Clued up on crypto? An accountancy guide to digital currency

Offering more efficient transactions, better (albeit less stable) interest rates, and increased relevance in a marketplace of global transactions, it is little wonder that the growth in cryptocurrency has been little short of explosive. Already more than a $3.47trillion marketplace, cryptocurrency is expected to grow at 13.1% per annum between now and 2030. Add to this its growing ability to purchase business assets such as property, and it’s essential that accountants get clued up on crypto. We asked Tim Pinkney, Director of Professional Standards at the Institute of Financial Accountants (IFA) for his insights. 

A global market and the regulation challenge

A major attractor of cryptocurrency is its position as a currency that lacks globally applied legislation, and which offers transactions without government or bank intervention. The key benefits of this are that the currency is responsive to supply and demand; hard (but not impossible) to steal or counterfeit; offers much faster transaction times with streamlined processes; is far less at risk of inflation and corruption; has fewer or no transaction fees; and because of its reliance on a decentralised computing platform, means it is less at risk of banking collapse or software failure. 

To put the demand in perspective, efficiency is a major driver of cryptocurrency, given its ability to eliminate the need for so called “middlemen”. For the average credit or debit card transaction, there are nine stages to complete between the customer submitting a payment and the payout reaching the merchant. This is old-fashioned and expensive, and also incurs additional fees. Cryptocurrency is a direct transaction between customer and merchant, eliminating this lag. 

Cryptocurrency has a dark side however, with reduced government oversight making it the currency of choice for criminals and terrorists, with links to extortion, human trafficking, kidnapping, fraud, and terrorism, among other crimes. The National Crime Agency (NCA) estimates that as much as $5.1 billion in illicit crypto transactions are linked to the UK annually. Not to mention arrests made earlier this year by the Financial Conduct Authority (FCA) with the Metropolitan Police, in connection with an illegal UK currency exchange, reported to have processed £1billion of unregistered crypto assets. It’s for exactly this reason that accountants need to upskill to support clients with cryptocurrency transactions, keeping them on the right side of the law.

Unfortunately, as yet, cryptocurrency is globally unregulated, despite appeals from the International Monetary Fund (IMF) to introduce a centralised regulatory system. Instead, accountants must rely on national law that incorporates either digital currency or its associated transactions, to ensure clients are operating legally without fraudulent transactions, money laundering, or tax evasion. 

In the UK, the Bank of England regulates payment systems, service providers and digital money, and has established expectations for how the money is used and regulated. The Financial Conduct Authority (FCA) regulates digital asset companies assuring best practices to prevent money laundering and terrorism financing. Cryptocurrency is therefore nationally regulated as part of the Money Laundering Regulations 2017(19) and The Proceeds of Crime Act 2022. 

Ultimately, cryptocurrency is gaining in popularity, it is offering good interest rates to investors, and there are an increasing number of businesses transferring at least some of their fiat currency into cryptocurrency assets. These can in turn be used to purchase business assets include machinery, property, or software, making it increasingly likely to cross accountants’ desks. Good core knowledge of cryptocurrency, as well as applicable regulations, will be essential to protecting yours’ and your clients’ reputations. 

Cryptocurrency: glossary of key terms

• Cryptocurrency – also known as crypto or crypto currency – it refers to currency in a digital format, used to make online transactions. There are digital processes that govern the creation of additional units of currency, but its value is no longer based on gold or assets held by a local government. Crypto brands include Bitcoin, Ethereum, and Dogecoin.
• Crypto assets – crypto assets are digital representations of something of value. The definition incorporates cryptocurrencies, but also includes things like digital art – in the form of NFTs – for example.
• Blockchain – blockchain is the “public ledger” that governs and maintains cryptocurrencies globally, delivered across a decentralised computer system in a peer-to-peer network. It utilises algorithmic equations to create a unique identifier for every digital instance of something – in this case currency – theoretically making each unit difficult or impossible to replicate and ensuring each denomination of cryptocurrency is unique. This makes it traceable and tradeable, and allows a process called “mining” to occur.
• Mining / miners – miners are individuals or entities that use specialised software to create more units of cryptocurrency. They can also be users of the digital currency they mine. Once created, the money is recorded and can be spent digitally with retailers or services that accept cryptocurrency, or they can transfer the cryptocurrency into fiat currency or precious metals via exchanges. 
• Fiat currency – traditional country currency (including paper notes and coins) managed by the local government, with the value traditionally denoted by gold or assets held in their treasury. 
• Exchanges / Exchangers (also referred to as virtual currency exchange) works like an exchange for foreign currency when you go on holiday. Here, cryptocurrency can be exchanged for other forms of cryptocurrency, for Fiat currency, or for precious metals, with a commission of course. Users or businesses can purchase cryptocurrency using their fiat currency via these same exchanges.
• Virtual currency wallet – similar to other digital wallets or online bank accounts, virtual currency wallets support storing, transferring, or spending digital money.
• Hot storage – an internet-connected online wallet, offering quick access and spending of your cryptocurrency, but at higher risk of hacking / theft.
• Cold storage – an offline wallet (via something like a hard drive), restricting the instantaneous spend of currency, but offering far greater protection against hacking and theft – assuming you don’t lose it or corrupt it of course.