In today’s newsletter, Ganna Vitko, President of the Toronto Chapter of Women in Crypto, walks us through the current accounting rules for crypto and digital assets as well as some of the challenges of managing these new assets.
Next, in Ask an Expert, Aaron Brogan of Brogan Law answers questions about token issuance and its tax implications.
-Sarah Morton
Crypto Fund Accounting and Auditing Challenges: An Overview of the European and American Markets
The crypto market poses significant challenges for auditors and accountants in all jurisdictions. Here are a few.
What you need to know:
- Since digital assets do not fit neatly into the existing frameworks of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), there is a lot of uncertainty around their classification, valuation and disclosure, both in the EU and the US.
- While the EU slowly moves toward better standardization through new regulations, the United States continues to rely on interpretative approaches.
- All this forces auditors, accountants and fund managers to deal with inconsistencies and higher risks.
The financial sector has undergone an extraordinary metamorphosis over the past decade. As digital assets have become integral elements of the financial ecosystem, each market player has had to adapt to new circumstances.
No one has had it more difficult than auditors and accountants. Specifically, conventional auditing and accounting practices – based on traditional financial instruments and reliable infrastructure – are not enough to cope with the ever-changing world of digital wallets and distributed ledgers.
Below we’ll discuss some of the most common challenges faced by auditors and accountants, both in the US and EU.
The heart of the issues
At the heart of crypto accounting and auditing problems is a fundamental inadequacy: digital assets simply do not fit into long-established frameworks. For example, under U.S. GAAP and IFRS, assets are grouped into clearly defined categories such as cash, securities, derivatives, or intangible assets.
However, cryptocurrencies defy these simple classifications. Are these financial instruments? Intangible assets? Or should they be considered inventory? Despite recent attempts, few jurisdictions have succeeded in fully defining them.
This lack of clarity has several negative effects, as it determines how crypto holdings are validated, when impairments are recognized, and how gains and losses are actually recorded in financial statements.
Regulatory pressures and enforcement trends
We should note that this accounting and custody ambiguity manifests itself in an environment where regulatory oversight is at an unprecedented level. While not all SEC enforcement actions are directly related to crypto or auditing failures, recent accounting and auditing enforcement data provide a useful window into the compliance conditions under which digital asset funds now operate.
The data in the table above reveals a notable change in the dynamics of law enforcement. On the one hand, it is clear that the number of defendants in accounting and auditing cases has decreased in fiscal year 2024. However, average settlement amounts have increased significantly, particularly for individual defendants. This trend reflects a move away from large-scale application and a move toward fewer cases with higher financial stakes. This, in turn, increases personal and professional risk for everyone involved.
On the other hand, Europe is moving on a significantly different path. As markets in crypto-assets (MiCA) enter phased implementation and supervisory coordination strengthens across all member states, the focus is slowly shifting towards formalized compliance frameworks and standardized reporting obligations.
There is therefore a contrast in regulatory mechanisms between these jurisdictions. In the United States, the intensity of repression varies depending on political orientation and case selection. On the other hand, EU codification is progressing through structured legislative harmonization. These two dynamics shape the governance environment in distinct but important ways for crypto fund managers and their auditors.
Looking to the Future: Best Practices and Innovation
Amid regulatory and technical uncertainty in the EU and US, market participants are doing their best to proactively adopt best practices. They include:
- Regular certification of reservations by third parties
- Independent Review Providers Using Multi-Exchange Pricing
- Enhanced Internal Controls Over Crypto Operations
- Investing in auditing technologies that leverage blockchain analytics.
Auditors and accountants themselves are expanding their skills and partnering with specialists, which is a big step in the right direction.
Conclusion
Right now, crypto fund accounting and auditing is at a crossroads. Issues such as fragmented regulation, volatile markets and new conservation agreements are all straining existing financial frameworks. In the EU, new regulations signal a move towards greater harmonization, while in the United States, the United States continues to rely heavily on creativity and interpretative approaches.
For auditors and accountants alike, navigating these waters requires more technical knowledge and active engagement with any emerging guidelines. Ultimately, things will improve once new and improved frameworks appear. Only they can improve transparency, reduce risks, and support sustainable growth in the crypto fund ecosystem.
– Ganna Vitko, President of the Toronto chapter of Women in Crypto
Ask an expert
Q. My client is considering launching a meme coin. What should they take into account?
The SEC has indicated that it does not consider certain “meme coins” to be securities. If a customer wishes to sell these tokens, they should be aware that the tax treatment of meme coin sales is not equivalent to an offering of exempt securities. IRC § 1032 states that stock proceeds are not taxable income, but they are a statutory creation with no cryptographic analogue. If your customer sells meme coins, they may have to pay ordinary income tax.
Q. How might this change in the future?
There has been a push among crypto law practitioners, such as Miles Jennings, to relocate cryptocurrency projects. However, many projects prefer to bid overseas, in part to try to avoid the tax burden of issuing in the United States. Taxation is a hot political issue among crypto lobbyists in Washington, DC, and a solution to the issuance problem could be the subject of future legislation.
– Aaron Brogan, Managing Attorney, Brogan Law
