The future of blockchain and market disruptors

Navigating the complexities, regulatory and otherwise

With innovative business models comes the need to thoughtfully consider the regulatory environment, best practices, and strategy. Professional advisors are left with dated rules and age-old playbooks as they evaluate the applications of this nascent, innovative commerce.

Tax

Determination of cryptocurrency as a security, commodity, debt, inventory, or cash equivalent bears significant consequence to income tax, indirect tax, and payroll tax analysis. This varies by state and by country, with a constantly evolving point of view by regulators and little authoritative guidance. Commerce enabled by tokens and cryptocurrency brings us into a world of barter transactions requiring determinations of character (capital vs. ordinary), and basis tracking of fungible assets.

Audit

In collaboration with regulators and standard-setting bodies, the CPA auditor must embrace the opportunities and challenges in having clients who have adopted blockchain technology in their operations and financial reporting processes. There may be increased transparency and the ability to automate routine audit tasks. However, immutable information can still be inaccurate due to error or fraud. 

The CPA auditor can provide both enterprise organizations and the emerging disruptors with new service offerings such as blockchain platform assurance, digital asset validation services, and smart contract assurance, as well as the traditional financial statement review and audits.

Controls

One of the most critical internal control areas centers on the granting, reviewing, and removal of access controls to encryption keys or other system settings. Access controls are also dependent on appropriate delegation of authority and segregation of incompatible duties. Another important area of internal control to ensuring the maintenance of adequate books and records is timely reconciliations between transactions recorded on the blockchain and those recorded in the entity’s financial and tax records.  

Technology

Technology consultants are now in the business of debunking blog hype, educating stakeholders, and debating what blockchain does and doesn’t do. We see new vernacular in the debates as to what is “on-chain” versus “off-chain,” or how “tokenomics” need to encourage good behavior. 

The advent of new protocols and platforms requires re-imagining an appropriate technology stack—which continues to evolve at both the core and the edge—as innovative solutions emerge across developer communities to help bridge the technology from its current nascent form to an enterprise-grade future. While building a scalable blockchain solution is complex, tried-and-true processes deserve ongoing consideration.

KYC/anti-money laundering (AML)

As an enabler for virtual currencies such as bitcoin, and early associations with illicit actors like Silk Road and the dark web, blockchain was initially viewed by regulators with considerable skepticism. Among other things, its inherent qualities of speed, cross-border functionality, irreversibility, and pseudonymity raised concerns that cryptocurrencies would be attractive to money launderers and sanctions evaders. 

Regulatory uncertainty with respect to the applicability of AML requirements such as KYC, have been blamed for stifling innovation among the players in the ecosystem. Ironically, blockchain may prove to be an ideal tool for satisfying regulatory requirements as a trusted repository of information, a mechanism for verification of identity, and a record of transactions. Financial services is among those industries facing the most significant disruption by blockchain technology.

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