“Accounting is the language of business,” said Warren Buffett. “You need to be as comfortable with it as you are with your own native language to really evaluate companies.”
Buffett is right. Modern bookkeeping is so important that some consider double-entry bookkeeping to be one of the great innovations of all time. According to economist Tim Hartford and others, this enabled Venetian and Tuscan merchants in the 1300s “to keep track of… extraordinarily complex websites”.[s] transactions” around the Mediterranean over time, laying the foundations for modern global business management.
Perhaps due to its long history, vast size, and enduring usefulness, the accounting profession takes time to absorb new information and update rules.
Currently, there are no specific rules on how to account for cryptocurrency, which makes sense since the asset class itself is barely ten years old. This led to some awkward manipulation as the profession tried to adapt the old rules to a new asset class. That could soon change.
Crypto-assets: fair value and fair treatment
Earlier this month, the Financial Accounting Standards Board concluded that companies should value crypto-assets using fair value accounting, with gains and losses recorded in current period comprehensive income. This decision is not final, so it will take time before these standards are reflected in US GAAP and other accounting rules that guide the day-to-day decisions of the profession. (For a detailed breakdown, read KPMG’s report on the decision.)
Still, it’s a big step forward as it brings us closer to the day when it will be convenient and simple for companies to carry crypto-assets on their balance sheets. Currently, the lack of clarity in accounting standards for crypto-assets is often cited as a reason for the limited adoption of crypto-assets by businesses.
According to a recent article in CPA Practice Advisor, most crypto-assets are accounted for as indefinite-lived intangible assets, such as trademarks, in the absence of crypto-specific US GAAP. This often means that companies should hold the asset at the lowest value since purchase, rather than simply pricing the market based on current values. Logically, a company will prefer not to hold an asset if it is brought to an artificially low value, especially if this means that it has to take a significant depreciation charge on this asset when its value decreases compared to the purchase price. Nevertheless, some companies like Block are offering Bitcoin despite the financial headache, while many others would love to.
In the years to come, many companies will own crypto-assets, either as a cash investment or because they are essential to running their day-to-day business – for example, it is easy to imagine many companies that offer Web3 services having to carry ETH balance sheets to act as a network validator. This should make adoption much easier.
(Blockchain’s impact on accounting and other critical financial services functions will take center stage at the upcoming Web3 and Blockchain Global Event on November 8-9 – only a handful of tickets remain.)
Beware of GAAP: go beyond traditional accounting
In the short to medium term, this is a big positive that will ease the way for companies to own this asset class. In the long term, however, we believe much of the accounting industry itself will be replaced as more transactions move on-chain. Blockchains allow for triple-entry accounting, with the third entry (or entries) appearing on the chain, i.e. each transaction has created an entry in a blockchain that everyone can see. Already, we can search, verify and audit on-chain data across a range of blockchains. Soon we will have a record of large amounts of economic activity, not only the movement of money, but also the trading of financial assets, intellectual property and even physical goods in this manner.
The example of Yearn Finance is illustrative. The DeFi lender has made its GitHub repository a destination for data on the platform, all of which can be independently verified on-chain. On it, we can track every Yearn transaction in real-time, get transaction records, and search protocol income, protocol expenses, income statements, month-end balances, and more. We can see revenue projections, charts, tables, and other useful data. Going forward, a mix of on-chain verifiable raw data, data analytics tools, and verifiable information curated by individual projects like Yearn will replace today’s quarterly statements and other financial documents.
In a world where on-chain data gives us a perfect snapshot of an organization’s financial health, what role does the accounting firm or the auditor have? A lot, it turns out. However, instead of auditing data in a spreadsheet, auditors will need to verify on-chain data and audit smart contracts. It’s time for them to get familiar with Web3.
Alex Tapscott is co-founder of The Blockchain Research Institute, host of W3B and Blockchain World, in Toronto, November 8-9. Alex is also the Managing Director of The Ninepoint Digital Asset Group. The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not reflect the opinions or beliefs of Fortune.
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