Fundamental considerations for digital assets

Mar 24, 2019
Blockchain Financial services

Digital assets like cryptocurrencies are a new asset class with a volatility and global availability that excite the investment community, but it is not without risk and comes with its own set of compliance responsibilities. Companies using cryptocurrencies need to ensure its holdings are taxed appropriately, comply with the most current regulations and maintain a high level of security.

Tax and audit issues: Digital assets are currently taxed similarly to property and hence need a tax strategy that differs from other asset classes. Since these assets are decentralized and not backed by a government, certain procedures need to occur to help ensure they are auditable.

Transaction details: Understanding how transactions are recorded—and what internal and external audits are required—is essential to creating financial statements for digital asset transactions. Transactions can include numerous complexities related to valuation, like-kind exchange, wash sale and transfer pricing. How the transactions are performed, such as on an exchange, through an OTC partner, in wallets or cold storage, creates a unique set of processes and reporting requirements to consider.

Security: Cryptocurrency transactions cannot be reversed, so operational and information security are critical.  There are numerous forms of wallets—the software or hardware that stores address and private key, and interacts with blockchain—that organizations can utilize, including online web, paper, mobile, air-gapped or offline, multi-sig and hardware-based wallets.

Many middle market companies do not have the proper controls set in place to adequately mitigate risks regarding the operation of virtual currency wallets. Clients need to consider wallet management strategies and proper operational controls for their business processes and develop disaster recovery plans in the event of theft or loss. Improper wallet management controls have resulted in the theft of millions of dollars.

RSM contributors