Blockchain has gone mainstream, attracting the attention of investors, policy makers and public companies. Despite its recent popularity, it did not appear overnight. In fact, blockchain emerged more than a decade before him in 2008 to support the birth of Bitcoin, but its uses have doubled since then. Blockchain can now be used to record various types of transactions or contracts in a permanent ledger, often hosted in a transparent database. It also underpins various digital assets such as cryptocurrencies, stablecoins, and non-fungible tokens (NFTs).
The Harvard Business Review suggests that “a true blockchain-driven transformation of business and government is … years away.” However, that hasn’t stopped public companies from incorporating blockchain and digital assets into their corporate strategies.
“The use of blockchain-backed digital assets is increasing,” said Taylor Harris, Professional Practice Fellow at the Center for Audit Quality (CAQ). Also, from a governance perspective, “Companies and their audit committees should understand how they engage with their digital assets and related financial reporting and oversight responsibilities, including navigating a rapidly evolving regulatory environment.” I need it,” he said.
But doing so is not always easy. Especially since a company’s commitment to blockchain and digital assets will not only affect corporate reporting. “Digital assets are technologically complex and rapidly evolving,” says Harris. Harris explains that digital assets “influence a wide range of corporate strategies and test cybersecurity defenses.”
The actual day-to-day functions of digital assets and blockchain may appear granular and transactional, but their nature, complexity, usage, and implications for financial reporting require the attention of business leaders. It means that there is
“If your company is involved in any way with digital assets, I think there are four very important steps that management and the board should take to assess and mitigate the risks,” Harris said. says.
“First, we need to make sure we understand the purpose of the company using digital assets. Second, we assess regulatory considerations and how they may change. Third, you need to ensure that your internal controls and reporting base are covered, including discussions with your audit committee and external auditors, and finally, the considerable We need access to expertise to provide security for
Questions to Consider When Starting Your Digital Asset Journey
what is your main purpose?
This is probably the most important of the four steps as it drives decision making and risk assessment. It is imperative that CFOs and management determine the intended use of digital assets to understand whether the strategies employed will lead to the right outcome or raise additional questions. For example, are they investing in Bitcoin to diversify their portfolio or to hedge against inflation? Are they prepared for the financial reporting consequences that come with investing in crypto assets (e.g., existing General intangible asset accounting)? Have they considered tax, legal and regulatory requirements and how they may change in this emerging area? Without forethought and a deep dive into the details, dealing with the complexities of the digital assets involved in reporting can quickly get out of hand.
Questions for Business Leaders to Consider
1. What is the regulatory situation?
Companies now operate under existing regulatory frameworks and use existing accounting rules to account for digital assets. But that is changing. “CFOs should be aware that there may be changes in regulation and standard setting that could impact how they interact with digital assets. It is,” says Harris. In the United States, regulators such as Congress and the SEC are paying close attention to digital assets. For example, the 118th Congress alone produced 50 bills and resolutions on the prospects of cryptocurrencies, with the Department of Labor voicing concerns about whether cryptocurrencies are a good fit for pension plans and 401ks. And that’s just a fraction of what’s coming down the Pike.
“We expect the regulator’s primary focus to be consumer and investor protection,” Harris says.
2. What should the audit committee do?
Audit committees and auditors have common goals. To provide audit quality that builds trust and confidence in the capital markets. Both play a leading role in overseeing the company’s involvement in digital assets.
First, Harris said: Second, it should work with external auditors to ensure that the company has the expertise, resources and controls to monitor and report on the use of the company’s digital assets. We also ask auditors about current market dynamics and how they view the regulatory environment.
3. What are the risks?
It’s important to ensure that management and audit committees are fully engaged on the other front line: cybersecurity. Because digital assets are encoded with private keys using cryptography and often stored in digital wallets, they face cybersecurity risks. Losing a private key means losing associated assets. “Blockchain can be a target for bad guys,” Harris said. It is imperative that management has appropriate processes and controls in place to handle cybersecurity risks and perform due diligence on all aspects of digital asset involvement. This includes engaging with experts and some level of transparent reporting on security to reassure investors and the wider market.
The market for digital assets continues to evolve rapidly. It is imperative that CFOs, management teams, boards of directors, and especially audit committees are educated and engaged on this topic so that they are prepared for the latest risks and opportunities that blockchain and digital assets may pose.
CAQ helps auditors and audit committees perform their roles better.They are published a resource “Jumpstart Your Digital Asset Journey, A Resource for Audit Board Members” contains more information to help you better understand the landscape of blockchain and digital assets.