When JPMorgan Chase announced the launch of JPM Coin in February, the effect was nearly instantaneous. Crypto-enthusiasts immediately set Twitter ablaze with debate, analysis and conversation related to what the news means for the broader blockchain community, as well as how this new asset fits into the cryptocurrency infrastructure.
Over the following days, the debate only intensified between those who were supportive of this development, individuals and institutions who had questions about this new product and service line, and a broader debate in the financial community. That is all well and good, but from an accounting perspective there are a few core issues that need to be addressed. Whether or not a specific individual or firm is ready to embrace blockchain or cryptocurrency options is not the point; blockchain is increasingly coming into the mainstream anyway. Let’s take a look at a few of the core issues, topics and considerations accountants should keep in mind about JPM Coin and other assets like it that are becoming more mainstream.
First, and perhaps most important for accounting professionals, despite some headlines to the contrary, this asset is not the same kind of cryptocurrency or asset as traditional cryptocurrencies such as bitcoin, ether or XRP. These cryptocurrencies, which have generated considerable buzz and interest for the last several years, operate differently from JPM Coin. Second, this coin operates on a centralized and permissioned platform that, for now, is only utilized by institutional and commercial clients already using JPMorgan services, so it is a closed ecosystem. While this will limit initial adoption and utilization, it also means the volatility and accounting considerations will be simplified for now. That said, the launch and implementation of this coin (or token, depending on which source it used), seems to represent a continuation of the shift toward increased institutional interest and investment in private or consortium blockchains. More important than any particular transaction or settlement for which this coin is used is the trend it illustrates: Cryptocurrencies are becoming part of the mainstream financial services conversation.
Drilling down specifically into what practitioners should keep in mind, the following considerations should be part of the conversation for cryptocurrency accounting at large, as well as the launch of more private or permissioned tokens.
Internal controls over the creation, custody and destruction of different types of cryptocurrencies are an aspect of the accounting conversation that are rapidly becoming a top concern. Accounting professionals need to keep developing and maintaining robust internal controls around cryptoassets, whether they’re related to permissioned tokens like JPM Coin or other cryptocurrencies. The saga unfolding at Quadriga demonstrates what can happen when organizations launch businesses and raise capital without implementing appropriate controls and safeguards (see Crypto exchange founder dies, leaving behind $200M problem).
If you believe the hype, the changes wrought by technology in accounting over the past 30 years is nothing compared to what it’s going to do in the next 5.
The reporting and classification of different cryptocurrencies, from both an income statement and balance sheet perspective, is going to become an increasingly high-profile concern for accounting professionals. Even though no definitive or authoritative guidance has been issued yet by the Financial Accounting Standards Board, institutional interest is only going to accelerate the conversation throughout 2019. While there are different options available for firms, such as intangible assets, inventory and marketable securities, it ultimately comes down to the appropriate guidelines established between firms and clients based on current accounting and regulatory standards.
Actions undertaken at Fidelity, Coinbase, JPMorgan and elsewhere illustrate that blockchain is moving from the fringe to the mainstream. Of particular importance from an accounting perspective, the controls, procedures and processes between blockchain and other systems are going to lie directly in the wheelhouse of practitioner expertise. In addition to helping prevent incidents like the failure at Quadriga, extra attention to these areas can help stop breaches and other attacks at the points where blockchain connects with other technologies.
In addition to these accounting-specific items, a broader shift is underway in how accounting professionals interact with current and future clients. Firms are already shifting from a compliance-first model of operating to an advisory-based model, but it is also evident that practitioners are going to have to become more comfortable working closely with other professionals. Building on existing relationships with legal and technical experts and organizations is only going to become more important as blockchain and other emerging technologies become increasingly integrated into the mainstream financial system. Bitcoin may have launched the blockchain conversation, and during tax season the focus of practitioners may well be on the tax aspects of cryptocurrency and blockchain, but that’s only the tip of the iceberg. Institutional interest and fund flows are increasing as 2019 rolls forward. As that happens, cryptocurrency and blockchain overall will become part of the day-to-day accounting conversation.