Managing digital assets is a significant issue for accountants as they become more prevalent as investments. Valuation, security, privacy, and data breaches are just a few of the concerns.
The market for cryptocurrencies, in particular, has expanded considerably over recent years. Digital currencies aren’t influenced by other markets and so have become popular with investors seeking to diversify their portfolios.
NFTs, or non-fungible tokens, are a relatively new type of digital asset that cannot be traded and so pose a unique challenge for accountants. Countries including Jamaica and the Bahamas have also launched a Central Bank Digital Currency (CBDC), and the UK and other countries are currently looking into the possibilities of doing the same.
With such new types of asset holdings, it’s not surprising that managing and accounting for them is problematic at present.
What are the issues surrounding digital asset management?
Security, privacy, and integrity
The blockchain technology that underpins cryptocurrency is viewed as secure because of its complexity. The ‘blocks’ within the blockchain record time-stamped transactions and each new block is connected to the last.
This provides an accurate and reliable audit trail for all users. Furthermore, it cannot be altered, which boosts data integrity, security, and privacy. Cyber threats still exist, though, and data breaches present a significant danger to digital assets.
These are some of the additional measures investors can take to safeguard their digital assets and improve privacy:
· Using a ‘cold wallet’ to store cryptocurrencies - this is an offline physical device that stores the crypto keys that enable access to the digital currencies
· Using more than one wallet
· Using strong passwords for wallet accounts and updating them regularly
· Storing the assets with a reputable exchange
· Ensuring the private key is kept safely - a public key identifies the owners account but a private key is needed to prove ownership of the public key and therefore access the investment
Regulation and compliance
In general terms, these types of digital assets aren’t regulated, apart from security tokens. These are digital versions of ‘traditional’ investments and are used to confirm ownership of a digital asset or confirm a right to receive value from an asset.
The Financial Conduct Authority (FCA) does carry out checks to ensure that firms dealing in cryptocurrencies comply with Money Laundering Regulations and counter-terrorism legislation.
Firms that market cryptocurrencies are also legally obliged to promote them as they would any other high-risk investment. The UK Advertising Standards Agency (ASA) checks how these types of assets are promoted to consumers, and firms failing to comply face stringent enforcement action by the FCA.
Auditing and valuing digital assets
Auditing and valuing can present significant difficulties given the market volatility of cryptocurrencies. The fact that businesses aren’t obliged to take digital currency as payment is a key point, even though some businesses may accept Bitcoin and other cryptocurrencies in some instances.
Digital assets are commonly treated as intangible assets. The ICAEW, the professional body for chartered accountants in England and Wales, report that the Financial Accounting Standards Board suggest fair value may present a route to valuation, depending on the type of digital asset.¹
Managing digital assets and their ever-increasing scope
Technological advances and an expansion in the types of digital assets available make managing them an increasingly challenging task. Their complexity lies partly in their intended use versus how they’re actually used.
For example,in the case of cryptocurrency, Bitcoin is commonly purchased as an investment rather than as an alternative to cash. So from volatile fluctuations in value to security and privacy, managing digital assets isn’t straightforward but may benefit from more stringent government and financial regulation in the future.