Should Your Business Invest In Crypto?

Investing in cryptocurrencies has become increasingly popular among businesses in recent years. Cryptocurrencies like Bitcoin and Ethereum are decentralised, unregulated by central banks or governments, and have a limited supply, making them attractive to businesses for various reasons.

Businesses can open accounts on cryptocurrency exchanges like Coinbase, Kraken, or Binance to buy, sell, and trade cryptocurrencies. These exchanges offer features such as advanced trading tools, secure storage of digital assets, and the ability to make transactions in multiple cryptocurrencies.

Before investing in cryptocurrencies, businesses should be aware of the risks and volatility associated with the market. The price of cryptocurrencies can fluctuate significantly, and there may be tax implications when converting profits back into traditional currencies. Additionally, the regulatory landscape for cryptocurrencies is still evolving, and businesses should stay informed about any changes that may impact their operations.

Overall, investing in cryptocurrencies can provide businesses with new opportunities, but it is essential to carefully consider the risks and potential challenges before making any decisions.

Crypto volatility and accounting surprises

Cryptocurrency is a highly volatile asset class, and this volatility can cause accounting surprises for businesses that invest in it. This volatility is due to the unpredictable nature of digital assets, which is both a defining characteristic and a significant challenge for investors and accounting professionals. As a result, businesses that incorporate crypto into their portfolios need to understand how to properly account for its fluctuating value to avoid surprises.

Volatility in Cryptocurrency

Cryptocurrency prices can fluctuate dramatically, with Bitcoin, for example, seeing its price rise or fall by thousands of dollars in a single day of trading. This volatility is inherent in the nature of digital assets and can be challenging for businesses to navigate. It is important for businesses to recognise that this volatility is par for the course when it comes to crypto assets.

Impact on Accounting

The volatile nature of cryptocurrency can cause accounting surprises for businesses, as traditional accounting methods may not accurately reflect the changing value of these assets. This can be a challenge for accountants, who need to report values and assets accurately. Implementing systems and processes that offer accurate reporting on crypto assets is crucial to avoid surprises and ensure compliance with regulations.

Fair Value Accounting

To address the volatility of crypto assets, the Financial Accounting Standards Board (FASB) has shifted to a fair value accounting model for designated crypto assets. This model allows for changes in value to be reflected in real time, providing a more accurate picture of the asset's worth. This is in contrast to the previous cost-less impairment model, where gains could only be recorded when the asset was sold, leading to a disconnect between the reported value and the actual value.

Challenges and Pain Points

Businesses holding crypto assets face challenges in data aggregation and making sense of the data. They need to have a comprehensive view of all crypto assets, even if they are stored across multiple wallets and blockchains. Ensuring the accuracy and completeness of the data, as well as efficient analysis and aggregation, is crucial for effective reporting to stakeholders.

Hedging and Regulatory Considerations

Hedging instruments such as futures contracts and options can help protect against adverse price movements, but their accounting treatment adds complexity. Additionally, regulatory bodies are paying increasing attention to the accounting treatment of cryptocurrencies, which further underscores the need for accurate and timely reporting.

Best Practices for Accountants

Accountants working with crypto assets should prioritise automation and the use of SOC-tested systems. This will help ensure accurate and efficient reporting, reducing the risk of errors that could impact the business's understanding of its crypto holdings. While volatility should not be a primary concern, accountants must take seriously their duty to provide an accurate assessment of the ever-changing value of crypto assets.

Crypto tax implications for businesses

Cryptocurrency taxes are complicated because they involve both income and capital gains taxes. The type of taxes a business pays and how much depends on the circumstances in which the business acquired and used its cryptocurrency, its income, and its tax status.

In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. This means that if a business sells or uses crypto in a transaction, and it is worth more than when they purchased it, they trigger capital gains or losses. If its market value has changed, the business owes taxes on that gain. If the business uses cryptocurrency to buy goods or services, they owe taxes on the increased value between the price they paid for the crypto and its value at the time they spent it, plus any other taxes they might trigger. If a business accepts cryptocurrency as payment for goods or services, they must report it as business income. If a business is a cryptocurrency miner, the value of their crypto at the time it was mined counts as income.

In the UK, businesses need to pay corporation tax on the profits from cryptocurrency. Similarly to most investments made through a limited company, only the tax gain part is subject to tax. In other words, if a business bought £100 and sold £120, they need to pay 19% tax on £20 = £3.8. Businesses pay tax only in the tax year that they sold the investment, not if they just hold it.

The most commonly accepted accounting treatment for cryptocurrencies in the US requires writedowns of losses, but the rules don’t permit “writeups” of gains. That could potentially mislead investors when they’re reviewing financial statements, so companies may need a stronger non-GAAP financial disclosure system to keep investors informed about digital assets that are gaining in value.

Crypto payment security

With the growing popularity of cryptocurrencies, more and more businesses are accepting them as a form of payment. However, there are some security concerns that businesses should be aware of when accepting crypto payments. Here are some tips to ensure secure crypto transactions:

• Use a reputable crypto exchange or payment gateway: Crypto exchanges or payment gateways, such as Coinbase Commerce, Square, or PayPal, allow you to accept crypto payments from customers and convert them into fiat currency. These platforms often provide additional security features and API integrations that make it easier to manage crypto transactions.
• Enable two-factor authentication and use strong passwords: Always use two-factor authentication when accessing your crypto accounts and wallets. Additionally, use strong and unique passwords for each account. Avoid using the same password across multiple accounts, as it increases the risk of credential stuffing attacks.
• Consider cold storage or hardware wallets: For long-term crypto storage, consider using cold storage or hardware wallets. These wallets are kept offline and are less susceptible to hacking attempts. They provide an extra layer of security for your crypto assets.
• Regularly back up your crypto wallets: Back up your crypto wallets regularly to ensure that you can recover your funds in case of device failure or loss. Store your backup files securely and consider encrypting sensitive information.
• Monitor for phishing and malware attacks: Be vigilant against phishing attempts and malware infections. Never click on suspicious links or download files from untrusted sources. Use antivirus software and keep your devices and software up to date to protect against known vulnerabilities.
• Implement burner crypto wallets: For added security, consider using burner crypto wallets for individual transactions or daily business operations. These wallets do not have seed phrases, reducing the risk of permanent fund loss. Transfer the funds to your main wallet at the end of the day.
• Choose crypto wallets with security features: When selecting a crypto wallet, look for those that offer advanced security features such as multi-signature transactions, biometric authentication, and transaction notifications. These features provide an extra layer of protection for your crypto assets.
• Keep yourself informed: Stay up to date with the latest security developments and best practices in the crypto space. Follow trusted sources and security experts to ensure you are aware of emerging threats and countermeasures.
• Use crypto cards for business expenses: Crypto cards, such as the BitPay crypto debit card, allow you to spend your crypto holdings on business expenses. These cards often provide rewards and cashback, making them a convenient option for businesses wanting to utilise their crypto assets.
• Be cautious when dealing with large transactions: When dealing with significant crypto transactions, consider using an escrow service or a trusted third party to ensure the security of the funds. Additionally, be wary of potential scams and always verify the legitimacy of the recipient before sending funds.
• Monitor regulatory and tax compliance: Stay informed about regulatory changes and tax implications related to crypto transactions. Consult with legal and financial professionals to ensure that your business complies with the applicable laws and reporting requirements.

By following these security measures, businesses can safely navigate the world of crypto payments and take advantage of the benefits that cryptocurrencies offer. Remember, staying vigilant and proactive in your security practices is crucial to protecting your crypto assets.

Crypto acceptance and regulatory hurdles

As crypto continues to gain mainstream acceptance, regulatory focus is increasing as usage by investors, companies, and some central banks grows. The regulatory landscape is fragmented and evolving quickly, with gaps and overlaps being created as the market develops. Efforts to better define an appropriate regulatory regime are underway, but this may require legislative change.

One of the main challenges in gaining mainstream acceptance for crypto is the perception that it is risky for anti-money laundering (AML) purposes. While crypto is traceable, the risk of AML is higher compared to traditional banks. This is due to the lack of unified KYC, AML, and due diligence standards across the crypto market, as well as the large number of exchanges that do not operate robust KYC and AML functions.

Another regulatory hurdle is the varying definitions of "virtual currency" at the state or federal level. In the US, for example, a federal definition of "digital asset" has been introduced through the Infrastructure Investment and Jobs Act. However, there is still uncertainty regarding whether a digital asset or related product constitutes a security, commodity, or derivative under relevant federal/state laws.

The regulatory pace of cryptocurrencies has picked up and is catching up with the market. There is a divide between retail and institutional segments of the virtual market, especially in regulation. In retail, a great deal of consumer protection is considered, while institutional regulation is approached from a balance sheet viewpoint.

To overcome these regulatory hurdles and gain trust, crypto exchanges will need to operate with the same obligations as traditional banks and financial institutions. This includes implementing robust KYC and AML functions, as well as clear and consistent reporting to stakeholders.

While crypto acceptance and regulatory hurdles remain, they are not insurmountable. With the growing size and application of crypto, it is only a matter of time before it becomes part of mainstream finance.

Crypto investment options for businesses

There are several crypto investment options for businesses, including investing directly in cryptocurrencies, using crypto exchanges, or utilising crypto funds and investment management services. Here are some specific ways businesses can get involved in the crypto space:

• Direct Investment: Businesses can choose to buy and hold cryptocurrencies such as Bitcoin, Ethereum, or other digital assets. This approach allows companies to benefit from the potential appreciation of these assets over time. However, it's important to note that cryptocurrencies are highly volatile, and the prices can fluctuate significantly.
• Crypto Exchanges: Using a crypto exchange like Kraken, Coinbase, or Binance, businesses can set up institutional accounts to trade cryptocurrencies. These exchanges often provide additional features such as crypto wallets, commerce platforms, and advanced security measures.
• Crypto Funds: Businesses can invest in crypto funds or exchange-traded funds (ETFs) that provide exposure to the crypto market. These funds may invest in a basket of cryptocurrencies or focus on specific assets, offering diversification and potentially lower risk compared to direct investments.
• Investment Management Services: Companies can also explore crypto investment management services, where they can work with specialised firms or individuals to manage their crypto portfolios. These services can include crypto financial planning, investment advice, and portfolio customisation based on the company's risk tolerance and goals.
• Accepting Crypto Payments: Businesses can start accepting cryptocurrency as a form of payment from their customers. This approach can attract new clients who prefer to use crypto and can help businesses tap into a global customer base. Companies can utilise crypto payment gateways or platforms like Coinbase Commerce to facilitate these transactions.
• Blockchain Technology: Beyond investing in cryptocurrencies, businesses can explore the use of blockchain technology to streamline operations, enhance security, and develop innovative solutions. This may include creating blockchain-based applications, smart contracts, or exploring the use of non-fungible tokens (NFTs) for various use cases.

When considering crypto investment options, businesses should carefully evaluate their goals, risk tolerance, and the regulatory environment. It is also essential to conduct thorough research and consult with legal and financial professionals to ensure compliance and minimise potential risks.

Frequently asked questions