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What CPAs Need to Know

Eighty-four percent of executives say their companies have at least some involvement in a blockchain project, according to PwC’s 2018 Global Blockchain Survey.

Blockchain has evolved beyond the distributed ledger for cryptocurrency transactions alone. It has become a powerful, coveted technology that maintains assets and property rights, and disrupts operational frameworks across industries.

Large enterprises are incorporating it into their infrastructures to secure and store digital assets, accept and process direct payments, gain greater visibility into the supply chain and execute contracts faster, at a lower cost and without intermediaries. Though moving slower, smaller companies are beginning to turn to blockchain-based solutions for investment in digital assets and for operations where blockchain can improve transparency and security.

What does this mean for accounting and finance professionals supporting these smaller companies?

Double-entry accounting has revolutionized and become the standard of bookkeeping. By definition, it recognizes the interplay between organizational assets as well as liabilities and equity to create an accurate fiscal view of an entity. Blockchain builds on fundamental accounting principles so financial assets are shared and transmitted to counterparties quickly via a shared, trusted ledger. All transactions are recorded in a distributed, public or private ledger that cannot be altered, resulting in a trustworthy audit trail. Also, multiple participants can validate all transactions against the digital identities and rules in a blockchain network, which eliminates challenges around validity and multi-party reconciliation.

This doesn’t mean blockchain will eliminate the need for CPA services. However, the nature of their work will change. CPAs will have to master blockchain to get their work done, like spreadsheets before it.

Accounting and tax advisor knowledge remains critical, but will require an understanding of the software networks that attest to the integrity of transactions. Accountants must focus on valuation, market volatility and regulatory compliance to help clients investing in digital assets stored on blockchain-based systems. They will also need to prove the existence of the account and test the client’s ability to access and control the asset.

For example, if a business maintains custody of its digital assets, issues may arise with internal controls, as well as proof of existence and access. By holding private keys, which are sentence-long strings of random digits, the business can initiate transactions from an account or send the balance elsewhere. To safeguard these keys, accountants can recommend risk mitigating approaches such as they split the string up and segregate access, using wallets that require multi-party signoff and using encrypted hardware to put them into physical “cold” storage. These are fundamental changes from traditional approaches to account control and signature authorization. CPAs will need to understand the meaning, strengths and weaknesses of digital asset key custody approaches as they emerge.

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