Lack of Accounting Guidance Stifles Blockchain Growth in U.S.

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By Denise Lugo

Advocates for blockchain technology and the digital currencies it supports told Bloomberg BNA those databases can’t meet their potential in U.S. capital markets unless the U.S. standard setter fashions accounting rules specifically for them.

“It already is a big business issue,” said Perianne Boring, founder and president of Chamber of Digital Commerce, a Washington-based advocacy group. “We have many companies that are members of the Chamber of Digital Commerce. They’re operating in the blockchain ecosystem and if they’re holding or have on balance sheet digital assets, they cannot get audits. They’re having a very, very difficult time obtaining an audit.”

“Of course if you don’t have an audit, that causes a number of other business challenges: if you want to go public you have to have an audit, if you are a public company you have to have an audit, if you’re seeking investment it’s standard to get an audit—it’s a lifeline for your business,” Boring said.

Companies like Microsoft Corp., Overstock.com Inc., IBM Corp., BNP Paribas SA., Bank of New York Mellon Corp., Toronto-Dominion Bank., Accenture PLC, among others, are all members of Digital Commerce’s executive committee of advisers.

“There is a huge focus on what are called initial coin offerings and this new mode of how startups are raising money through the use of them, and it’s a very white hot space, but it’s not our focus with our clients,” David Treat, managing director who leads Accenture’s blockchain practice globally for financial services, told Bloomberg BNA. “The majority of our work is actually using the underlying technology without the cryptocurrency.”

Digital Chamber wrote the Financial Accounting Standards Board a month ago to request a full suite of accounting rules for reporting digital assets and currencies.

FASB Examining Request for Rules

The topic is being examined by FASB as part of its due standard setting process. “The FASB staff plans to perform pre-agenda research about accounting for digital currency—identified in the Digital Chamber of Commerce’s agenda request—and will discuss it with the Board at a public board meeting,” John Pappas, senior manager, media relations and constituent communications at FASB told Bloomberg BNA.A blockchain is a type of electronic distributed ledger, similar to a stock ledger, that is maintained by a number of participants in a network of computers. Bitcoin and Ehereum blockchains are used to create and track transitions in digital currencies like bitcoin or ether.

The blockchain industry now has a market capitalization of over $100 billion, according to industry reports. Over $1.5 billion of venture capital has been invested in bitcoin and blockchain companies to date.

There is currently no accounting standards specific to blockchain or digital currencies like bitcoin or eretheum under U.S. generally accepted accounting principles (GAAP). There is therefore general confusion and differences about how to categorize them and what accounting standards to use for companies that want to use GAAP financial statements.

Flight to International Accounting?

Blockchain advocates fear U.S. companies will miss an opportunity because companies will invest overseas where there might be more interest in developing accounting rules.

Other governments around the globe like United Arab Emirates and Switzerland have taken a very proactive stance in understanding the technology and are in the forefront of building regulatory compliance around it to allow start ups and innovators to actually experiment with the technology, practitioners said.

In April, Japan recognized bitcoin as a legal method of payment. Its standard-setting body is mulling potential standards for digital currencies.

Growing Influx of Capital

A huge and growing influx of capital currently is flowing into digital currency companies. One of the most popular is initial coin offerings (ICOs), also referred to as token offerings. The last 30 ICOs that reported their launches raised about $540 million in 2017, practitioners said.

“This may be one of the most important innovations that happen in our lifetime,” Griffin Anderson, of blockchain technology company ConsenSys, told Bloomberg BNA. “It may be more powerful than cloud, or artificial intelligence, machine learning, or any of the other technologies.”

“My caution for the big four accounting firms is this technology is going to have an impact on the way they audit, tax, and do business,” Anderson said.

Accountants Hear Clamor for Rules

Accountants told Bloomberg BNA that many of their clients want to take advantage of the opportunity to transact in blockchain currency. “The issue becomes, what do you do in the absence of specific standards,” said Judith Herron-Arango, an accountant at Pittsburgh, Pa.-based accounting firm Markovitz Dugan & Associates. “The first place you go to is what regulators have done before—the IRS said if you’re putting it in tax returns, you’re going to have to treat it like a property transaction.”

Ultimately, the market will drive what happens, and the technology is still in an early stage, practitioners said.

“The more sophisticated investor will want things to be more standard so that you can compare across the industry, so that will be one of the factors to drive how quickly the FASB operates on this,” said Robert Graham, partner and head of the digital currency practice at New York-based accounting firm Friedman LLP.

“But it’s a very new technology and it’s a whole different way of doing things, and I think that complexity and the way people are utilizing the technology—there’s a lot of tokens coming on the market and things are structured in a different manner, so it’s still early and evaluating what these are and what people are doing with them.”

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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