It's Time for CFOs To Embrace Digital Assets
We can talk at ends length about Crypto Winters and the cyclical nature of this highly volatile asset class. But we’ve been here before and will likely be here again after another bull run –– ad nausea.
No, what excites me –– and what I believe will excite you, too –– is what the industry is calling “The Merge” and how it will be the catalyst that finally brings enterprise into the digital asset fold. But before I get into that let’s take a moment to discuss what The Merge is at a high level.
The Merge refers to the transition of the Ethereum blockchain from a Proof-of-Work consensus to a Proof-of-Stake consensus. This move will reduce the energy expenditure of Ethereum significantly –– three orders of magnitude decrease in carbon footprint for the network.
The shift to Proof-of-Stake legitimizes the Ethereum network as it is de-risked at the settlement layer. PoW blockchains are vulnerable to reorg attacks, while similar attacks are much more difficult to occur on a PoS blockchain since the attacker would have to burn ⅔ the supply of ETH.
This de-risking of ETH will open floodgates of institutional capital as the network is more secure and friendly to corporate ESG and sustainability goals. This component can’t be overstated – many businesses have been sitting on the sidelines of digital assets because of environmental concerns.
Perhaps that is part of the recent surge of institutional interests from firms like BlackRock and Brevan Howard.JPM reportedly wants to bring $1T of tokenized assets into the DeFi ecosystem.
And while the interest brings even more legitimacy to the industry, I have some cautionary advice for CFOs whose organization is leaping digital assets. Cryptocurrency, NFTs, DeFi, no matter: Every digital asset transaction has multiple obligations your team is ultimately responsible for. Take steps to understand where your team will be impacted.
From controllership to FP&A, investor relations, digital assets impact every function within a finance organization. This is what every CFO needs to know how to thrive as their organizations take digital assets onto their balance sheets.
Let’s start with the two most straightforward and obvious finance functions: Controllership and Tax.
Controllers are responsible for defining and handling unique and changing accounting treatments for digital assets and digital asset activities. This can include transaction tracking, categorization, and Crypto AR/AP. The tax team tracks tax liabilities that are picked up and are responsible for managing tax compliance and reporting requirements.
Digital assets impact every function within a finance organization, from controllership to FP&A and investor relations. This is what every CFO needs to know how to thrive as their organizations take digital assets onto their balance sheets
And when dealing with a highly volatile asset class with confusing and often limited guidelines, these tasks are easier said than done –– especially at scale. Whether tracking cost-basis, reporting gains or losses, or tracking decentralized finance (DeFi) activities, automation is the only reasonable way to keep track of these activities.
The treasurer’s responsibilities aren’t as obvious, but they are critical. They manage and monitor how the assets are used at the highest level. As far as treasurers are concerned, digital assets function more like a bank account rather than a credit card.
For example, a treasury department can go from having three bank accounts to having 10,000 digital asset wallets to which hundreds of employees have access. If funds go missing or someone loses a key/password, there isn’t an entity that will go hunt it down. Instead, controllers need to consider what internal controls they have to monitor and manage their assets.
My advice is to look for a software solution that maintains strict separation of duties with role-based access for bookkeeping managers and tax administrators: Read-only, User, Writer, Owner, and Admin.
Moving on to FP&A, the function that manages new strategic finance opportunities, markets, and datasets to evaluate and turn insights into action.
A common problem we see all the time is that firms will record revenue from their digital asset holdings one year, and the price will drop the next year. In this situation, its easy to not have enough funds to cover the taxes owed. This is why I recommend having access to accurate data for modeling and pricing. That way your team has real real-time visibility into your holding’s performance.
The financial operations team is the lifeline of any organization. It monitors and executes new digital asset-specific processes such as wallet management. They will watch how wallets are used and report that information to controllers. This team is also responsible for impairment testing for US GAAP and IFRS compliance.
Audits are a regular activity for mature financial organizations, particularly in the first year after holding digital assets. Most organizations go through a very intense audit. Auditors will expect records of transactions regardless of volume, so organizations must be prepared for that reality. I recommend that CFOs educate their auditors on the tech.
Another straightforward and important finance function to take note of is investor relations. This function is responsible for communicating and disclosing digital assets ownership, use, and management.
Finance teams must maintain diligent recordkeeping to ensure the reports they provide investors accurately reflect current conditions. Fortunately, digital asset management software offers robust roll-forward reporting and balance verification features to make this relatively easy.
And finally, while IT doesn’t usually report to a CFO, they are a critical stakeholder, which makes sense. IT is responsible for crucial tracking and wallet ownership tracking. In practice, they work closely with the Treasury — whom, if you recall, are accountable for monitoring wallets –– and possess
More businesses and investors are looking into digital than ever. And while regulations in the space are constantly changing, a solid understanding of all the moving parts –– along with a tax accounting platform –– makes it easier to keep up with compliance and streamline accounting processes.
If you take one thing away from this, it should be to make your life easier and automate as much as you can. Your stakeholders across the org will thank you –– as will your auditors.