The blockchain and cryptoasset landscape continues to accelerate and evolve in ways that just a short time ago would have seemed radical or outlandish. Below are some recent developments and what they might mean for practitioners moving forward.

Crypto Payments are Here

Following the clarifications by the Office of the Comptroller of the Currency (OCC) allowing federally chartered banking institutions to buy, sell and approve certain crypto transactions, the trend is clear. In addition to these announcements, multiple banking charters have been granted to digital asset institutions. The takeaway is that clients will be dealing with crypto payment issues, and CPAs need to know what to ask, how to ask and how to interpret the answers received. Other issues include the following:

• Specific industries, such as the still-nascent cannabis industry, can benefit dramatically from the integration and implementation of blockchain and crypto asset solutions.
• Cost savings and other operational opportunities regarding near-real-time reporting and reducing the need for manual confirmations are going to increasingly move from concept to reality; are practitioners prepared for these adjustments?

New Iterations of Crypto Are Here

Stablecoins, digital twins connected to blockchain and the potential rise of the non-fungible token (NFT) sector all represent new iterations of blockchain that need to be understood, assessed and integrated into business operations. Depending on the client, an increasing percentage of assets, revenues and operations might be taking place in a purely digital or even crypto environment.

Specific questions to ask include the following:

• What crypto wallet (storage) applications are being considered and potentially implemented by the organization?
• Has the insurance for the organization been updated or modified to account for the potential risk of hacks or other cybersecurity issues linked to blockchain and cryptoassets?

Stablecoins

Can the profession successfully navigate the potential complications that can, and do, arise from cryptoasset accounting for instruments such a stablecoins? Some additional issues that stablecoins create include the following:

• From a practitioner perspective, what are the broader implications of clients, both now and in the future, beginning to accept crypto payments as an integrated part of business operations?
• From a cybersecurity standpoint, are clients and practitioners going to be up to speed with regard to dealing with an increasing amount of digital payments?

Accounting Open Items

There are still a significant number of accounting-related open items that need to be addressed in order to generate wider adoption and utilization, including the following:

• Are clients aware of tax obligations related to crypto?
• Do clients properly disclose crypto-related information to regulators, most notably the IRS, in the correct manner?
• Is there a process in place at the organization to correctly value and report updated values of crypto holdings as they change?

Cyber Risk

Cybersecurity and other technology controls and considerations also need to be brought to the front burner. Practitioners need to pay special attention to the following issues:

• If crypto payments are accepted, what controls exist over the interoperability between new crypto-specific applications and legacy systems?
• Are the cybersecurity policies inside the organization (e.g., internal controls) updated and inclusive of blockchain and crypto-specific issues?

Decentralization of Finance (DEFI)

In the last year or so, the concepts of decentralized finance and decentralized exchanges have raced ahead. Doing a deep dive on these concepts is beyond the scope of any single piece, but the tax and accounting implications of concepts like block rewards, liquidity mining, yield arming and other DeFi-native applications are going to continue to raise complicated questions for the foreseeable future.

Non-Fungible Tokens

The race toward new cryptoasset applications and developments continues unabated, with the recent rise of non-fungible tokens (NFTs) representing just the most recent iteration. Highlighted by digital collectibles and potential video game monetization opportunities, NFTs have tremendous potential. A working definition of this new cryptoasset can be put together as follows: NFTs are a unique and indivisible digital asset that 1) are connected to an underlying blockchain, 2) are unique and cannot be exchanged for one another as equivalents (versus dollars or bitcoin) and 3) are linked to a specific asset.

Clearly, the blockchain and cryptoasset sectors continue to develop and evolve at a rapid rate, and alongside this rapid development and expansion are going to be accounting and reporting issues that need to be addressed. These might seem like significant challenges, but they also create quite a few opportunities for motivated and proactive practitioners.

Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York — Lehman College. He can be reached at drseansteinsmith@gmail.com.

Reprinted with permission of the New Jersey Society of CPAs, njcpa.org, from the Summer 2021 issue of New Jersey CPA magazine (njcpa.org/newjerseycpa).

This article appears in the summer 2021 issue of the Washington CPA magazine. Read more here.

Learn more about blockchain and crypto here.