Blockchain, cryptocurrency and security – In whom do we trust?

Background

The purpose of the Sub-Group is to provide a platform where interested ICAEW members in Scotland can contribute to dialogue and/or engage with local, national and international stakeholders (e.g., other professionals, FinTech practitioners and students) regarding opportunities, risks and role of accountants in FinTech ecosystem to protect public interest. The longer-term plan is to build a network of professionals that will support dialogue and advocacy works on FinTech, governance and human security in line with the United Nations’ Sustainable Development Goals (SDGs).

The Sub-Group was reinvigorated and facilitated by Clare Beck, Vineet Jain and Dr Marizah Minhat, with support from Stelios Kornaros. The impetus for the first roundtable was a response to concerns relating to cybersecurity, the emergence of disruptive force of cryptocurrencies that has paved way to the wider use of blockchain technology. David Lyford-Tilley was invited to speak in his capacity as Technical Manager, Tech and the Profession. The presentation covered a broad and shallow perspective on blockchain, cryptocurrencies, and accounting considerations.

Reflection on key points

1. Decentralisation and governance

A key point that one may wish to reflect on from the presentation is the notion that there is no controller to the record stored on blockchain. If the system allows users to keep track of who owns and owes what, does it mean that those individuals are easily identifiable? Perhaps not so as in the case of cryptocurrency transactions, where counterparties’ real identities can be invisible unless extra effort is incurred to trace them.

The decentralisation of the recording system via blockchain is not controlled by any company or government. From a governance perspective, this raises the question of: in whom do we trust? Compare this to the fiat currency system, the trust is built upon the central authority. A currency is indeed a source of national legitimacy. With the market for privately issued cryptocurrencies has grown exponentially since the global crisis of 2008, there are thousands of them in the market and they are hardly regulated by state regulators. Not all of them can be straightforwardly recognised as legal tender due to their speculative nature.

2. Code’s control

For the use of smart contracts that was briefly touched in the presentation, one can be critical on whether counterparties would be entirely happy to surrender their rights to negotiate and leave their fate to the autonomous decisions made on their behalf? From a common-sense perspective, coding errors cannot be ruled out. From a non-programmer contracting party’s perspective, there is always uncertainty of whether the underlying computer code will necessarily perform the functions intended in a contract. This again raises the question of: in whom do we trust?

3. Accounting considerations

As in the case of accounting for cryptoassets, according to the IFRS Interpretations Committee (2019), IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 Intangible Assets to holdings of cryptocurrencies.

However, in Europe, the Discussion Paper that was proactively developed by the European Financial Reporting Advisory Group (2020), has proposed other options for addressing IFRS related requirements, namely (1) update existing requirements for both holders and issuers of cryptoassets, and (2) develop a new Standard with explicit requirements for the accounting for cryptoassets (liabilities). There seems not much appetite from the accounting profession to address this issue so far. Accountants’ efforts to address the accounting issue should be welcomed and supported in the process of trust building towards the profession, to enhance confidence in FinTech industry and to protect the interest of wider community.

Next agenda

Knowledge about FinTech is growing together with pressing commercial interest and security implications. With public interest at the heart of the accounting profession, accountants can choose to be ahead of the curve by continuous learning, participating in discourse relating to FinTech governance, and actively influencing global policy directions. On this note, the ICAEW Scotland Tech Sub-Group is planning for the next event by considering this purpose in mind. if you’re interested to join our initiatives, kindly get in-touch with us: ims@icaew.com

Related content

Helpful links to the ICAEW Blockchain / Crypto resources: