In today’s fast-paced financial landscape, these digital currencies have emerged to revolutionize the way we understand money and transact business with it. One of the notable type of digital currency is the cryptocurrency. A cryptocurrency or a crypto for short is designed to work as a medium of exchange through a network of computers, each called a node. Unlike the ordinary forms of money issued mainly by a central bank, a cryptocurrency other hand operates on decentralized networks called blockchains. It is, indeed, described as a decentralized network in the sense that it relies on nodes in a peer-to-peer network to validate and record transactions. It is also based on the fact that it does not have a centralized monetary authority’s formal regulation to guarantee the involvement of financial intermediaries when funds are being transferred from one person to another across the globe.
Bitcoin is the first cryptocurrency known be released in 2009. As at June 2023, reports revealed that more than 25,000 other cryptocurrencies traded on the marketplace, of which more than 40 had a market capitalization exceeding $1 billion. Other prime examples of cryptocurrency include Ethereum, Litecoin, Monero, Ripple (XRP) and Stellar (XLM). Ripple (XRP), for instance, focuses on facilitating international money transfers in real-time. In the case of Stellar (XLM), it aims at connecting financial institutions across the globe with a focus on cross-border payments and remittances among individuals and businesses. It is worth reiterating that cryptocurrencies are not considered as currencies in the traditional sense but are generally viewed as a distinct class of assets and often classified as commodities or securities. In this context, it is also worth identifying virtual currency and a central bank digital currency as the other known types of digital currency.
Transaction Processes of a Cryptocurrency
A cryptocurrency transaction usually goes through the following steps:
Step 1: Someone requests a transaction.
Step 2: A block representing the transaction is created.
Step 3: The block is sent to all network nodes.
Step 4: Nodes validate or verifies to confirm the transaction.
Step 5: Nodes are rewarded for proof of work.
Step 6: The block is added to an existing blockchain.
Step 7: Parties are notified that the transaction is completed.
In effect, when a person undertakes a transaction using a cryptocurrency such as a Bitcoin or Ethereum, it adds to a block on the chain. The sequence and an addition of another cryptocurrency to a blockchain makes the transaction irreversible and transparent. Transparency helps to eliminate or minimize the risk of fraud and manipulation among players in the cryptocurrency market.
Benefits of Cryptocurrency Trading
In modern finance, dealers in cryptocurrencies have identified benefits from trading in them. They have identified transaction speed, transaction costs, accessibility and security(privacy) as some of the benefits. They have also identified cryptocurrencies as a medium for diversifying investments from the traditional financial assets such as stocks and bonds while serving as a protection against inflation as the game changer in the digital finance space. With regard to accessibility, it has been established that the process of setting up a cryptocurrency wallet is extremely fast compared to opening an account at a traditional financial institution which requires rigorous regulatory due diligence or Know Your Customer(KYC) background checks. Hence, any individual who has a computer or smartphone and an internet connection can use or deal in cryptocurrencies. While individuals are required to provide a unique identifier or a wallet address on the blockchain, it however, doesn’t mandate them to disclose such detailed personal data. Thus, transactions are characterized by the use of false names (pseudonyms) and cryptographic procedures to mask transactions. Those procedures in essence, ensure the integrity of transactions while protecting the true identity and privacy of dealers. This level of secrecy tends to attract individuals seeking greater control over their personal financial information in the modern financial ecosystem. Aside from that, it is also worthy to note that a Bitcoin has a hard cap on the total number of coins that can be issued for a period. This way, other cryptocurrencies are able to cap supply and use same mechanism as a protection against inflation.
Risks/Challenges
Despite dealing in cryptocurrencies offer some benefits, the risks and challenges associated with them cannot be ignored. There are pertinent issues regarding financial crimes such as money laundering and terrorist financing, tax reporting, volatility in values and regulatory concerns. Those risks still haunt the global adoption and acceptance of cryptocurrencies as a digital money in respect of identifiable characteristics and functions of money as established in Economics. Crypto assets have been more of a nightmare than a revolution for many users. As a result, institutions like the International Monetary Fund (IMF) and the Financial Stability Board in the global financial architecture call for stricter regulations. Nonetheless, to identify and realize any full potentials of cryptocurrencies, it behoves the global community consisting of governments, regulators or money authorities and other relevant stakeholders to collaborate effectively to address the associated risks and challenges.
The need to address the underlying risks and challenges is premised on the fact that the rapid advancement in technology and the evolution of the global financial landscape envisage cryptocurrencies becoming an even more integral part of the business world. The debate over the official adoption of cryptocurrency is more relevant now than ever as central banks around the world are exploring the idea of issuing their own digital currencies known as Central Bank Digital Currencies (CBDCs). CBDCs would provide governments with greater control over monetary policy while still leveraging on the efficiency and security features inherent in blockchain technology.
Implications of Cryptocurrencies for Accountants
The rise of cryptocurrency brings a new layer of complexity to accounting professionals which is worth highlighting. Regarding financial reporting, there are issues with cryptocurrency valuations and how to maintain accurate accounts for tax filing. Meanwhile, accountants need to understand the dynamics of cryptocurrencies and how these assets can be classified under generally accepted accounting principles (GAAP). For instance, the question of how to determine if a holding is a tangible or an intangible asset need clarity and understanding. Aside from that, same knowledge is required to interpret what constitutes a digital ledger for auditing purposes.
To uphold ethical standards, accountants have a duty to fight financial crime by ensuring that they have robust due diligence systems to manage their relationship with clients who deal in cryptocurrency. In that regard, they have a duty to ensure that clients who deal in cryptocurrency transactions tick the appropriate boxes of control. Indeed, screening of transactions against high quality sanctions, politically exposed persons and adverse media publications is very important. It is also of paramount importance for accounting professionals to be abreast with the evolving developments in the cryptocurrency market to enable them respond appropriately with regard to their professional services.
Conclusion
Cryptocurrencies have created new business models and spurred innovation which cannot be glossed over. The insurgence in use of cryptocurrencies is also an indication of an increased level of efficiency in trading and exchanging value through the Internet. That said, as technology advances and the global community harnesses the benefits, it is incumbent upon relevant authorities to weigh the risks of cryptocurrencies against the benefits. Those decisions and actions are necessary to safeguard the global financial architecture without stifling innovations inherent in blockchain- induced cryptocurrencies.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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