[IMGCAP(1)]Although most Americans still pay for their groceries and just about everything else in U.S. dollars, virtual currencies -- once thought to be the preferred method of payment for hackers, money launderers, and drug traffickers -- are going legit. States have become more accepting of businesses conducting transactions with digital currencies, and financial regulators have begun to issue rules on their use.
However, since most clients are not conducting transactions in Bitcoin -- the best-known of the digital currencies -- CPAs have found little need to be educated about it themselves. That thinking is wrong. Not only does this ignorance leave the profession at risk of soon having to follow rules that it had no input on as they were being written, the larger issue is what virtual currencies portend -- a completely virtual global financial system in a digitized, intangible world. CPAs need to start thinking now about how this evolution could disrupt the profession's core service functions and plan now for a virtual future.
If you think this is not something CPAs have to think about just yet, consider that the market value of Bitcoins in circulation is $12.6 billion, according to The National Journal. Businesses that plan to be in the business of accepting, investing in or spending with Bitcoin need guidance now, and CPAs are the best equipped professionals in the financial space to determine what that guidance should look like.
Historically, confidence has been the hallmark of a stable currency. Like the U.S. dollar, Bitcoin has value because it is scarce and businesses and individuals accept it as a form of payment. What makes Bitcoin and other virtual currencies different from the dollar, though, is that there is no central bank or government entity backing them. Instead, technology and the level of acceptance, or confidence in Bitcoin, are what determine its viability. For instance, most virtual currencies are created, or mined, through the use of specialized computers tasked with solving complex algorithms. The reward for solving these algorithms is a piece of code, which equates to a unit of virtual currency. This makes Bitcoin as a commodity extremely volatile.
In a recently published whitepaper on the intrinsic value of virtual currencies, Kirill Gourov, director of finance for Blocktech, a new company whose mission is to develop hardware to use virtual currencies, argues that the value should be based on the market capitalization required to maintain the currencies' transaction volumes and the number of coins used with these transactions. A London-based expert on virtual currencies from EY, Roger Willis, told The Guardian that he sees virtual currency as a payment system and not a currency, and instead of focusing on price volatility, pointed to fraud control as the main point of concern.
The bottom line is that no one really knows, including the "experts," how all of this is going to shake out. The one given in all of this speculation is that the CPA perspective is needed, now, as state, national and international regulators try to get their arms around virtual currencies.
Already, an inconsistent patchwork of rules and regulations is beginning to be shaped state by state. Recent legislation in California repeals a ban on the issuance or circulation of anything but "lawful money" of the U.S., but now also allows for cash alternatives in commercial transactions. In July, New York proposed a regulatory framework for virtual currency exchanges that would require them to be licensed and meet other consumer protection rules, including annually filing audited financial statements to the state. Other states and countries are developing or have developed their own rules. The only substantial guidelines produced by the federal government so far have been from the Internal Revenue Service, which, after being pressured by the Government Accountability Office, issued guidance on how to treat Bitcoin and other virtual currencies for tax purposes. The verdict? Bitcoin and other currencies like it are not currencies, but should be treated as property for tax purposes.
The accounting profession needs to be asking the bigger questions: What role does the independent, third-party audit play in a virtual world? If confidence is the benchmark of the health of our monetary system and that system is entirely virtual, what impact does that have on the confidence we give to a CPA attestation regarding the financial condition of a company?
The New York State Society of CPAs has created a Virtual Currency Task Force to address the issues that a virtual currency presents. The group is tasked with evaluating virtual currencies and developing recommendations on what considerations governments should make as they begin to regulate this new form of currency and how these transactions should be taxed, audited, and accounted for.
To sit on the sidelines would allow those without the technical and financial expertise to dictate the guidelines that CPAs and their clients will eventually have to follow. The ever-changing nature of virtual currencies dictates a proactive approach; otherwise, we risk having our opinions outdated before they are even released.
Joanne Barry, CAE, is CEO and executive director of the New York State Society of CPAs.
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