From cowrie shells to cattle, coins to e-commerce, barter and exchange has transformed societies since the dawn of civilisation. Now, it’s happening again.
Cryptocurrency, encrypted digital currencies like Bitcoin, and the disruptive blockchain technology that underpins it will fundamentally change how businesses operate – and present profound challenges as well as opportunities for accounting, auditing and assurance.
With a market capitalisation of about US$6 billion and a daily transaction volume of around 200,000 according to Deloitte, Bitcoin has exploded into the mainstream. Today, Bitcoin is still widely viewed to be an investment vehicle, as evidenced by the Bitcoin ‘Rich List’, however it is increasingly being accepted as a payment method.
In fact, more than 100,000 merchants worldwide accept Bitcoin, from Expedia, Microsoft and Tesla to LOT Polish Airlines, GAP and Subway.
Operating your business on Bitcoin
Before widespread use takes off amongst small businesses though, there is a range of tax issues that needs to be addressed by the government first. On one hand, owners of cryptocurrencies are not identifiable or traceable; on the other, a transparent distributed ledger means all transactions are public.
For these reasons and more, small businesses may not want to run their operations on Bitcoin just yet. Nevertheless, businesses that do want to accept payments for goods and services in Bitcoin today can do so via digital wallets.
As Bitcoin becomes more readily accepted as a currency, the next step is to integrate it with digital wallets. Currently, most cloud accounting solutions such as Reckon One will integrate with Paypal to allow instant payments when an invoice is sent. Going a step further, and accepting Bitcoin payments will remove credit card processing fees, simplify foreign exchange risk and reduce risk of fraud when a payment is made. It makes it easier to send ‘money’ to businesses anywhere, anytime; and because personal information is kept from prying eyes, it protects against identity theft.
There are risks though. If someone hacks your traditional bank account, your bank might protect you from the loss. With Bitcoin, that’s unlikely. As such, businesses also need to decide whether to keep accepted Bitcoins, or immediately convert them to dollars to protect against volatility.
What’s more, Bitcoin is also the biggest digital currency in the world, with a market capitalisation of $19.7 billion USD, which is larger than the next 99 crypto currencies combined. It has also been fastest out of the gates, so if it stumbles, the value of existing Bitcoins could go from hero to zero, like many that have been pumped, dumped and relegated to zombie coin status by speculators.
GST: no longer a big barrier to doing business in Bitcoin
Beyond transactions, businesses will be able to run accounting software entirely on digital currencies.
During the latest Federal Budget update, the government announced that the double taxation of digital currency will be removed. In essence, this means that the ATO no longer sees Bitcoin as an asset for capital gains tax purposes but as tangible cash.
With purchases of Bitcoin no longer subject to GST, this is certainly a positive step forward and should encourage more widespread use by consumers.
In turn, the increased adoption by end-users will make digital currency a more legitimate form of payment acceptance for local businesses, which has flow on benefits such as removing credit card processing fees, simplifying foreign exchange risk and reducing risk of fraud when a payment is made.
Further to that, it will also make it easier for fintech businesses based on Bitcoin, Ethereum, Ripple and other digital currencies to grow in Australia.
Blockchain to change the game
Garnering even more interest is blockchain, the solution underpinning cryptocurrencies, with many pundits predicting an even bigger future for the technology. Looking further ahead, the impact of blockchain on the accounting software industry and the role of the auditor will be profound.
Blockchain flips traditional accounting and auditing on its head. To use an accounting analogy, a blockchain is essentially a shared ledger, where all parties can be confident as to the data reliability it contains – a big improvement on the current 'single ledger' concept within cloud accounting today. This has enormous implications for how companies will communicate with each other, settle payments, contracts and more.
It’s still early days, but three things are clear:
- mainstream uptake of digital currency is inevitable;
- the role of auditor will change – blockchain will no longer require third-party validation for many inter-company transactions, given the technology itself can be relied upon to endorse records; and
- accountants will need to understand blockchain to keep pace with changing client needs and increasing requests for advice on recording, reporting and accounting for cryptocurrency holdings and transactions.
Ultimately, it is clear that blockchain’s game-changing technology will come to significantly transform the accounting industry and impact every sector globally.
Longer term, these continued advancements within the Australian fintech space will not only aid in driving new value streams for the financial services sector here, but also give a much needed boost to the national economy as a whole.
So watch this space closely!