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Expert Series – Steven Baum

What was your journey into cryptocurrency like? What initially caught your attention and why?

After earning my graduate degree in Financial Accounting, I launched my career at Friedman LLP. I started working primarily with public companies in the emerging technology space, and my clients often aimed to raise capital through debt or equity transactions, initial public offerings, mergers or acquisitions. Since beginning my career, I’ve always had an interest in emerging technology and that natural interest drew me to cryptocurrency and the underlying technology.

I first started learning about Bitcoin specifically in 2014 in order to get up to speed for a new prospect we had on the horizon. In 2015, Friedman retained a new client that was very involved and heavily invested in Bitcoin. I was eager to work with the client and began to research and understand how digital assets and distributed ledger technologies would impact accounting. This passion evolved into spending a significant portion of my time learning about how blockchain technology would impact all areas of business and how new digital assets that were coming into the industry would shape the economy. From there, cryptocurrency markets began to skyrocket, and so did our client base. I began to focus more and more of my time on getting involved in a variety of groups that encouraged learning and innovation with the digital currency community.

When did your firm begin offering crypto accounting as a service? What specific services do you offer to crypto clients?

Nearly 5 years ago, our firm launch a digital currency practice and we began to immerse in various projects in the space. We gained significant industry knowledge from existing clients and through building new relationships with entrepreneurs in the industry. Since then, we have assisted clients in interpreting the accounting and tax guidance to stay compliant with the current rules and regulations in place for accounting, auditing, internal control compliance and taxation for digital asset and distributed ledger companies. As one of Friedman’s dedicated specialists, I am tasked with building our digital currency practice and am proud of the critical work we have achieved over the past few years.

What are the top three mistakes you see crypto clients make when it comes to accounting?

Cryptocurrencies are a unique asset class. Since there is incredible uncertainty around regulations and guidance, people fear making mistakes. Some of the biggest mistakes we see are:

1- Making the assumption that cryptocurrency is different and should not fall in line with current accounting guidelines. While this may be true from an operations standpoint, as accounting professionals we must follow the current guidance we have in place. It is truly a matter of interpreting the existing guidance and using that as a reference for current trends in the asset class.

2- Maintaining completeness of record and hiring an educated team who understands the technology in your finance and accounting department. Due to the large amount of transactions with some of our clients, along with the ability to easily move assets, presents a challenge to maintaining complete and accurate information. Cryptocurrency is beginning to present a change in the treasury functions of companies; this function, which has historically been focused in finance, is now being shifted to an information technology role. We are seeing more technical people, such as CTOs and software engineers, becoming a significant part of the treasury discussions when moving large valued assets.

3- Relying on third party service providers that do not have appropriate compliance for internal controls and security. It is extremely important for our clients to fully evaluate all service or custody providers, such as exchanges, in order to rely on the financial information being created by these institutions. Since most exchanges are off-chain its very important to have a deep understanding of these service providers before relying on any information for financial record keeping.

What are the top three challenges when it comes to accounting for crypto?

As more money and interest continues to push into the digital currency space, regulation and relative accounting guidance uncertainty is the biggest challenge we face. Agencies like the SEC, PCAOB, IRS and AICPA need to begin to develop more definitive guidance around this unique asset class and transaction within the asset class.

Until agencies are able to further evaluate, understand and develop definitive guidance themselves, the best approach is to leverage current guidance and apply it to specific situations based on analogy. Overall, the U.S. has effectively kept professionals in the space informed of significant events. Additionally, refraining from giving premature guidance has avoided the issue of potentially overwriting it once the industry is better understood in the future.

What's the future of crypto accounting?

I think cryptocurrency and the underlying technology is going to revolutionize the auditing world through real time auditing abilities on a decentralized ledger, which could atomically approve transactions based on actual occurrence with the use of smart contracts. The ability to audit through a blockchain can make it easier to verify transactions, move reliance away from the auditors substantive testing and allow companies to be more transparent with the users of the financial information. I also think the concept of blockchain will make internal controls around cybersecurity in all companies extremely important. We are beginning to experience a whole new wave of risk and uncertainty that exist with this revolutionary technology.

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