Ep. 219: Matt Druckman - Navigating the Wild West of Crypto Accounting: Challenges and Best Practices

April 17, 2023 | 22 Minutes

In this episode of the Count Me In podcast, host Adam speaks with Matt Druckman, an expert in the field of crypto accounting, about the challenges of accounting for digital assets. With no authoritative guidance in place, Matt explains the framework of best practices and opinions that have been pulled together to guide the industry. However, as the nature of crypto and digital assets is changing rapidly, there is a need for increased vocalization and guidance from regulatory bodies such as the FASB. Matt also highlights the complexities of cost basis and accessing and making sense of data, which can present challenges for accountants as they try to categorize and report on digital assets. This episode is a must-listen for anyone interested in the field of crypto accounting and the future of accounting for digital assets.

Connect with Matt: https://www.linkedin.com/in/matthew-druckman-60a21938/

Full Episode Transcript:
Welcome back to Count Me In. The podcast about all things affecting the accounting and finance world. In today's episode we explore the world of crypto accounting with Matt Druckman, currently, the Vice President of Business Development at Soft Ledger. A company focused on helping companies get their data faster. 
Despite the existence of non-authoritative guidance, there is still no clear framework for crypto accounting. The lack of clarity is due to the, constantly, evolving nature of digital assets. Which are not easily categorized within traditional accounting practices. Join us as we navigate the Wild West of crypto accounting and discuss best practices for accounting, in this rapidly changing field.
Matt, thank you so much for coming on the Count Me In podcast today. I'm really excited to be talking to you about crypto accounting. And, as everybody knows, Bitcoin has been around since 2008. But when you look at the authoritative guidance there is none, it feels like the Wild West. And maybe, as an expert in the field, you can talk a little bit about what it looks like to be in the crypto accounting space.
Matt:              Great, thanks so much for having me on, Adam. Happy to get into this a little bit with you. You're exactly right, there is not authoritative guidance, yet, on the topic. What we have is non authoritative guidance. We have this framework of best practices and opinions, that have been pulled together that folks are following. 
There's a really good practice aid that the AICPA put out on accounting and auditing digital assets, and that's proven to be very helpful. But there is not this authoritative framework for people to follow. So everyone's still figuring this out and the nature of crypto, and digital assets, and their evolution is it's this breakneck pace. Things are changing on a daily, weekly, basis. 
So there's, definitely, a need and an increased vocalization to have this guidance in place. And it does look like the FASB is really starting to take a harder look at this, we'll probably get into it a little bit later. But there's been some momentum, recently, specifically, in October, but right now it's still early days.
Adam:            So when we think about accounting. It's been the same since the 15th century, when the first accountants came into place and they were writing their entries. The accounting has pretty much been the same at its core. And when you look at digital assets, they don't really fit that core. And, so, what does that look like, especially, prior to this FASB vote that happened in October of 2022?
Matt:              Yes, it's a great point. And, so, you have this new asset class, digital assets, come into play here, and we need to figure out a way to account for them. And, I think, that's where some of this complexity has really arisen, is trying to figure out where to put these. And then once you put them there, what guidance are we following? And there, probably, isn't a one-size-fits-all and that's what's happened. 
And, so, currently, or prior to this vote, digital assets, for the most part, were treated as intangible assets, and following the guidance within ASC 350. And, so, as a result, you also need to follow the impairment guidance that exists, and it doesn't quite match up with the economics of what's taking place with a lot of these assets. Where you have these very active markets, readily available prices. 
And, so, the idea of marking down an asset, and pairing an asset, when there is an event, which would theoretically be anytime the price drops below cost. You're never going to be able to write that back up. And that just doesn't quite make sense, in terms of how people are viewing these assets, and how they're using them, and they're leading to some very material impacts on financial statements. 
And, so, that in and of itself is an area that people have been very vocal about, and trying to take a better look at how these should be classified and updating how we're accounting for them.
Adam:            So, Matt, are there any more complexities that accountants have to be aware of, as they're really getting into the nuts and bolts of this accounting?
Matt:              Yes, the cost basis piece is definitely a tricky one that we've addressed, and that can present a lot of issues, especially, with higher volumes. But another one that should be known is just the accessing and making sense of your data. It sounds like something that should be so simple. 
You have these series of transactions that are taking place on an exchange, or within a wallet, or on a blockchain. And you're just assuming that you can pull that data down, easily, and it's all going to make sense, and everything's going to be nicely categorized and classified the way you want to see it. And that's really just not the case, at least, not in all cases, some have better data outputs than others.
But, especially, as you start to get into more complex transactions and, maybe, you're getting more involved in DFI's, or dealing with NFTs, or just different less-plain vanilla transactions, if you will. Being able to make sense of the data that you're pulling down, and tag that properly, and ensure that that's going to be getting into the system in a way that you want to report on it. 
It can be a bit manual. There could be a process that needs to take place, to make sure that you're properly categorizing everything and getting it into the system. It's not just going to pop out of an exchange or another data source, and everything's going to be nice and neat. So I think that going into it, knowing that there's going to need to be some work there and probably some processes that need to be ironed out. 
Certainly, if you have maybe a little bit more of a sophisticated operation, and you're capable of putting a business logic layer on top of that data before it gets into your platform. A system like ours, like Soft Ledger, that's programmable via API, that's one way that data could be ingested. 
So there are some things to help automate that and smooth that process, but it can be a bit manual. I would think that in the future, as there's more regulation and more of an impetus to standardize data. That should improve, and maybe there'll just be better tools, if nothing else, to help scrape that data and give you what you need, but just something to be aware of. 
And, so, I guess, when we're talking about what crypto accounting or accounting for digital assets, at the end of the day, it's still accounting. You're still going to be booking debits and credits. The complexities, a lot of them lie in the fact that there's a lot of new terms. There are new terms being used that we're not familiar with. 
People are learning about blockchains, and NFTs, and DFI protocols. And what it really comes down to is getting more familiar with what's really taking place with these transactions. Understanding the nature of these transactions. How they, ultimately, need to be classified and presented. 
And I think that, on top of that, there's just the inherent complexities that come with dealing with a volatile asset and high volumes of transactions, if that's the case for your business. That are going to present some difficulties and, thankfully, there are systems out there that are specifically designed to help automate some of these processes, and remove some of the manual, cumbersome, elements that come with needing to track and calculate cost basis. But, ultimately, we are still accounting for assets in the way that we are familiar with.
Adam:            So do you think that this FASB vote will help bring us towards some guidance or something to help accountants, in organizations, get to a place where they can set that value properly?
Matt:              Yes, it really looks like things are moving in the right direction and these things are never fast. But just based on when this was taken up, in May, and where we are right now. On October 12th, the FASB voted to start treating these under the guidance of Fair Value at ASC 820. So rather than as intangibles where you're impairing these assets, you'd be marking to market. 
And, so, of course, this isn't going to cover all digital assets. Initially, it was thought that maybe this would just be Bitcoin and Ethereum, but it looks like it's going to be broader than that.  And, I think, that this is really welcome, and more in line with how people are viewing and using these assets.
Adam:            So as people are continuing to use these assets, it makes me think of your typical ERP system. It doesn't seem like those ERP systems were created with the ability to support these types of assets because of the volatility. I know in our talks, before this, we were talking about how, sometimes, you have to go to eight decimal points with cryptocurrencies. How are major organizations handling that?
Matt:              Yes, it's a great question, and there's a software component and then there's just a human capital component, as well. I mean, this is all new, for the most part. I know it's been 14 years or whatnot, as we said at the beginning. But still, in terms of where things are from an adoption standpoint, and from just an experience and exposure standpoint, for a lot of accountants, it's very early. So you have that component. 
You also have the fact that a lot of these crypto businesses, they're very early stage. They're not going to have, in many cases, an accounting or finance department. Let alone one that's filled with experienced, X big-four, auditors. So there's a lot that is still up and coming on that front.
But from an ERP and system perspective, yes, you're exactly right. These systems weren't designed to handle digital assets. This technology, these assets, didn't exist when these systems were created. And, so, you can bump into these issues. The first one being that you're going to need to have a separate, call it crypto tool, to track your crypto activity and then integrate that with a system that wasn't specifically designed to handle crypto. 
So there are issues that are going to exist within that ERP, such as we refer to coin support. Are they going to be able to represent that specific asset in the system properly? To your point, on decimal precision, a lot of these assets you need to be able to go out eight decimal points. Is that going to be a problem in a system that wasn't designed to handle digital assets? 
So there are a few points in the process where things can break down and necessitate work-arounds. Chief among them is needing to have this integration between a crypto tool and an ERP system, and that's something that we, specifically, address, in the fact that at Soft Ledger, we are a full-featured, cloud accounting platform, but we're also crypto native. 
And, so, for us, it's a sub ledger and we don't suffer from issues with coin support or decimal precision. Everything's neatly stitched together in one system. So you have this very controlled and auditable way, to go from crypto transaction to financial statement impact.
Adam:            Do you think that there is a gap in knowledge within the accounting and finance team, within organizations? Is there a gap in the competencies that they're missing in understanding what crypto is? And I even think back to even colleges, are colleges catching up to training the next level of accountants so that they can be in this world where crypto is a thing?
Matt:              Yes, absolutely, I think that any gaps, really, they're resulting from a couple of things. It's the fact that, again, this is new but more important, coming back to what we were discussing, at the beginning of the show, that authoritative guidance doesn't exist, yet. So I think that once we get this hammered out, then it's going to become a lot easier to really embed this into the accounting curriculum that's taking place. 
But this is absolutely something that's being discussed, at this point, because it's here and it's on corporate balance sheets, and it's going to continue to be an asset class. It's going to change, I'm sure, and some of the digital assets we're talking about won't be around. But as a whole, this technology, this is going to be a part of our future and we're going to need to be spending the time educating people on how to properly account for it.
Adam:            So it's almost like we need to educate our accounting and finance team, but also find partners such as Soft Ledger or other crypto accounting softwares, that can help your accounting team get to a place where they're able to do this.
Matt:              Right, there's plenty that's been written, but there's much more to come. And I think that having these conversations, having the platforms in place, is certainly a really helpful piece because there are just inherent complexities beyond just the guidance. Issues we've discussed with actually tracking and accounting for these assets that present themselves, that can be really quite cumbersome. 
So I think that having not only the coursework and bringing this into the classroom, and having well-developed guidance, but there's just going to be this need to continue to have these other forums and places for people to go and learn about this ever-changing landscape. 
Because that is really one of the other real tricks to it all, is that a transaction that exists this week, that's novel, that's not going to be so novel next week, perhaps, it's just a really evolving space. And keeping up with the different types of transactions. and understanding what the nature of those transactions are. and how to properly treat them, it's something that you need to stay on top of.
Adam:            So as you work with accountants and accounting teams, in your organization. What are some of the bigger pain points that you're seeing that they're having, as they're trying to work through these different issues we've been discussing?
Matt:              Yes, it's a great question. A pain point that, consistently, comes up is tracking and calculating cost basis. That is something that is always difficult, especially, at higher volumes, depending on your operation.
Once you start to have any volume, keeping track of all of your cost layers, in Excel, can start to become quite cumbersome. High volume combined with a volatile asset class, constantly, fluctuating prices. It can really lead to a nightmarish situation when it comes to actually determining what the cost basis is on a given transaction, so that you can appropriately calculate a gain or a loss. 
So, at a certain point, and that point usually arrives pretty quickly. You're going to need a system that's going to enable you to do that properly, and relieve that component from the accountant's day-to-day because it really is a cumbersome process. 
And, so, from a calculating your cost basis perspective, according to the practice aid I mentioned earlier. You're going to want to use a reasonable and rational method, is what they refer to as the cost method that should be selected. FIFO is what we see most commonly and that is considered a reasonable and rational method, and that would be what you would be using to calculate the cost basis on a given transaction. 
Other methods we do hear about, and there's definitely a number of folks that are interested in weighted average. We certainly hear people discuss LIFO and sometimes HIFO — Highest-In, First-Out. There's clearly some tax advantage reasons behind that but the guide, and the current best practices, to use a reasonable and rational method and FIFO seems to check that box. 
Another complexity that can, sometimes, arrive is just finding the principal market in terms of pricing information and that's not a difficult thing when you're talking about BTC, or ETH, or some of these high-volume assets. But more thinly traded assets, it can be maybe more challenging to identify that principal market in terms of identifying pricing information.
Adam:            It seems like that this market with cryptocurrency and crypto accounting, especially, when it comes to an organization and it comes to your assets, it's a very volatile market. You can just look at the Dogecoin how it had a huge rise and then a huge fall. 
What advice would you give to organizations, as they're looking to get into this and they're wading these waters? Are there questions that they should be asking themselves, and their teams, they should be asking their stakeholders before they get into this.
Matt:              Yes, absolutely, I mean, certainly, having the infrastructure in place to be able to handle the accounting. Whether that's having the right individuals on your staff or finding the right partners to outsource the accounting to. That's going to be critical because there, certainly, are firms that do have the experience that would be able to properly support that. 
Understanding these assets. Understanding the nature of the transactions that are taking place, but also what's underlying these different assets. What are the technologies involved and getting a better understanding of what they really are. Versus just the speculative nature of investing in a specific coin or token, that's definitely going to be critical. 
But then also, as we were discussing, having a system in place. If you're just dipping your toe in the water here, and it's going to be really low in transaction volume and maybe it's just an initial investment. Then perhaps a system isn't quite necessary, yet. But if this is going to become a part of your operation, you're going to want to invest in a technology that's going to ensure that you are properly accounting for these transactions. 
Adam:            So as it becomes much more common, I go back to us talking about somebody just getting into this. They’re "Oh, I just have a few transactions. I don't need to look into anything too big because we're just doing one or two transactions." But if you're saying it's going to become more common, does that mean that it could ramp up very quickly for those people?
Matt:              Yes, and that's a great point. And that's something that we do hear when we're speaking to prospective customers and other companies. It doesn't take much volume for complexity to really ratchet up. So while you might be fine in Excel, for a little while, if you're planning on staying involved with digital assets and they're going to become an increasingly more important part of your business. 
It definitely makes sense to start thinking about a solution that's going to allow you to properly track and account for those assets in an automated way. And Excel is a great tool, you can take Excel really far, but you're still going to have the opportunity for manual error. And, so, something purpose built is definitely worth the investment.
Adam:            So looking into the crystal ball, trying to look into the future. There's been tons of futuristic movies where "I'll give you 50,000 credits for that." Those kinds of things, there's so much volatility in this market. Where do you see things going as we look into the next five, 10, 15, 20 years?
Matt:              Yes, it's an interesting question. As I said earlier, I believe crypto is here to stay, and it's going to evolve. It's going to, probably, look different. There's going to be assets that are going to go away, new assets that we haven't thought of, yet, but it's here to stay. And I think that people are looking to, with this type of technology, one of the interesting facets is that you're cutting out the middleman in a lot of ways. You're speeding up the pace of the transaction. You have this decentralized concept. 
But, really, most people that are serious about crypto are looking for regulation. That's something that really needs to happen so that there is wider adoption. Once there is regulation in place, then people are going to become more comfortable getting involved due to the protections that are afforded by having regulation. 
And, so, I think that we're going to get there on the regulation piece, and that's going to really increase adoption. And, so, with that is going to just become this need to have better processes and systems in place. To ensure that you're properly accounting for these assets, which are going to become much more common on companies' balance sheets.
Adam:            So what advice do you have for accounting and finance teams? Accounting and finance professionals, listening to this podcast, they're like, "That's great, Matt, you've given me some great insight and inputs. What's next? What next step should I take so that I can be prepared for the coming wave of crypto accounting?"
Matt:              Yes, I think, just trying to learn as much as possible. Keep reading, articles are being put out on a daily basis. There's podcasts like this. There's no shortage of people that are speaking about it, just continue to take in the information. 
If this is already a part of your operation and you don't have a proper system in place, start doing some investigative work there and feel free to go to our site and take a look at what we have. I'd be happy to have conversations with folks as well. Like I said, this is something that's going to be with us, and education is really critical in proper adoption here.
Adam:            I agree, and we'll put some links in the show notes for today's episode. So if you want to take a look at some things that Matt talked about and other things, please take a look at those show notes. Matt, thank you so much for coming on the podcast today.
Matt:              Thanks for having me, Adam, I really enjoyed it.
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