Checking in on crypto: July 2024

Crypto trends accountants need to know

To say that 2024 has been a dramatic one for cryptoassets would be an understatement, and as the year continues to move forward, it seems a logical time for accounting professionals to check in on the broadening sector, and the trends that are shaping it.

In these exciting, fast-moving times, it will be interesting to see how the issues discussed below develop, and how the accounting profession — and, indeed, the global economy — will change because of them.

Regulatory action

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The year kicked off with the long-awaited approval of eleven spot Bitcoin ETFs, and the first half of 2024 has seen a bull run in virtually every aspect of crypto. Bitcoin hit all-time-highs in March 2024 of over $73,000, stablecoins have seen an uptick in usage and even the moribund NFT subset of crypto continues to show signs of life. This regulatory approval and subsequent bull market has led to an increasing number of users and investors in the sector, but these increases have not proceeded in a straight line. An example of this is the continued measured approach taken to cryptoassets by accounting regulators.

The Financial Accounting Standards Board should be applauded for issuing the first (and only) crypto-specific accounting standard in December 2023, but much more remains to be done. Rather, as crypto continues to become more mainstream there are several factors, both regulatory and market-driven, that CPAs, financial advisors, and other financial professionals should be aware of.

Rising prices should not obscure bad actors

Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives Exchange, departs from court in New York, US, on Thursday, Dec. 22, 2022. Bankman-Fried was released on a $250 million bail package after making his first US court appearance to face fraud charges over the collapse of FTX, the cryptocurrency exchange he co-founded.

Sam Bankman-Fried of FTX

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It might be tempting, especially for newer crypto investors entering the space following the adoption of crypto by institutions, to assume that the bad actors and unethical behavior has all been flushed out. It is imperative for CPAs and other financial advisors working with these clients, however, to emphasize that during every bull market for every asset class there are always going to be bad actors and unethical practices.

A prime example of this is to remember that the rise and (fraudulently driven) collapse of FTX occurred during the last bull market, and Sam Bankman-Fried was often put forward as a responsible steward for crypto innovation. Rising prices can be cause for optimism and even celebration but should not distract from the reality that any asset class can be subject to fraud, especially during bull markets. Prudence and continued education continue to be the watch words for accounting professionals.

Bitcoin is an asset class

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If any doubt remained as to which cryptoasset is the leader of the sector, those questions and debate have most assuredly been put to rest: Bitcoin remains the undisputed leader. Alongside the regulatory clarity that ETFs have provided, corporate treasurers also seem more willing to slowly diversify into bitcoin holdings. Given market volatility and stubbornly higher-than-expected inflation, diversification into an asset that has outperformed most others over the last decade seems to make sense.

With nations like El Salvador establishing national bitcoin reserves, bitcoin spot ETFs leading to billions of new investments in the U.S. as well as in other markets, and sentiment continuing to shift positively among investors, the long-term trends are presently positively. This also means that bitcoin continues to overshadow and dominate the conversation at the institutional and governmental policy levels.

For practitioners still wondering about the legitimacy of bitcoin, or dealing with clients who are still hesitating, it is worth pointing out that Blackrock's IBIT is the largest BTC spot ETF. TradFi has moved rapidly into crypto, with few signs of slowing down or decreasing allocations to the assets.

Additionally, it is worth pointing out that since Bitcoin is the only substantive cryptoasset utilizing the proof-of-work consensus methodology, future conversations and debates around the environmental impact of crypto will be, in essence, a critique of bitcoin. Given that for institutional investment, as well as the majority of market analysis, crypto is synonymous with bitcoin (although the reality is far more complicated), CPAs and other advisors should be well prepared for more questions moving forward.

Crypto taxes will only become more complex

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Although there remain some crypto advocates and enthusiasts who argue that crypto should be exempt from taxation, the fact remains that the crypto tax advising business continues to be red-hot, as indicated by the preparation of tax practitioners for a dramatic increase in IRS crypto audits. Changes that are set to have significant effects on crypto for years to come are the coming changes to IRC Section 6045, IRC Section 6050I, and the newly drafted form 1099-DA.

No matter how these proposed tax changes actually come to pass, the reality is that there is going to be much larger amount of information reported to the IRS than previously. While the specifics of these changes are still being ironed out, the data that will be collected and reported include the name of the taxpayers involved, the date of the transaction, Social Security (or tax ID number) and the nature of the transaction. Coupled with the broker reporting complications — at this point centralized exchanges such as Coinbase only support first-in first-out, which would cause larger tax liabilities versus other methods — and the upcoming tax seasons are sure to be bumpy for crypto investors and tax advisors alike.

Stablecoins will continue to drive adoption

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Stablecoins might have been thought of as an interesting off-shoot of crypto, but ultimately a technological dead end, but that could not be further from the truth. With TradFi institutions from PayPal to SocGen creating and issuing stablecoins, and crypto-native firms such as Tether generating record profits in the billions, this subset of crypto has quickly become a sizeable economic force in its own right. Designed and purpose-built to combine the best traits of existing fiat currencies with tokenized payments, stablecoins have quickly become an important part of the crypto onboarding process as well as the DeFi sector.

With clients of all sizes becoming more aware of both the interest and investment in stablecoins, it seems inevitable that tax questions connected to these assets will arise as well. Stablecoins are intuitive, easy to understand for even the non-expert user, and increasingly available via both crypto-native platforms as well as TradFi institutions. For CPAs with clients looking to enter the crypto space, stablecoins seem like the obvious on-ramp (because they are), but that does not mean that said adoption and usage will be seamless. Rather this presents both an opportunity and challenge for proactive practitioners to educate clients and colleagues regarding the opportunities and obstacles related to adoption.

Crypto is now part of the political scene

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Against the backdrop of all the above, crypto has recently been top of mind in political circles, particularly given the upcoming U.S. presidential election. Donald Trump has invoked crypto as a wedge issue against Joe Biden, campaigning on a platform that innovations such as crypto need to be nurtured in the U.S. and even (potentially) speaking at a crypto-focused event in July. Of course, there have also been the usual controversies surrounding the candidate, including a seemingly obligatory foray into meme coin mania.

The campaign of the sitting U.S. president, whose administration has been downright hostile to all things crypto, has found itself on the back foot in the matter, pivoting in its search for votes to even considering accepting crypto donations to the campaign. Coupled with the hundreds of millions of dollars from the crypto industry being donated to political action committees, crypto may find a place on political debates stages for some time to come, and the accounting profession will arguably be impacted by these developments.

Crypto and blockchain are now public company issues

Crypto

Moe Zoyari/Photographer: Moe Zoyari/Bloombe

Finally, it is worth noting for the accounting profession the growing interest in crypto and blockchain across the global economy. Indeed, public companies are looking to add exposure to crypto (mostly bitcoin) to their treasury accounts. For example, MicroStrategy, one of the original public company supporters of crypto, continues to buy at an astounding pace, issuing debt to enable multimillion-dollar bitcoin purchases. Other firms have noted that they plan to do likewise.

In addition, blockchain and Web 3 initiatives are now a growing part of major company initiatives, with 56% of Fortune 500 executives noting that their organizations are working on such projects. This is true even given the growing fervor for all things artificial intelligence. From tokenization of real-world assets to Web 3 gaming and more, the accounting profession will continue to be a critical participant in these developments. In fact, the very tools of accounting and audit will adapt and evolve, and technology awareness and expertise will be a differentiator, not just for accounting professionals but accounting vendors as well.