some of the cryptocurrencies and blockchain technology, but it’s concerning how little accounting professionals really know.
Moreover, while I am encouraged by the interest of the accounting community at conferences and in publications, we should take care to not abandon our professional skepticism during the evaluation process.
I was an early observer of the space, during my time as a point-of-sale and payment consultant. Later, it became a research interest for me while I was pursuing my DBA.
During an unplanned break in my academic journey, I turned to reading whitepapers and emerging research in the field. With the rise in initial coin offerings (ICOs) in late 2017, I made reading a whitepaper a day a hobby.
The excitement in the space made it impossible not to get involved, and I tested platforms and concepts, attended workshops and events and worked with local developers. I found that what concerned me most was the lack of an accounting and finance presence in the space. This is not surprising, given the historical and late adoption tendencies for which our profession is known.
Additionally, successful capital raises by computer programmers and developers reinforced the familiar battle cry of “make money first, account for it second.” Through my time engaging with participants in incubators, co-work spaces, Twitter, Google Hangouts and small businesses transacting in cryptocurrencies, I have been honored to meet some incredibly talented individuals who taught me a tremendous amount about the technology.
I follow multiple aspects of the cryptocurrency market on a daily basis, including the major mining companies, cryptocurrencies, exchanges, reverse mergers and stablecoins.
My goal in writing here is to cover some of the events and trends in the marketplace to give the reader practical questions, approaches and concepts when talking with clients or prospects interested in participating in the blockchain and cryptocurrency space. While many of us are able to spot some blatant abuses and schemes, I want to raise some potential, unintended consequences that may arise from current structures, models and the macro-environment.
Some may consider the current price of bitcoin and other cryptoassets to be at an attractive point of entry. Additionally, we see the emergence of many stablecoins, which are intended to be a tool for retail traders conducting frequent trades on exchanges that either do not have on/off fiat ramps or want a short-term asset to reduce risk while in between positions. It is my opinion that they are not a worthwhile investment of time or money for the casual participant considering purchasing one or more of the common cryptocurrencies.
Fiat backed stablecoins are the first type of project to engage CPAs for public attestations. This breed of coin is typically pegged 1:1 to USD. Given current regulations, these stablecoins are not considered equity shares in the issuing company. Instead, most serve as an “IOU” 1 stablecoin for 1 USD.
Projects state that they hold in reserves $1 for every stablecoin in circulation. It makes sense that a token holder would want assurance that these funds are available on demand. Currently, TrueUSD (TUSD), Circle (USDC), Paxos (PAX), and Gemini (GUSD) all have engaged top accounting firms to perform their attestation. Market caps, auditors and other useful information can be found at arewestableyet.net
It is important to be aware that the largest stablecoin, Tether (USDT), has never undergone an audit or an attestation and it is currently subject to scrutiny and federal investigations. Banking is a challenge for many in crypto, however, Tether routinely has had reported issues of maintaining a banking relationship.
The control of Tether supply has varied throughout its existence. For some time, it was controlled through its related exchange, Bitfinex. Per the most recent, November announcement, tether supply and the redemption process is now handled directly through its Treasury and the Tether.to platform.
Technically, per the terms of service, US citizens are not eligible to redeem USDT. Even though you or your clients may not utilize USDT, the market cap and dominance in the marketplace is likely to have an impact.
Some potential issues include: other stablecoins competing for listings and volume may provide incentivizes to exchanges and traders, exchanges wanting to reduce their exposure to USDT may encourage competitions and incentives for traders to deposit other stablecoins. Today, we saw the introduction of collateralized lending using stablecoins.
The regulatory environment is evolving, and many exchanges are voluntarily adopting higher standards. However, there are many unregulated exchanges and projects that have not had even a security audit.
It is not likely to have a significant impact on the retail participant willing and able to lose a small amount of money for the experience of signing up for a wallet and a domestic exchange. However, I would also say that waiting a bit longer will not cheat them out of an experience. In fact, they’ll likely save a couple of hours, surrendering personal information, and some fees.
For any of your clients seeking to participate with a significant amount of capital, I suggest seeking additional advice from those that actively monitor the markets. Additional stablecoin resources and trackers include: stablecoinindex.com and stablecoinswar.com
Editor's Note: Kara plans to write more practical and viewpoint pieces on these topics here on AccountingWEB so stay tuned in 2019 and (hopefully) beyond!
About Kara Haas
Kara R. Haas, CPA, CITP, CFE provides research and advisory services for accounting and legal firms.