Adam Efrima

@AdamEfrima

Why Managing Crypto Assets Is Different From Fiat

The skills required to be a successful CFO in traditional finance are certainly important, but successful crypto CFOs have an entirely new set of skills to develop.

While there is some overlap between traditional CFO skills and those needed for crypto companies, the simple truth is that blockchain technology is too transformative for CFOs to not update their knowledge.

Here are seven ways that managing crypto assets differs from managing fiat:

Transactions are more difficult to track

Fiat: Understanding exactly who sent or received a transaction is simple. The beneficiary and bank are clearly identified. If a transaction for $10,000 was sent to ABC Construction, it’s automatically labelled by the bank and there’s no guesswork required.

Crypto: Imagine if instead of seeing “ABC Construction,” you saw “1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqX.”

This random assortment of 34 letters and numbers is what a typical Bitcoin wallet address looks like. Due to the cryptographic nature of cryptocurrency, there is no direct way to know who actually owns that address.

Was that payment sent to ABC Construction? It’s difficult to know unless you understand how to work with crypto assets. Exchanges recorded on a blockchain or other form of distributed ledger technology (DLT) are secured cryptographically are recorded on nodes that verify blocks of data, and the process occurs automatically. Unlike with traditional banks, it’s not always clear who is involved in the transaction, which can make it more difficult to record from an accounting perspective. Cryptography gives crypto asset transactions speed, anonymity, and reduced costs, but the lack of transparency can make those transactions difficult to track and record from an accounting perspective.

Unless you have the right systems in place — and the right skills to interpret crypto exchanges — your company may find it difficult to verify the identities of senders and recipients. You need a means of recording and tracking who a wallet belongs to so finance teams can verify that an approved transaction took place.

Every transaction is a taxable event

Fiat: There is no gain or loss to be calculated every time you complete a transaction with fiat currencies.

Crypto: While the cryptocurrency name may lead you to believe you’re dealing with currency, tax authorities make it clear that you are not. The IRS offered guidance in 2014 that they would treat cryptocurrencies as property, not currency.

This means when you acquire any crypto, you have to record its value from the moment it was received. When you spend it or sell it, you have to record its market value again. Any difference is recorded as a loss or a gain. This makes every transaction subject to short-term and long-term capital gains taxes.

Creating new accounts is complex.

Fiat: Signing up for a new bank account is simple, and today companies can open bank accounts online with completely digital banks. The entire banking experience is seamless and fluid, even in cases of lost data or account breaches. For example, forget your password, it’s okay — just do a quick password reset and you’re back to normal in no time. If your bank account or credit card is hacked, you simply call your bank, explain the problem to their fraud department, and they’ll reissue your card and resolve any unauthorized charges. Banks also have capabilities for ongoing account monitoring to detect fraudulent or irregular activity.

Crypto: When trying to buy crypto, the process is lengthy, personal and complicated. New users are required to provide extensive personal documentation and even banking information. Additionally, due to concerns over bad actors, a new KYC process is becoming an industry standard to remove any potential threats. But, it does not stop there, once your account is created, you are responsible for safeguarding your private keys. Should they ever be lost, retrieving access to your account assets can occasionally be impossible. In the case of fraud, very rarely are customers able to re-access their funds.

The process can become so laborious that it scares away many interested parties. Today, more solutions are being introduced to ease the onboarding process for new users. Eventually, the crypto process will be similar to the traditional banking experience.

Extreme market volatility

Fiat: If you go to sleep at night and see that your company has $1,000,000 in the bank, it’s safe to assume that you’ll have pretty much that same amount when you wake up the next morning. (This excludes countries with unstable economies.)

Crypto: Crypto is incredibly volatile. That $1,000,000 in liquid capital could easily be worth $700,000 the next day. But, it could just as easily be worth $1,300,000.

These unpredictable price fluctuations make a CFO’s job incredibly challenging, especially when it comes to financial planning, budgeting, and projections.

Basic Payments are more time-consuming

Fiat: Going back to the example of ABC Construction, let’s say you need to send them a payment of $10,000 for completing work on your new office. It’s an incredibly simple process: you log in to a banking portal, add their banking details, and press send. After a few days and some high transaction fees, the money arrives in their account.

Crypto: Now let’s compare that to a crypto transaction. ABC Construction is not a crypto company. In fact, they likely have no idea what cryptocurrency even is. They want to be paid the old-fashioned fiat way. To complete this transaction, you need to access your crypto wallet, transfer the funds to an exchange, wait several days to receive your fiat conversion, then follow the process through traditional banking methods. And remember, you’ll need to record the value of the crypto when you sent it to the exchange and when you received it back, as both are taxable events.

Limited access to banking solutions that support crypto

Fiat: Opening a corporate bank account is one of the first steps you take when you form a new business. In most countries, that is a five-minute process that can typically be done entirely online. Fill out a form, submit a few documents, and your bank account is operational, ready to send and receive payments.

Crypto: Major banks like Chase and Wells Fargo have strict policies for cryptocurrency. They’ve historically closed accounts for crypto companies, and have an outright ban on using credit cards to purchase cryptocurrency. This is all done in the name of protecting customers. Crypto assets are still a relatively new phenomenon, and banks are wary of exposing themselves to fraud or potentially passing fads, as well as running afoul of regulations. As crypto becomes more prevalent, large banks are coming around, but they are historically slower to adapt, due in part to strict regulatory standards. Their existing technology is tried-and-tested and was developed according to regulatory guidelines.

This lack of access to traditional fiat banking, debit, and credit card solutions presents new challenges that crypto CFOs simply don’t have to deal with in the fiat world. Crypto tech is still in its infancy, and CFOs need to be sure that any crypto asset management solution they select will allow for the tracking microtransactions and other critical bookkeeping functions that ensure they are in compliance with federal guidelines.

Fortunately, fintech companies are faster to adapt and they are subject to less stringent regulations that make it easier for them to implement innovative solutions. This makes them natural partners for crypto CFOs. But traditional banks are likely to offer more crypto-friendly solutions in the future, as their key stakeholders recognize the value offered and the business opportunities, and as the regulatory environment becomes clearer as well.

Lack of tools and integrations

Fiat: CFOs have a broad range of tools to choose from to make them more effective. These include general ledger software such as Quickbooks, as well as cognitive banking solutions and centralized, integrative dashboards. The latter provide visibility into the companies’ financial accounts, transactions, and earnings projections. However, all of these tools are built for the fiat world, not for crypto asset management.

Crypto: The cryptocurrency ecosystem lacks many of the modern finance tools that exist in the fiat world because the field is still new and unpredictable. Very few platforms currently solve crypto accounting challenges, and those that claim to often fail to deliver on that promise. Then there is the issue of trust and adoption. In the case of blockchain, the technology represents a paradigm shift for finance, yet much of the industry continues to rely on spreadsheets to track their crypto assets. CFOs are missing out on opportunities to leverage a safer and more efficient method of accounting because they don’t have access to the right solutions and they don’t trust the ones that do exist.

Each of these challenges comes with a wide set of questions and problems, making the role of a crypto CFO quite challenging. However, as blockchain technology and cryptocurrencies become more ubiquitous, CFOs will find a greater range of solutions to these challenges and more widespread integration support from fintech partners and potentially traditional banks as well.

Although cryptocurrency can feel like uncharted territory, now is the time for crypto CFOs to dig in, leverage solutions that already exist, and position themselves for continued growth as the industry evolves.

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