Despite maintaining a relatively low profile since its market crash in 2017, cryptocurrency has shot back into the mainstream in recent weeks with its poster-boy currency, Bitcoin, reaching a new high of $58,000 and a one trillion-dollar market cap.
Often referred to as ‘digital gold’, Bitcoin has seen a 72% increase in value since the turn of the year, partly helped by the backing from large corporations such as Tesla. When compared to the returns offered by the S&P 500 (4.5%), the FTSE 100 (3.5%) and Gold (-7.6%) over the same period, it’s clear to see why it’s a very tempting bet for investors, despite its associated volatility.
And although it’s Bitcoin that tends to grab the headlines, it’s the Distributed Ledger Technology (DLT) behind the currency, more commonly referred to as Blockchain, that is having the biggest impact on industry.
With the pandemic forcing businesses to fundamentally re-evaluate their business models, it is thought that 2021 will be a ‘breakout’ year for both cryptocurrencies and DLT. We have therefore taken a look at how this may impact two key areas of accountancy over the years ahead.
One of the fundamental features of blockchain technology is that it securely records the details of every transaction processed within it. Smart contracts are made using digital code and stored in transparent databases where they are protected from tampering, deletion and revision.
If blockchain removes the need for maintaining and reconciling ledgers whilst providing absolute certainty over the ownership and history of assets, then does this eliminate the need for auditors? With certain tasks yes, but not entirely.
There may be little need to confirm the accuracy or existence of blockchain transactions, however there is still plenty of attention to pay to how those transactions are recorded and recognised in the financial statements. For example, blockchain might make the existence of a debtor certain, but its recoverable value and economic worth are still debateable. So although certain roles will no doubt be threatened, such judgemental elements require context and knowledge, ultimately requiring a human mind.
Despite the promise of greater security and transparency, blockchain technology can also not fully protect against fraud, illegal transactions or incorrectly classified statements. Humans code the necessary software to integrate with blockchain, meaning it is still vulnerable to human-error, fallibility and corruption.
Such vulnerability will likely carve out a new space for auditors, who will need to provide an extra level of objectivity and verifiability to transactions by placing more emphasis on the operating effectiveness of the technology.
Big Four accounting firms such as PwC are already providing cryptocurrency auditing services to clients, claiming to establish evidence of ownership of cryptocurrency and reliably gather more information about blockchain transactions. We expect to see trends of increased digitisation among firms in order to meet demands of clients and stakeholders.
It is estimated that 100 Million people (1.3% of the global population) own some form of cryptocurrency. With that number set to increase as we continue down the path of global digitisation, tax professionals will need to become well versed in providing advice on the various tax implications of digital currencies and tax authorities will need to offer clear direction.
Digital currencies pose a unique set of challenges for tax policy-makers as their prices are highly volatile. This means that there will be complex and potentially imprecise records of value over long time periods. Moreover, different exchange platforms may offer different prices for the same virtual currency. Difficulties in valuation will make it hard for tax policymakers to establish fair and accurate tax consequences of cryptocurrency profits.
As there is no clear industry practice or any standard accounting framework for how to manage cryptocurrencies, tax professionals will have to make their own judgements on how to handle these digital assets and their value fluctuations until a standard policy is introduced.
Cryptocurrencies also pose tax evasion issues. In some countries, such as the US and China, traditional anti-tax evasion mechanisms cannot address cryptocurrency tax evasion. In fact, they do not require cryptocurrencies to have any special tax classification at all. This means that governments rely on taxpayers to report their losses and gains, creating an inherent disincentive to report cryptocurrency income. Some even argue that cryptocurrencies create supertax havens.
If embraced by authorities, the technology behind cryptocurrency could help provide a solution to tax evasion. The attributes of blockchain, such as providing provenance, traceability and transparency of transactions, match priorities for any modern tax system. VAT payments could be tracked, micro transactions could become more visible, and authorities could have full confidence in the data supplied to them, all helping reduce the estimated £31 billion tax-gap in the UK.
The full impact that cryptocurrencies and blockchain technology will have on the accountancy industry is yet to be seen, but with the World Economic Forum forecasting that 10% of global GDP will be stored in blockchain by 2025, it is clear that private and public organisations will need to adapt their audit and tax departments in line with evolutions in the technology and demands of shareholders.
We don’t believe that accountancy professionals will need to become ‘blockchain engineers’, but they will certainly need to know how to advise on blockchain adoption and consider its impact on both their businesses and clients. If embraced in the right way, it is clear that there are lots of opportunities in this space.
Author: Sophie Adamson