A new report from “Big Four” auditor, KPMG, identifies the opportunities, key challenges facing crypto assets, and their chances of becoming institutionalized. The accounting firm also introduced a Cryptoasset Framework to help address challenges to the adoption of these new assets. The report couldn’t have come at a better time, as the price of cryptocurrencies experiences freefall in 2018.
Cryptoassets are a Big Deal
The first section of the report explains why the investment class is impossible to ignore. It has held its own against other traditional asset classes of stocks, bonds and others over the past two years; even in spite of the bad press.
The report, making a case for crypto assets, highlighted some of their use cases. They include solving friction that exists with fundraising, cross-border payments, and the “overhead costs associated with the issuance, transfer, and management of traditional assets such as securities, commodities, and real estate assets.”
Institutionalization of Crypto Assets
The auditing firm notes that the success of cryptos “will be defined by their ability to reduce friction and inefficiencies that currently exist within the global economy.” However, the volatility in prices currently hinders this aspiration. But the KPMG report thinks these assets will become less volatile as they mature.
Jeff Horowitz, the chief compliance officer at Coinbase, and Eric Scro, the vice president of finance at Coinbase emphasized the need for the institutionalization of crypto assets. That will increase the global accessibility, liquidity, and transparency of the ecosystem. But for that to happen, the Coinbase executives think regulators need to step up and discuss the role crypto could play in the financial system.
“The focus on crypto innovation must not come at the expense of security, compliance, and consumer protection,” they explained.
The report highlighted significant challenges to the institutionalization of crypto assets. These problems include:
Compliance with regulatory obligations – The uncertainty in regulatory guidance in many countries is impacting the ability of the crypto industry to implement specific controls and processes.
Fork management and governance – There need to be answers to critical questions as regarding soft and hard forks. One of those questions is the tax implication of forks. The report pointed out other issues the crypto assets community and regulators have to face.
KYC and crypto asset provenance – To guard against illegal activities, there should be standard practices around determining crypto asset provenance. Moreover, it needs to be built out alongside the KYC process, says the KPMG report.
Securing crypto assets – The report discussed leading industry approaches to crypto security practices. It emphasized why crypto businesses should build cybersecurity programs to secure its users and assets.
Accounting and financial reporting – “Cryptoassets challenge traditional financial reporting boundaries,” states the report. It says neither the neither the Financial Accounting Standards Board nor the International Accounting Standards Board have provided specific accounting guidance.
Tax implications – Tax authorities are still struggling to find an effective way to treat the sales and purchase of cryptocurrencies.
Optimism about the future
KPMG still believes cryptocurrencies like Bitcoin don’t fully qualify as a currency. As they are not yet a store of value or a medium of exchange. However, it concludes that other crypto assets like stablecoins, security tokens, and utility tokens could turn out to be promising use cases of crypto.