When we started Cryptoworth in 2017, because of a lack of proper tools to track crypto, the problem got bigger with the rapid growth of the web3 space. Seven years later, the world of crypto data has become even more challenging and institutional-grade solutions are needed more than ever. In this blog, we are going to talk about some of the oldest and the biggest challenges still faced by organizations all over the world and ways companies can overcome these challenges:
- Lack of standardization: The root cause of the problem is that cryptocurrencies are still a relatively new asset class, and there is no standardized format for reporting and accounting for transactions. This can make it challenging to gather data from different sources and reconcile it accurately. Different blockchains, protocols, and centralized exchanges report in different formats.
- Decentralized nature: Cryptocurrencies operate on independent decentralized networks, meaning that there is no central authority or organization that maintains or enforces a data standard. This can make it difficult to gather accurate and complete information on transactions.
- Limited accessibility: Some cryptocurrency exchanges and wallets may not offer APIs or other methods for accessing transaction data, making it difficult to automate the process of gathering and reconciling data. It can be difficult for finance teams without MySQL or code knowledge to build a workable automated data pipeline. Consuming in-house resources on tools that will not generate revenue is not something decision-makers organizations would want.
- Valuation: The value of cryptocurrencies is highly volatile and can fluctuate rapidly, making it challenging to determine their accurate value at any given time. This challenge is further complicated by the lack of established valuation methods and standards for cryptocurrencies. Some assets do not have fair market values
- Multiple data sources: Cryptocurrencies are usually stored in multiple wallets and traded across various exchanges, making it difficult to track and reconcile transactions across different platforms.
How to overcome the challenges
Set up a team together. This is dependent on the size of the organization. We recommend at least two or three team members working together to get the data in. At a minimum, it is required that a finance controller and a bookkeeper work together to make the process successful. Larger organizations would need the finance controller, bookkeeper, CFO, and SecOps teams working together to get access to the data and ingest them into a solution.
Know Your Sources
It is important for the team to know all the connections (wallets, custody, exchanges) used by the company. Have access to public addresses, read-only API Keys, and/or have the ability to get the CSVs.
Before cryptocurrency transaction data can be accounting/audit-ready, sanity checks must be conducted beforehand to ensure data integrity and reliability. The purpose of the sanity check should be to detect any differences between computed balances from the ledger versus balance data pulled from connection data sources like the blockchain or exchanges/custody solutions. In the context of crypto, a sanity check should also ensure any detection of inventory or market value deviations within the crypto sub-ledger. Inventory deviations are common in crypto accounting, this occurs when the ledger detects discrepancies between send and receive events. The other common transaction deviation is one of missing market values, quite common in Web3 when it comes to newer tokens or NFT assets. A proper FinOps tool for Web3 should have strict sanity checks in place to maintain the integrity of the data and prevent mistakes from being migrated into a main ledger or ERP like Oracle NetSuite or Sage Intacct.
Understand Tax Implications
Cryptocurrency transactions are subject to tax, and it’s important to understand the tax implications of buying, selling, and trading cryptocurrency. Understanding implications are important to accurately label transactions and adjust tax implications. Seek the advice of external consultants (if necessary) who specializes in cryptocurrency to ensure you are properly reporting your transactions. Cryptocurrency regulations are constantly evolving, and it’s important to stay informed about any changes that may impact your accounting practices. Stay informed through industry news, and government publications, and consult with a legal professional.
Use crypto-specialized financial software such as Cryptoworth. It’s important that the tool helps you ingest data to the sub-ledger, runs sanity checks to ensure data integrity, provides classification and label automation facilities, improves transaction readability, automatically calculates gains and losses, generates reports for tax and accounting purposes, and integrates with web2 accounting and ERP software solutions. Tools like Cryptoworth can speed up the data process by up to 90%.
Overall, the key to overcoming crypto accounting challenges is to stay organized, maintain data integrity, stay up-to-date with regulations, keep the sub-ledger organized, seek professional advice if necessary, use specialized software, and constantly maintain the process.