Cryptocurrencies highlight the need for better accounting standards

The cryptocurrency sector is no stranger to volatility, but in recent months there has been an increase in both the frequency and severity of headline-generating news stories. With more stock exchanges filing for bankruptcy, trillions in value being erased from space and demands (once again) for the “end” of crypto, there are growing demands for regulation and supervision. It is always worth remembering, although blockchain and crypto may represent new ways and paradigms of doing business, that the basic economic laws always apply. Regulation comes for the crypto area; there is no doubt.

What remains to be seen, however, is how wisely the said regulation is designed and implemented in today’s marketplace.

Stablecoins have clearly taken a prominent role in the regulatory conversation lately, and for good reason. In addition to representing a subgroup of the crypto-asset class with a market value of over $ 100 billion, stack coins also play an integrated role in the fast-growing – and volatile – decentralized financial area (DeFi). It would be safe to say that the role of stack coins is difficult to overestimate for the further development of the blockchain and crypto sector more broadly. Once considered by some to be a less exciting niche area in space, stablecoins continue to cement their role as an integral part of the ecosystem.

An element that has also been brought to the fore during recent volatility is the critical importance of understanding exactly what underlies stablecoin instruments. In the myriad of regulatory proposals that were issued and promoted during 2022, the focus – almost without exception – has been at least in part on how to account for and report the value of stack coins. In other words, it seems that the accounts for crypto – especially stablecoins and stablecoin-related instruments – are finally getting the attention they deserve.

Let’s take a look at some of the factors and ideas that are, and should continue to be, driving the crypto conversation forward.

Reserve certificate is crucial. Whether it takes the form of the Proof-of-Reserve (PoR) attestation protocol that has been developed, or a similarly constructed alternative, it is crucial to understand and be able to communicate the reserves of cryptocurrencies. As has been highlighted by the error of some algorithmically stable coins, both investors and decision makers can benefit from greater transparency regarding both the crypto asset in question, as well as which assets are used to substantiate the value of said assets.

Increasing transparency related to cryptocurrencies also has significant implications for stock exchanges, several of which have failed spectacularly in recent months. Investors and decision makers rightly expect clear, consistent and comparable ways in which these entities’ assets and liabilities can be verified.

Better accounting and certification standards play an integral role in allowing issuers and exchanges to meet the needs of the market.

Valuation means something. Despite some conversations to the contrary, losses should – at the very least – be acknowledged even if the instruments themselves are not sold by the entity that owns them. By recognizing the appropriateness of accounting concepts such as unrealized gains and losses versus realized gains and losses, the issues of valuation remain open items that need to be addressed as soon as possible. Highly traded cryptocurrencies such as bitcoin have a deep and liquid market, including some financial products such as exchange traded funds (ETFs) and trusts, but not all the tens of thousands of cryptocurrencies have such available price and trading information.

Given the rapid growth of the cryptocurrency sector, and the proliferation of thousands of cryptocurrencies, it is important that the valuation methods that inform investors are also up to date. Questions include, but are not limited to, the following. How are these valuations determined in the first place? Are there comparable estimates and valuations? What protocols are in place to take market volatility into account when it comes to price volatility? Does the profession have processes in place to accurately report these value changes on a consistent and comparable basis?

Stablecoin prominence. Stablecoins, which were once seen by some as a relatively boring and uninnovative addition to the cryptocurrency sector, have quickly emerged as something quite the opposite. As both institutions, entrepreneurs and individuals seek to gain exposure to the wider blockchain and crypto-asset world, stack coins provide a logical and functional ramp for these market participants to gain the said exposure. Of particular importance are the processes by which traders, investors, stock exchanges and decision-makers can gain greater clarity in the role and effect of stack coins on various crypto-activity activities.

As the basis for a number of other blockchain-based applications, stack coins have a critical role to play in both the further adoption and use of cryptocurrencies for payment purposes, as well as the development of more advanced blockchain applications. Cryptoassets, even during the current crypto winter, continue to evolve in exciting new directions, with stable coins playing an integral role in many of these innovation applications. With this proliferation, however, the need for better and cryptospecific accounting processes continues to grow; The accounting profession is well positioned to take advantage of this development.