Need for Financial Transparency in the Web3 Community

The growth of cryptocurrencies, utility tokens and NFT’s (Non-Fungible Tokens) is evident over the past few years, this lead to a growth of number of individuals and organisations holding, trading, mining and staking these crypto assets either for capital appreciation or even transactional purposes. With the growing popularity of crypto (and the growing number of coins in circulation), some companies are aiming to get ahead of the curve and potentially capture a new crypto-centric customer.

With a combined market capital of 2 Trillion Dollars and more than 18,000+ crypto assets in the market and more than 1,00,000 organisations across the world are utilising crypto assets in their day to day business operations. This brings the need for accounting these crypto transactions and treasury management of an asset which the current accounting systems are not equipped for.

First let us analyse the types of the business and how they use crypto assets in their day-to-day business operations.

1. Traditional Business Organisations

   1. Investments

   2. Payment Solutions

2. Mining Organisations

   1. Mining & Staking (Revenue)

   2. Payment Solutions

   3. Investments

3. Decentralised Autonomous Organisations (DAO)

   1. Governance

   2. Payment Solutions

   3. Treasury

   4. Investments

   5. Mining & Staking

4. Crypto Asset Exchanges & Wallet Providers

   1. Investments

   2. Mining & Staking

   3. Payment Solutions

   4. Treasury

Even as Bitcoin and other “traditional” cryptocurrencies have become better understood, are making inroads onto financial statements, and are the focus of more comprehensive accounting conversations, the ecosystem continues to rapidly evolve. In June 2019, the International Accounting Standards Board (IASB or the Board), the IFRS Interpretations Committee (IFRS IC or the Committee) concluded that holdings of cryptocurrencies should be accounted for under IAS 38 unless they are held for sale in the ordinary course of business, in which case IAS 2 Inventories would apply.

Consideration of cryptocurrencies, utility tokens and NFTS as assets and treatment of them accordingly in the books of accounts of organisations such as Traditional businesses and Equity based Organisations has become much more clearer for accountants and business owners over the last few years, But the real question mark comes in when how do we treat these transactions in case of DAO’s(Decentralised Autonomous Organisations), DAPP’s (Decentralised Applications) and other web3 start-ups which are run on non-equity model and no revenue model and completely on the use cases of their utility tokens.

The Questions which a raise in accounting of these Web3 Start-up’s are:

• Is DAO backed by a Legal Entity?

• Who Pay’s the Taxes?

• Who handles the Reporting?

• Will the traditional profit and loss account structure fit for non-revenue based web3 Start-ups?

• Will sale of tokens to investors be treated as revenue or equity?

• Will the tokens be treated as Inventory or Investments?

• Will the traditional GAAP (Generally Accepted Accounting Practices) issued by accounting bodies apply for these kind of decentralised organisations ?

DeFi apps require “DAOs,” or Decentralized Autonomous Organizations, to operate. DAOs manage DeFi apps through the individual decisions made by decentralized validator nodes who own or possess tokens sufficient in amount to approve blocks. Unlike joint stock companies, corporations, limited partnerships and limited liability companies, however, DAOs have no code (although, ironically, they are creatures of code). In other words, there is no “Model DAO Act” the way there is a “Model Business Corporation Act.” DAOs are “teal organizations” within the business organization scheme theorized by Frederic Lalou in his 2014 book, “Reinventing Organizations.” They are fundamentally unprecedented in law. It’s time for legislation and regulation to follow where the technology is taking us.

However, in the absence of such legislation and regulation it is up for the community for itself to maintain such technological as well as financial transparency to ensure the growth of these decentralised structures.

It is in this juncture, CR Square Finance plans to build an ecosystem which incentivizes financial transparency among the web3 or decentralised community to be future ready.