final wsba stablecoin 2.0 public copy.pdf

STABLECOINS 2.0

Advanced Considerations for Accounting Practitioners

This document is provided for general information purposes only. Nothing noted in this document should be considered accounting guidance or rules proposals, nor should any definition, commentary or analysis herein be considered legal, investment or accounting advice or opinion.

From the Chairman

On behalf of the Wall Street Blockchain Alliance, we are very pleased to present our latest publication for the Accounting profession: Stablecoins 2.0: Advanced Considerations for Accounting Practitioners. This work is the collective result of the ongoing efforts of our global members, principally the firms and individuals who are part of our WSBA Accounting Working Group, as well as the WSBA team, Board of Directors and Advisors. We are grateful for all of their thought leadership and hard work. In particular, I want to recognize the Chair of our Accounting Working Group, Dr. Sean Stein Smith, for his ceaseless efforts, exceptional analysis and ongoing friendship.

Stablecoins continue their upward march into the public consciousness, even in the wake of the difficulties and human tragedy during the ongoing COVID-19 global pandemic. Innovations such as the collateralization of stablecoins across multiple asset classes, as well as growing enterprise interest in these instruments, makes this publication even more relevant. As market capitalization grows into the billions, understanding the implications of stablecoins will bring the roles of accountant and auditor into starker relief and greater importance.

As with all WSBA publications, we would welcome your thoughts and feedback and hope that you find this document useful and informative.

Sincerely,

Ron Quaranta, Chairman of the Board
Wall Street Blockchain Alliance
May 2020

Stablecoins 2.0 – Advanced Considerations for Accounting Practitioners

Introduction

In the first whitepaper published by the Accounting Working Group of the Wall Street Blockchain Alliance, stablecoin basics and terminology were addressed. This paper broke down what stablecoins are, how they are different from both cryptoassets and fiat currencies, and what considerations should be factored into any preliminary analysis by accounting practitioners. What this 2.0 document seeks to do is move beyond the basics and instead focus on some of the next-step considerations and factors that should be integrated into any conversation connected to stablecoins and other cryptoassets. Let’s get started on breaking down some of these next-level applications and issues.

Setting the Stage

Governance is crucial for different cryptoasset projects. If investors are not able to have confidence in how the issuing organization operates, it will cause concern and forestall broader adoption. Peeling back the layers on governance also highlights an underlying difference that needs to be understood between cryptoassets and asset-backed coins/stablecoins.

Governance

As per the Organisation for Economic Co-operation and Development (OECD), Principles of Corporate Governance states:

“The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies (OECD, 2015).”

The topic of governance as it relates to cryptoassets, which includes stablecoins, might seem contradictory. Specifically, understanding where appropriate controls and documentation overlap with stablecoins should start during the stablecoin issuance process itself. Stablecoins require a robust set of governance controls and protocols. Factors that should be part of any analysis of a stablecoin product or offering include:

  1. Who is the management team at the organization, and what is their track record?

  2. Are the rights of all investors equally safeguarded and protected?

  3. How are the rights of investors communicated and updated?

Redeemability

The idea of a stablecoin is a mashup of cryptographically secured financial data underpinned by the stability of an existing currency or asset. What does redemption of stablecoins look like in practice? For example:

  1. What does the backing and pegging of the stablecoin actually mean?

  2. Who is in charge of custodial services?

  3. What steps are in place to secure these assets in case of negative events?

  4. How is the price of the stablecoin adjusted to reflect changes in the price of the underlying asset?

Smart Contracts

Smart contracts, defined as the digital representation of a traditional contract, are critically important to the implementation and operation of stablecoins. Comprehensive controls over how smart contracts are constructed and implemented are necessary.

Storage

Custodial services for stablecoins must differentiate between the custody of the stablecoin itself, and the custody of the underlying asset. Controls must be transparent and robust.

Key Management

Key management is crucial for both clients and practitioners to understand the importance of securing access to keys. This includes differentiation between self-custody and custody managed by authorized third parties like exchanges.

Types of Wallets

Understanding wallet options is essential. Hot wallets provide convenience but are less secure, whereas cold wallets offer more security at the cost of accessibility.

Implementation

When implementing stablecoins, several factors should be considered:

  1. Are the smart contracts coded correctly?

  2. Are clients aware of the reporting obligations?

  3. Is there a succession plan in place for key personnel?

Business and Organizational Considerations

Utilizing stablecoins requires careful planning, including approvals within the organization and processes for accounts receivable/payable.

Practical Takeaways for the Accounting Practitioner

The conversation around stablecoins is evolving, and practitioners need to be prepared to assist clients with inquiries that arise over time, particularly in response to broader economic changes.

Conclusion

As of mid-2020, the economic landscape remains uncertain. The potential for a legitimate stablecoin may become more appealing post-COVID-19, as investors seek high-quality assets. However, the accounting and financial reporting challenges associated with stablecoins need careful analysis, and the WSBA is ready to provide necessary guidance.

Lead Author

Dr. Sean Stein Smith – Chair, WSBA Accounting Working Group

Contributing Authors

Samir Chokshi - Managing Partner, Magara Capital
Kacee Johnson – Strategic Advisor, CPA.com
Ron Quaranta - Chairman and Chief Executive, Wall Street Blockchain Alliance
Joseph Ryan - Chief Financial Officer, Gilded

Citations

OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris.
https://dx.doi.org/10.1787/9789264236882-en