Armanino White Paper
White Paper

Evaluating Crypto Accounting Solutions

by Noah Buxton, Jeremy Nau

Practical considerations for leadership of crypto-native and non-crypto native organizations.

INTRODUCTION

Companies holding or using cryptocurrencies as part of day-to-day operations face a unique set of challenges. Along with security and the operational nuances of managing a crypto-related business, the tracking and accounting for crypto/digital assets steepens the learning curve for those new to the space. While many cryptocurrency companies have created their own methods for tracking and accounting for digital assets, selecting a proven and ready-made third-party software solution is often the most cost-efficient option.

During our review of the current marketplace, it became evident that not all crypto accounting solutions are created equal. Most (if not all) of these companies are building features and just starting to scale their products. These companies also tend to have strengths within different industry niches and sets of solutions that cater better to certain client environments

However, one thing is clear - these companies are continuously BUIDLing and the future looks bright.

In this white paper, we will discuss six differentiating factors that finance teams should consider when reviewing crypto accounting solutions:

  1. Use cases and accounting functionality
  2. Digital assets supported
  3. Data derivation and integration
  4. Audit logs and considerations
  5. Cost basis tracking and reporting
  6. Capabilities and future of platform

For a list of all factors Armanino reviewed by compiling this whitepaper, please refer to Appendix A.

The following recommendations are solely the opinions of Armanino and are not the expressed opinions of the accounting solution companies or any other companies representing the cryptocurrency and accounting industries.


6 DIFFERENTIATING FACTORS TO CONSIDER

1. Use Case: Subledger vs. Standalone System

Accounting solutions in the space typically come in two general varieties. When evaluating potential accounting solutions, management should have an idea of their current pain points and how crypto assets are used and integrated within their business.


The two most common varieties of accounting solutions are:

  1. A solution that acts as a crypto subledger intended to be used in conjunction with other, more typical accounting software, such as Xero, QuickBooks, NetSuite or Intacct
  2. A full-scale accounting solution intended to work as a standalone system

Solutions that act as a crypto subledger typically include functionality that help with crypto asset tracking, wallet and exchange management, and asset reporting. Most are accompanied by visually pleasing UI dashboards and help make crypto asset management digestible and segmented from other pieces of the business. Systems typically include basic accounting functionalities such as creating journal entries, transaction tagging and GL coding by wallet or asset. The ability to explicitly track cost basis does vary by system and should be considered by management (see section Cost Basis Tracking and Reporting).

Data from these systems is then exported and uploaded into a traditional accounting solution, such as QuickBooks or Intacct. Manual integrations via CSV are common. However, many roadmaps include future automated integrations with "parent" accounting systems to cut down manual processes.

A standalone full-scale crypto accounting solution typically includes crypto asset tracking and management, along with modules that you would expect from a typical accounting software system, such as:

  • AR and AP modules to pay and invoice vendors
  • Cash management module to link bank accounts and manage cash flows
  • Sales/revenue module to account for sales and fulfillment
  • Inventory module to manage stock

However, since the industry of crypto accounting solutions is relatively young, these standalone solutions may lack the functionality to address the needs of a large business with complex reporting challenges.

Management should ponder the following questions to determine which type of solution is right their business.

MANAGEMENT CONSIDERATIONS:

  • How do I want my future accounting system infrastructure to behave and interact with the rest of my operational environment?
  • Which option is scalable for my business?
  • When do I anticipate needing to assess for audit impacts?
  • Do my business operations revolve around transactions involving cryptocurrencies, or are crypto transactions a secondary concern?
  • Am I willing to centralize my accounting function into relatively new software? Or would I rather rely on my existing systems, complemented by a niche-specific product?
  • What kinds of systems integrations are necessary for my accounting IT environment?

RECOMMENDATIONS:

The "crypto subledger" variety is recommended to:

  • "Traditional" (non crypto-native) companies transacting in crypto as a subset of operational business.
  • Companies (both crypto-native and non crypto-native) using a traditional accounting system that is integrated with a complex IT environment, looking for a simple way to account for crypto transactions.
  • Startup crypto-native companies looking for a tool with basic asset tracking and reporting functionality.

The "full-scale accounting solution" variety is recommended to:

  • Crypto-native projects looking to centralize the accounting function (including AP/AR, inventory management, etc.) and related IT accounting infrastructure.

2. Digital Assets Supported

With more than 2,000 currencies currently in circulation,1 developers of crypto accounting systems must make difficult decisions to determine which cryptocurrencies and digital assets to support.

While most systems currently support Bitcoin and Ethereum (including ERC-20), any other currencies are less likely to be supported. Even top-five currencies XRP and EOS are unsupported by nearly half of the crypto accounting systems we researched.

Why is this the case? As we will discuss in detail in the next section (Data Derivation and Integration), many of these crypto accounting solutions typically host their own nodes on the back end to pull relevant balance data automatically. The up-front infrastructure and maintenance of supporting less transacted currencies may be too burdensome to support initially. However, most do have plans to expand the currencies they support.

Some solutions may be able to support all currencies. However, these systems typically trade off the ability to automatically pull blockchain data from hosted nodes.

Unique scenarios, such as the ability to support non-fungible tokens2 (ERC-721) are slowly being added to many of these systems.

MANAGEMENT CONSIDERATIONS:

  • Which currencies do I currently use or plan to use in operations?
  • Would I rather be able to include all asset transactions manually, or be bound by supported currency transactions that are updated automatically?
  • Do I need to account for non-fungible tokens now or in the future?

TOKENS SUPPORTED ON:

All Platforms Most Platforms Some Platforms Few Platforms
Ethereum
ERC-20
Bitcoin Bitcoin Cash (ABC)
Bitcoin Cash (SV)
Bitcoin Gold
Dash
Litecoin
Non-fungible tokens
(ERC-721)
Stellar
EOS
Other

Data as of January 21, 2019


3. Data Derivation and Integration

Since blockchain data is publicly available, crypto asset accounting solutions can automate token balance and pricing data (typically via API). However, these blockchains must be supported by the software solution provider, typically by hosting their own node to pull data. Other solutions opt for the manual but flexible option of manual tracking and data input.

Along with wallet balances (which can be held by the company or by a third party), asset cost basis and current prices can be automated using APIs to third-party sources. If pricing sources are derived from illiquid or tainted exchange or pricing compilers, cost basis and balance data may be inaccurate. Therefore, management should always consider which data sources are being pulled for each wallet, exchange and market price. Below are typical data derivations:

Wallet and/or public address balances

  • Extracted directly from node hosted by accounting solution
  • Extracted from a third-party explorer tool (e.g., Etherscan)
  • Integrated via API from a wallet provider
  • Input manually or uploaded via CSV

Exchange balances

  • Integrated via API from the exchange
  • Input manually or uploaded via CSV

Pricing (Fx) datav

  • Integrated via API that is compiled from multiple sources by the solution provider
  • Integrated via API that is compiled from a third-party pricing compiler (e.g., Nomics)
  • Input manually or uploaded via CSV

In any case, the ability to automate processes should be weighed against the tolerance for relying on third parties to provide complete and accurate information. A SOC report helps companies gain confidence in the processes on the back ends of these systems and should be discussed during the evaluation process.

As noted, the ecosystem currently lacks direct (automated) integrations between crypto accounting systems and traditional systems like Xero and QuickBooks, but such a solution is on many projects’ roadmaps.

MANAGEMENT CONSIDERATIONS:

  • Do I want to track exchange gains and losses in (near) real time, or update periodically?
  • What data sources am I comfortable relying on for blockchain and pricing data?
  • How much do I value automated wallet balance and pricing data?
  • Which systems offer SOC reporting for third-party assurance over internal controls.

After a thorough survey and use of 5 leading solutions, we noted the following.


PER SYSTEM

Average # of Nodes Supported Average # of Direct APIs to Exchange Average # of Compiled Pricing Sources
3 5 >100

4. Audit Logs and Considerations

Reporting is an important but often overlooked aspect of the evaluation process. Along with general operations data, reporting is especially important when producing financial reports and accounting for future audits. Often, companies scale faster than expected and must think about reporting implications years in advance.

The usability and formatting of report data becomes especially important when using CSV uploads into other accounting or data systems. Most systems try to ensure that data has been compiled into an format that can be uploaded easily.

Certain software tools that host their own nodes or pull from complete third-party sources have a unique capability: to track transaction data for transactions occurring before the company's implementation of the software.

MANAGEMENT CONSIDERATIONS:

  • What systems support my financial statement reporting and audit needs now and in the medium-term future?
  • Do I need historical look-back functionality to retrieve pre-implementation data?

From a reporting standpoint, the transaction hash and ID are of utmost importance. When reconciling transaction data during an audit, the transaction hash/ID acts as the unique identifier to pinpoint transaction data on node explorers used to reconcile against management’s books. Ensure your reporting system includes this data to avoid future issues.

5. Cost Basis Tracking and Reporting

Anyone holding crypto assets knows that tracking the cost basis and accounting for the taxes on crypto transactions is a unique headache. Tracking and automating the gains and losses on transactions is a key value-add for crypto accounting systems.

Along with the typical double-transaction headache for crypto-to-crypto transactions, businesses have an added challenge of tracking the cost basis when tracking funds moved internally within the business (but to different wallets). This is not a taxable event, but the system may not be aware, as internal moves look like any other executed transaction. Management should consider this often-overlooked aspect of tracking tax basis and the prevalence of inter-wallet transfers within their business. If inter-wallet transfers are prevalent in your business, a solution that accounts for them can save substantially in tax preparation fees each year.

Most systems have adopted the "FIFO by wallet" method as the standard treatment, but certain systems have more or less flexibility for selecting cost basis methods (e.g., LIFO, specific ID).

MANAGEMENT CONSIDERATIONS:

  • What cost basis methodology do I need supported by my system (e.g., FIFO, LIFO, specific ID)?
  • Do I transfer funds between internally held wallets?
  • Do I need real-time unrealized gain and loss data?

While the use of Section 1031 (like-kind) exchanges was possible in the past for cryptocurrencies, the Tax Cuts and Jobs Act (TCJA) — effective January 1, 2018 — amended the Section 1031 rules to only apply to real estate transactions. Therefore, users buying and selling cryptocurrencies cannot transfer their cost basis in any scenario for U.S. tax purposes.

6. Capabilities and the Future of the Platform

Bitcoin, and the other public blockchains supporting digital asset transactions recently turned 10 years old. However, the meaningful adoption and use by crypto- and non-crypto-native organizations is a shorter history, arguably 5 years or less. Therefore, many of the solutions leading the market are relatively young organizations, still in their BUIDL phase. Thus, a proper vendor assessment is a key consideration when selecting a crypto accounting solution.

Many of the teams have been proactively building out user guides and FAQs on company websites. Some have hired customer service employees or third-party contractors across the globe. Depending on the complexity of the system and management’s technical savvy, the support function may become important.

At this stage, no one solution provides all the answers. But each company is progressing on their roadmap: building out reporting functionality, adding currencies and exchange APIs, and more. While the solution chosen today may not be perfect, management should ensure that the future state of the solution will fit their needs.

MANAGEMENT CONSIDERATIONS:

  • What solution provides the support capabilities I need?
  • What solution's roadmap most aligns with my business needs?
  • Which companies do I believe will stand the test of time?

The oldest crypto accounting system surveyed was created in 2014, and the largest team has more than 40 employees. While the current technical capabilities of a crypto accounting system are important, you should also consider the long term prospects of the underlying company. Accounting solutions in the crypto industry are still nascent. It is prudent to implement a solution that you believe will survive going forward to avoid a potential future shake-up in your accounting environment.


PICKING THE RIGHT SOLUTION

Armanino continuously reviews the best crypto accounting solutions in the marketplace. Our deep-dive analysis considers more than 50 specific items spanning 10 categories.

Some additional areas that may affect management's decision, but did not make the scope of this white paper, include:

  • User interface and user experience
  • Volume of activity supported

To learn more about choosing a crypto accounting solution, reach out to one of Armanino’s industry experts (see page 20), who have created a data map and checklist to streamline the evaluation process.


Download White Paper


APPENDIX A

More than 50 Factors spanning 10 Categories for Choose a Crypto-Accounting Solution


UI/UX
Dashboard Viewership Y N
Filterable by Assets Y N
Loading & Speed1 = Terrible to 5 = Great 1 2 3 4 5
Look & Feel1 = Terrible to 5 = Great 1 2 3 4 5

COMPANY SPECIFICS
Team Size (#)
Incorporation Date
Customers
Funding Y N


BLOCKCHAINS
Currencies Supported Name:
Hosted Nodes Y N
Funding Y N


AUDITABILITY
Ability to access historical data Y N
Historical Lookback Y N
Y N
Deleted data stored Y N


ADMIN
Supported Browsers Name:
SOC Report Y N
Mobile Multiple Accounts & Users Y N
Support Team Y N
User Guide Y N
Permissioning 2FA Y N
Option for Access Y N


REPORTING
Historical Data Available Y N
Report Types
Tx Detail by wallet (incl. HD derivations)
Tx Detail by exchange
Tx Detail by GL Accoun
Cost Basis Reporting
Exchange Data include in/out wallets? Y N
CSV Importable format to:
Direct Integration to Accounting Systems Y N


TAX CONSIDERATIONS
Explicit Basis Tracking Y N
InterWallet Basis Tracking Y N
Basis Capabilities Y N

ACCOUNT FUNCTIONALITY
Contact Info for Wallet Addresses Y N
GL Code by Wallet Address Y N
Journal Entry Creation Y N
Support Tx Tagging Y N
Tx Splitting Y N
Cost Basis Tracking Y N
Multiple Reporting Entities Y N
Accounting Sub-Modules Names:
Full COA & GL Y N

WALLET LIMIT
Wallet Limit #
Address Limit #
Transactions # Limits #
Record Minting (new tokens) Y N
NFT Support Y N
Address Integration Capabilities Various:
HD Enabled Y N
Mass Upload Wallets Y N
Balance Update Frequency Time:

March 25, 2019

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Authors
Noah Buxton - Director, Blockchain - San Francisco, CA | Armanino
Director
Jeremy Nau - Manager, Blockchain - San Ramon, CA | Armanino
Manager
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