What CPAs need to consider about stablecoins
By this point, almost everyone who works in an accounting or finance related field has heard of blockchain and cryptocurrencies, and has most likely been involved in some sort of education on the subject.
Possibly the hottest and most engaging topic to impact the financial services landscape since the internet, blockchain has been a headline-making phrase at hundreds of conferences since it burst into mainstream conversation via the cryptocurrency Bitcoin in 2017. But with all the volatility lately with Bitcoin and other cryptocurrencies, investors have been seeking stability in the idea of a “stablecoin.”
The concept of a stablecoin seems to represent the best of both worlds when it comes to the cryptocurrency marketplace. Specifically, this recent development in the cryptocurrency space attempts to address one of the core pain points and issues that has prevented the broad adoption of cryptocurrencies across the business landscape: price volatility. While initially developed and thought of as an alternative to traditional fiat currencies – such as the U.S. dollar – the price volatility associated with many cryptocurrencies has made the use of these items as a medium of exchange slower than expected. The idea of a stablecoin has been discussed as the potential missing link to foster greater mass market adoption of cryptocurrencies.
Let’s take a look at some common questions associated with these new applications.
What is the big deal about a new type of cryptocurrency?
With the market, not to mention the headlines and business news networks, awash with news of different cryptocurrencies, initial coin offerings and “airdrops,” it may seem like this development is yet another iteration of the same old cryptocurrency theme. That assumption would be a mistake, as the price stability accompanying many of these more mature stablecoins is a potential game changer in terms of adoption, using these items as currencies, and increased transparency for accounting and reporting purposes.
How are stablecoins different from cryptocurrencies?
The primary way in which stablecoins are different from other cryptocurrencies, including the ubiquitous Bitcoin, is that these stablecoins are pegged to some existing asset such as a fiat currency, gold or some other asset. This pegging and ensuring price stability represent an important step in getting both individuals and organizations to actually use cryptocurrencies as a medium of exchange versus treating them as commoditized investments. Put simply, the average investor or consumer simply is not comfortable using something that can change in value by double-digit percentages as a way to pay for goods and services.
Are all stablecoins the same?
Some might assume, incorrectly, that since the different stablecoins introduced to the marketplace have tended to be pegged to the U.S. dollar, all of these stablecoins can be classified and thought of as nearly identical. Such an assumption, although appealing, is incomplete and can lead to incorrect decision making. Here are a few questions to ask:
How is the price stability actually achieved? Is there a direct backing of every stablecoin in circulation with corresponding fiat currency? Or is the price stability achieved via the execution of a series of smart contracts on a decentralized and distributed public blockchain such as Ethereum? Conversely, there is also the possibility that the token used for commercial purposes (coin A) is actually supported or backed by a “reserve” stablecoin (let’s call it stablecoin B), which in turn is linked to a fiat currency.
However the price stability is achieved, and assuming the issuing organization has the technical capabilities to achieve that stability, another question to ask is how are these amounts verified? This leads to the next question CPAs need to consider:
How can these stablecoins be audited?
An ongoing conversation in the accounting space is exactly how to value the quantity and value of cryptocurrencies that various entities claim to possess. In addition to those issues, already complicated by the cryptographic and anonymity associated with some of the cryptocurrencies themselves, is the fact that — as the name implies — every stablecoin that’s created should be backed by some underlying asset. A key consideration that should be taken into account when analyzing stablecoins or offering advice to clients on these matters is whether or not an independent third party has verified that this linkage — between the token and the underlying stabilizer —actually exists.
The development of stablecoins should not be perceived as an unusual or unforeseen occurrence. Instead, it should be viewed as an inevitable consequence and effect of the price volatility that has accompanied virtually every cryptocurrency introduced to the marketplace. Stablecoins should not be viewed in a cursory way, and don’t simply assume all of these items operate in an equivalent manner. As with every other asset, application or investment option in the marketplace, it is imperative that CPAs and other financial professionals perform due diligence before offering advice to current or potential clients. Work with a specialist or cryptoasset expert. Moving forward, CPAs and other financial professionals will have to possess a solid understanding of what a stablecoin is, what it represents, and how it functions.