How a Central Bank Digital Currency Could Help Crypto Accounting

by Dr. Sean Stein Smith, CPA, City University of New York-Lehman | June 3, 2020

Cryptocurrencies and blockchain have been discussed in thousands of venues and mediums, but a new entrant to the conversation — a central bank digital currency (CBDC) —  might have substantial implications for accounting, blockchain, and privacy/cybersecurity considerations. This would seem to represent the best of both worlds from a crypto accounting perspective. On the one hand, a CBDC brings to the table the encryption, traceability, and data integrity that lie at the core of every blockchain application. On the other hand, the support and back stopping of a governmental entity will help assuage concerns over price volatility as well as (hopefully) limiting criminal usage.

Setting aside those issues for now, let’s take a look at some of the specific accounting and reporting issues that might arise as development accelerates. These include the following:

  1. Will the rise of CBDCs finally lead to authoritative guidance for blockchain and crypto accounting? The Public Company Accounting Oversight Board (PCAOB) has weighed in on May 20 with a (non-authoritative) document, which combined with previous documents and pronouncements, is accelerating the conversation. Launching and using CBDC will only accelerate these conversations, and the profession will benefit from it. Institutions and individuals are adopting crypto, in various forms, and the profession needs to have guidance and best practices to handle the accounting, reporting, and disclosure issues.
  2. How are the privacy rights of individuals and businesses going to be protected? This might strike some practitioners as a non-accounting consideration, but with cybersecurity increasingly part of business strategy conversations, privacy issues should also receive robust analysis. If CBDCs are managed by a central government or centralized authority, this will inevitably lead to increased questions around consumer privacy and risk management best practices for the profession. Additionally, this will most likely lead to an expansion of the risk assessment processes connected to how data is managed. Hacks and breaches will happen, and practitioners need to continuously update toolkits and best practices to reflect new potential weak points.
  3. Will the implementation of virtual currencies lead to two-tiered valuation issues? Odd as this might sound, practitioners are going to need to at least consider this question, both for U.S. clients and for clients located overseas. Sticking to the USD for simplicity, the value of a crypto dollar would, in theory, be equivalent to that of a physical currency. That said, that may not be true of every CBDC that is introduced, especially if other clauses, caveats, and trends emerge. Specifically, what happens if only some institutions or individuals are mandated to use a CBDC, for example, as foreign entities or specific people? Even the implication of ulterior motives could lead to a breakdown of valuation until CBDCs become the default option.

The idea of a central bank digital currency should not be thought of as radical, but rather a logical evolution of the wider blockchain and crypto dialogue. Ensuring that accounting standards, cybersecurity and privacy considerations remain in place amid the growth of cryptocurrencies is both a challenge and an opportunity for the profession. Blockchain and crypto are here to stay, and CPAs are in a good spot to deliver advice and value to clients, both large and small, moving forward.

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