The Accountancy Profession Needs To Better Understand Cryptocurrencies
Bitcoin, Ripple, Ethereum and Peercoin are just some of the cryptocurrencies we have all become familiar with in recent times. And while digital currencies continue to hijack the news agenda, ACCA is calling on its members and future members to keep abreast of the fast-moving developments and understand the risks in this space.
There are growing concerns that cryptocurrencies are fuelling financial fraud worldwide, specifically money laundering. This was one of the reasons cryptocurrency dominated the agenda at the lastG20 summit in Buenos Aires although members were not on the same page when it came to enforcing regulation. Investors were able to breathe a sigh of relief when Mark Carney, governor of the Bank of England, announced to the G20 global leaders that tighter regulation was not an immediate priority, although the option of a future regulatory structure remains.
Lately, there have been examples of governments and regulatory actions to tackle issues surrounding cryptocurrencies. Recently, the Financial Conduct Authority issued a licence to one of the world's biggest cryptocurrency exchange in the US, Coinbase. Additionally, both Facebook and Google have vowed to shutdown advertisements for cryptocurrencies and initial coin offerings on their sites.
The need for new regulation acknowledges blockchain and cryptocurrencies are important and have great potential to be used in a positive way, but it also highlights that criminal activity must be addressed and that's where professional accountants come in!
The global accountancy profession has an important role to play in enabling stable economies where consumers are not exploited. As new technologies become adopted, it is vital that professional accountants develop their digital understanding alongside their ethical responsibilities to flag areas of concern.
Cryptocurrencies differ from traditional currencies in that their supply is not controlled by a national government. They generally operate on a digital peer-to-peer basis with encryption tools being used to ensure that payments occur correctly between the designated source and recipient.
Bitcoin, for example, has at least three dimensions that are causes for concern. Its pseudonymous nature means while one may identify the address a payment goes to, it is still not possible to confirm the identity of the beneficiary. This is an obvious risk for money laundering, terrorist financing and the funding of other types of illegal activities. Secondly, bitcoin's high volatility makes it inherently risky and unstable. Thirdly, it is funding a speculative bubble in other areas like Initial Coin Offerings (ICOs) with investors chasing poorly formed business propositions.
The underlying blockchain (distributed ledger) technology behind Bitcoin could revolutionise how financial transactions are done and have a positive impact on business globally. This potential must be viewed separately from the risks of Bitcoin Professional accountants can play a key role by ensuring they develop their knowledge and skills necessary to understand this emerging area.
In the United States, the Securities and Exchange Commission has identified certain ICOs, which are not acceptable and has put a stop to their fundraising, while others like South Korea and China have banned ICOs outright
Innovation is crucial to the long-term success of a business and ICOs are a useful way of funding blockchain based innovation. An ICO investment is made via a cryptocurrency and investors get coins (tokens) instead of shares and therefore, a number of ICOs fall outside existing securities regulation. ICOs have become popular, because businesses can obtain new funding with less complexity and greater speed than traditional methods. However, high-short-term gains in using ICOs might look appealing to investors, but it's easy to fall victim to a scam and for the investment to be lost
In our recent report ICOs: real deal or token gesture? ACCA called for the need to balance risk and innovation as blockchain technology and cryptocurrencies mature and enter the mainstream.
Regulators from around the world have adopted various approaches to curb threats posed by investments in ICOs and focus on the two headline features of protection for unsophisticated participants, and whether an ICO qualifies as a security with the associated regulatory controls.
In the United States, the Securities and Exchange Commission has identified certain ICOs, which are not acceptable and has put a stop to their fundraising, while others like South Korea and China have banned ICOs outright.
ACCA supports a close relationship between regulators and the accountancy profession to ensure that a robust, fair regulatory approach is crafted, and refined as developments emerge, so that it is fit-for-purpose in a digital age.
Now is the time for professional accountants to be aware of the developments surrounding digital currencies and distributed ledger technologies as they have a real potential to be a disrupt or of the finance function. There is an important opportunity for accountants to guide organisations by staying on top of regulatory announcements in their jurisdictions, and more generally to bring their training in risk, compliance and governance along with their ethical compass to this emerging area.