“Accounting is the language of business,” said Warren Buffett. “You have to be as comfortable with it as you are with your own native language to really evaluate companies.”
Buffett is right. Modern accounting is so important that some consider double-entry bookkeeping to be one of the great innovations of the time. According to economist Tim Hartford and others, it enabled Venetian and Tuscan merchants in the 14th century “to keep track of … extraordinarily intricate webs[s] of transactions” around the Mediterranean over time, laying the foundation for managing the modern global business.
Perhaps because of its long history, enormity and continued usefulness, the accounting profession takes time to absorb new information and update the rules.
Currently, there are no specific rules on how to account for cryptocurrency, which makes sense since the asset class itself is barely a decade old. This has produced some awkward jerry-rigging as the profession has tried to make the old rules fit a new asset class. That may soon change.
Crypto Assets: Fair Value and Fair Treatment
Earlier this month, the Financial Accounting Standards Board concluded that companies should measure crypto assets using fair value accounting with gains and losses recorded in current period comprehensive income. This decision is not final, and therefore it will take time for these standards to be reflected in US GAAP and other accounting rules that guide the profession’s day-to-day decisions. (For a detailed breakdown, read KPMG’s report on the decision,
Still, this is a big step forward as it brings us closer to the day when it will be convenient and straightforward for businesses to carry crypto assets on their balance sheets. Currently, the lack of clarity in accounting standards for cryptoassets is often cited as a reason for limited adoption of cryptoassets by businesses.
According to a recent article in CPA Practice Advisor, most crypto assets are treated as indefinite-lived intangible assets, such as trademarks, in the absence of crypto-specific US GAAP. This often means companies must carry the asset at the lowest value since purchase, rather than simply marking to market based on current values. Logically, a company would prefer not to hold an asset if it is carried at an artificially low value, especially if it means they have to take a significant write-down on that asset when it falls in value from the purchase price. Nevertheless, some companies like Block carry Bitcoin despite the financial headache, while many more would like to do so.
In the coming years, many companies will own crypto-assets, either as a treasury investment or because it is essential to run their day-to-day business – for example, it is easy to imagine that many companies offering web3 services will have ETH on their balances to act as a network validator. This should make adoption that much easier.
(Blockchain’s impact on accounting and other core financial services functions will play a central role in the upcoming Web3 and Blockchain World Event 8.-9. November – there are a handful of tickets left.)
Pay attention to GAAP: Traditional accounting with leaps
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 that much of the accounting industry itself will be replaced as more transactions move up the chain. Blockchains enable triple entry where the third record (or records) appear in the chain, that is, each transaction created a record in a blockchain that everyone can see. We can already search, verify and audit on-chain data across a number of blockchains. Soon we will have a record of large amounts of economic activity, not only money movements, but also trading of financial assets, IP and even physical goods in this way.
The example of Yearn Finance is illustrative. The DeFi lender has made its GitHub repository a destination for data about the platform, all of which can be independently verified on the chain. On it, we can track each and every Yearn transaction in real time, get transaction records and search for protocol income, protocol expenses, profit and loss statements, month-end balances and more. We can see revenue projections, charts, tables and other useful data. In the future, a mix of on-chain verifiable raw data, data analysis tools, and verifiable information curated by individual projects like Yearn will replace today’s quarterly accounts and other financial paperwork.
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 accountant play? Plenty, it turns out. But instead of auditing data in a spreadsheet, auditors will have to examine on-chain data and audit smart contracts. It’s time for them to brush up on Web3.
Alex Tapscott is co-founder of The Blockchain Research Institute, hosted by W3B and Blockchain World, in Toronto, Nov. 8-9. Alex is also the CEO of The Ninepoint Digital Asset Group. The opinions expressed in Fortune.com comments are solely the views of their authors and do not reflect the opinions or beliefs of Fortune.
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