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Master Class: Navigating the Changing Waters of Cryptocurrency and ICO

By October 23, 2018 No Comments

This post is part of Acuity’s Master Class Series, dedicated to shedding light on financial and other influential industry topics. Our goal is to provide a deeper understanding of the business community to empower their strategic decisions.

Bitcoin and cryptocurrencies continue to be a buzzword in the news, primarily because their value continues to fluctuate and prosper. Jagruti Solanki, Assurance Senior Manager at Aprio, has been in the trenches with technology, fintech, and cryptocurrency for the last four years, guiding her clients through the still-transforming waters of digital currency. Here, she answers our questions about the future.

What is Aprio?

We’re one of the top 50 CPA firms in the country and one of the largest, regional firms based in the Southeast. In addition to all the things a CPA does — audit, tax, accounting — we provide specialty consulting services like transaction advisory, IT assurance, PCI compliance and business valuation.

When did you get involved in cryptocurrency?

I’ve been at the firm about 10 years and for the past five years our firm has been working closely with companies that are using blockchain technology. Four years ago I worked alongside one of our senior managers who was working with what was then a little startup in a technology incubator and is now one of the largest bitcoin payment processing companies in the world. When the senior manager moved on, I took over as lead on that account.

What drew you to cryptocurrency?

I love doing things that are really challenging and can question my intellect, it’s been a great learning curve.

My specialty is fintech, and 40 percent of what I do now is blockchain and accounting advice, which is a switch from audit to a more advisory role. I’m loving it, going with the flow of where technology is going. I’m also a big believer in blockchain. Cryptocurrency is interesting, but blockchain is the next big thing.

What type of clients do you work with?

Most of our clients are ERC20 token issuers doing presale ICOs, domestic ICOs, or international ICOs. Some of them have come to us after they did what they thought was right, setting up a not-for-profit foundation outside of the U.S., and found out there were some U.S. tax implications that they had not considered when they set up an international foundation. We have a lot of clients where we unwind the tax structure to make sure they’re set up correctly and are compliant with the tax standards here in the U.S.  

Lately we’ve been seeing a lot of domestic ICOs set up here in the U.S. because of the new tax rate, the pain that they have to go through to set up an international foundation, and the fact that they have to give up control on the foundation-based ICO. A lot of companies are realizing that it’s just better to set up in the U.S., especially if you are a U.S. resident for tax purposes.

A couple of the clients I have already have their legacy businesses up and running and are wondering if their technology is considered blockchain. These businesses are already established, and they’re interested in taking blockchain as a technology to the next level.

How does this pertain to audit services and requirements? Particularly what are the needs of audit services within crypto and blockchain?

Right now, most of the clients we have don’t need an audit which is great because I don’t think they’re ready for an audit. There’s not a real need from an external standpoint yet, it’s more for management purposes and I think these ICO companies and management teams need to be focused on getting the platform up and running, and getting their business into a position before the financial reporting becomes important.

To be honest, for a lot of these companies I’m talking to, accounting is not even in their top three priorities and that’s fine—it’s more about helping them become audit ready.

What do business owners need to think about when they’re considering either crypto as payment? Any advice?

When I talk to non-crypto clients, or even non-blockchain clients, sometimes they don’t even understand what blockchain is. Those clients still need to be educated on what the technology can do, and I get it. Four years ago, I was in the same place. But a lot of security issues can be fixed using the blockchain, and education is necessary so they can understand how the blockchain is applicable to their business.

What are some of the pitfalls you’ve seen with crypto management and records?

Starting with the structure itself, it can be challenging when companies think that setting up their non-profit foundations outside the U.S. in a country where there’s no order minimum tax is their best option. You bypass the security laws and you don’t have to comply with regulations, but they’re really exposing themselves to much more risk than they think.\

The biggest challenge is talking to management and helping them understand the risks they are taking because what is best financially, may not be compliant with one of the evolving rules they are facing. So that’s the task, and we give them our perspective on the risks.

We also encourage them to get a second legal opinion because the legal issues regarding a utility token versus a security token are complex. Companies need a second opinion, to do their due diligence and have the paperwork right, just in case the SEC comes back one day and now you’ve got to prepare filings.

And from an accounting standpoint?

The record keeping is a challenge because it’s not a priority for most companies. The kind of information we get, it’s a data dump from the wallets or exchanges. We really like to ensure that they’re recording expenses, transactions, and things on a day-to-day basis correctly so they don’t go back six months later and have half a year of records to fix.

The biggest challenge is putting the right controls in place, as well as the appropriate person who has the authority to initiate some of these transactions. Unlike a bank, you don’t have traditional controls so you’ve got to come up with a set of controls early on to make sure companies are implementing those before it’s too late.

What’s your favorite cryptocurrency?

Ethereum because of the smart contract feature.

What’s your favorite utility token project?

IKON. It’s an amazing team, and when I look at these projects I always look at the team. The problem that they are trying to solve is definitely important, but my number one is who is the team working on it.

What is the industry that is most likely to be changed next?

Supply chain. But for the supply industry to change, it will take a long time because everyone in that ecosystem needs to change. Transportation is definitely another one, but I would vote for supply chain.

When you imagine that the blockchain will find its way to fix a problem that’s out there today, what is the problem?

Real time auditing. We should somehow figure out how to audit companies using blockchain technology, and I think we’ll get there. It’s just a matter of someone coming up with the solution.

How should a potential client engage with you?

ICO or non-ICO, our procedures are the same. First we want to see if they’re a good fit for us and we’re a good fit for them. For instance, there are some things we don’t audit, like hedge funds. If it’s an ICO client we want to make sure they’re serious about what they are doing and have legal council; if not two, then at least one. We have to go through certain policies and protocols, but we turn around pretty quickly. Within a week we know if we are moving forward.

Any words of wisdom for people doing business in cryptocurrency?

Before diving into the crypto space, the first question companies should ask themselves is if blockchain is the right technology for them or whether they’re just using it because it’s a buzzword. They need to vet out the options and play devil’s advocate internally, to see if there is a solution for them.

The second big thing is to surround themselves with a team of advisors, accountants, CPAs, tax advisors, ICO advisors, etc. There are a lot of people out there who are advising on the process, so make sure you have a team and always take a second opinion if needed. It’s a small world and everyone is here to help each other.