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Cryptocurrency and Accounting, with SoftLedger CEO Ben Taylor

Key Takeaways

Wouldn't it be nice if crypto accounting were less ... cryptic? FASB, the Financial Accounting Standards Board, has finally said it will think about setting rules around accounting for certain digital assets like bitcoin. Ben Taylor of SoftLedger, whose accounting software can help automate cryptocurrency transactions, breaks it all down. Listen in.

 

Cryptocurrency and Accounting, with SoftLedger CEO Transcript

 

Steve Soter: Hello, and welcome to Off the Books where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the risk, reporting, and compliance platform that simplifies your complex work and your exercise plan for beach season. Check it out at workiva.com/podcast. My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to having a great conversation, and I'm happy to have you with us. I'm also very happy to have Catherine Tsai joining me. Catherine, can you please tell the fine folks who you are?

Catherine Tsai: I'm not an accountant or Diet Coke aficionado, but I like asking questions, learning new things, and writing about them later. So I'm here to learn. And today I'm excited to hear more from Ben Taylor.

Steve Soter: Yeah, that's right, Catherine. We've had Ben on the podcast before. He's actually got an accounting background, but importantly, he's also the CEO and co-founder of SoftLedger, which enables real-time accounting in the cloud with pre-built connectivity to third-party systems, including crypto exchanges and crypto asset management. It turns out the Financial Accounting Standards Board, or FASB, is finally going to consider setting rules for the accounting of certain cryptocurrencies. So we wanted to bring Ben back to talk about it.

Catherine Tsai: Okay, let's get into it. So, Ben, welcome back to the show. I know you've been on a few episodes now, but for listeners who haven't met you yet, could you introduce yourself and tell us a little bit about SoftLedger?

Ben Taylor: Hi. Yeah, thanks for having me back on. And yeah, to give a little intro, I'm the CEO and co-founder of SoftLedger. We help companies get their financials in as fast as possible. And that means in real time often. And we do this by providing a modern accounting software platform and APIs that are more product-focused and flexible than legacy ERPs.

Catherine Tsai: I know it's been a while since you've been on the show. Is there anything new at SoftLedger these days?

Ben Taylor: There is. So we're continuing to release new features. We've released a bunch since we last spoke, including a pretty significant release over the past few months to update our inventory management, purchasing, and sales order management functionality. And regarding crypto, we have several important updates upcoming, including a new impairment accounting functionality update. And then also since I was last on the podcast, we've had more traction with the OEM side of our business. This is where we help software companies build their own accounting functionality.

Catherine Tsai: Okay, so there's a lot going on, but we'll get to the real reason you're here. In mid-May, after years of saying no, FASB, the Financial Accounting Standards Board, agreed to consider setting rules for the accounting of certain digital assets such as bitcoin and ethereum. What was your reaction when you heard that?

Ben Taylor: Excitement.

Ben Taylor: Well, you know, we've been waiting for this since we released our crypto module in 2018 and just excited to see what comes out and how soon it comes out.

Catherine Tsai: Steve, did you have a similar reaction?

Steve Soter: Well, I did. It felt like a little bit of a watershed moment. I mean, my crypto accounting experience is a little bit dated. But case in point, the accounting really hasn't changed since all the way back when I was doing it. So the fact that after so long, having refused to seems like even consider the issue, you know, the fact that there's an openness, and I think a willingness to do it fairly quickly, at least that was the sense that I got, I think is pretty exciting.

Catherine Tsai: What do you think finally made FASB decide to consider a rule?

Ben Taylor: So fortunately, I had the opportunity to hear Fred Cannon, a member of the FASB, speak at the DC Blockchain Summit last week. There were many disclaimers, of course. For instance, he made it clear that these are his views and not necessarily, it doesn't necessarily reflect the views of the other members of FASB. But after all that, he said that the current accounting rules in his views don't match the economics for certain areas.

Catherine Tsai: You were talking about the mismatch. Could you spell it out for me? What does that mean?

Ben Taylor: Well, I think that's intentionally vague to some extent, but I would expect that means that, you know, the current accounting treatment for bitcoin, for instance, which is a pretty actively traded asset, is it falls under intangibles guidance that are US GAAP, IFRS, and actually most other accounting standards too. And what that means is that we have this, I don't remember exactly the exact number that bitcoin came down to recently, but let's say it was $27,000. So it goes down 27,000, you have to mark it down and never up. And so it could be 100,000 next month. And you could you know, there's active markets where you could get 100,000 for it, let's say even if it's not that, if even if it was just, you know, right now it's at 32,000. You can't mark that up. And that's pretty material to companies like MicroStrategy and other public companies that have this on their balance sheet.

Steve Soter: So I can build on that just a little bit in a real-world example. So my time at Overstock, and I can disclose this because we publicly disclosed it, but we had bitcoin holdings. We were one of the first companies to do that and actually one of the first companies to make SEC disclosures regarding bitcoin. And that was a challenge, is that you would acquire it at some price. You know, back then this is going to sound crazy, but we were like, I think under $1,000 per bitcoin, I think. So you're talking to somebody who did not buy bitcoin. I wish that I did, of course. But, you know, you would buy it at, let's say $1,000 or whatever, and then the price would go up. You could never write that up on your balance sheet. You could only realize that once you had actually sold it. And it actually made for some odd decisions, like, for example, hey, we want to capture these gains to our income statement. And we never did that at Overstock, but there was discussion, "hey, you know, bitcoin has skyrocketed. Maybe let's capture some gains. Well, we can't do that unless we sell it." But then the answer was, well, but we actually think it's going to continue to go up, so maybe we want to hold on to it for a little bit. And so you were having this sort of odd, again, it was very disconnected from the economics. And again, in my experience, that was really frustrating because you saw this asset that was not behaving like an intangible asset, which is the guidance that it was being based on, which created some real challenges as you were trying to think about, you know, what you were going to do with it and what the disposition ultimately was going to be for those assets.

Ben Taylor: Yeah, that makes a lot of sense.

Catherine Tsai: Well, what kinds of questions are you hoping FASB will address?

Ben Taylor: I'm hoping, and I'm actually even more hopeful after hearing Fred speak last week, was that we'll have updated guidance from the FASB to at least record bitcoin at fair value on their --companies to at least record that at fair value on their balance sheets. And maybe anything similar, anything decentralized, not kind of governed by any central organization that has control of the financial interest in it. There's certain ways that I think they can kind of box out the decentralized networks, but maybe they'll just start with bitcoin. And so I think that would be a huge step forward. Like Steve was saying, that is kind of a watershed moment for the industry from a regulatory perspective. Because there hasn't been really anything on the accounting guidance front since it was kind of determined that they fall under intangibles. And then I was going to say, so I think that's kind of low-hanging fruit. That's clearly out of whack. I think anyone that can kind of work through that and go, this doesn't seem right. Some more complicated areas like DeFi, stablecoins, earning yield on them, all the things that come with that. There's a bunch of different activities involved in DeFi right now. These aren't necessarily as material to users of financial statements, which of course is the FASB's purview. So I don't know that those would come up quite as soon.

Steve Soter: Ben, was there any hints in the speech at all -- I suspect that there wasn't but just a question -- were there any hints about like some sort of critical mass that a cryptocurrency might need to have? Like bitcoin is fairly mainstream today. And so even though the price is volatile, you know, you can trade in it. It's readily available, whatever. Were there any references or hints at all to maybe that being a threshold to perhaps some type of new guidance? Or did Fred not even get into that area in his speech?

Ben Taylor: He didn't really get into that. It was really just kind of cut and dry. Is there something that is where the accounting clearly doesn't match the economics for financial statements such that the users of that are going to be thrown off somehow? And I think bitcoin clearly falls kind of on its own there so far. Maybe ethereum could get scoped in. There really wasn't much specified. The specifics weren't talked, about too much. I think they didn't want to go too far forward with what their decision would be, other than just saying that, currently, there is some work to do, essentially. Yep.

Steve Soter: Got it. It reminds me of an emerging cryptocurrency at the time called XCP. I don't know if that's actually even still available, but due to some handshake deal or whatever, you know, Overstock ended up acquiring, I think either like a fourth or a third or like some significant amount of the entire XCP currency that had been issued at the time. And the challenge was we didn't know what to do with it. And if we tried to sell it all at one time, of course, that would completely tank the price. And so we couldn't do that. So every month we would actually just like just trickle and just sell just a little bit at a time before we had finally, you know, gotten rid of the majority of it. And I bring that up because it's just an illustration of that kind of critical mass, right? Like nobody could do that with bitcoin today, or at least I don't think they could. But it is certainly possible with some of these smaller cryptocurrencies where, yeah, you could literally manipulate the price if you had enough of a holding.

Catherine Tsai: Would FASB also be considering any sort of rules for stablecoins.

Ben Taylor: I don't know. It was definitely a hot, hot topic. There was a whole session on stablecoins specifically because of the recent Terra/Luna collapse. I think, yes. You know, I don't think there was any anything super tangible that that's definitely going to happen. But it's clearly something on everyone's mind is the potential issues for these assets growing and then there being more and more reliance on them and then there being this trickle-down effect where, you know, if this was five months from now and Terra Luna had gotten five times as big, thinking about systemic issues there. And actually, that was one thing that the Comptroller of the Currency spoke and a lot of prior speakers were much more pro let's move regulatory regulations forward. This is something that we want to take steps forward with and encourage innovation and all this and pointing out that, you know, if there are systemic issues here, we need to be clear on what those are and be careful about how we move forward with stablecoins specifically.

Catherine Tsai: Yeah. What about NFTs? Do you hope there is regulation around that or guidance around that going forward?

Ben Taylor: Yeah, and I think there will be. Some of this fits into existing guidance. Like if it really is a piece of artwork that's an NFT, wouldn't that fall under the same kind of guidance as artwork? I think sometimes clear cut, sometimes not so much. And then even if it is clear cut, the fact that you can transfer these a lot easier and maybe there's just a lot more transferring, maybe that there's some other considerations that come up there. But I think we will see some NFT-specific guidance eventually. Again, how material that is to users of financial statements, that's unclear right now. So that would be important to figure out first.

Steve Soter: Well, we're going to take a quick pause here for a moment and get to a commercial. We'll be right back.

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Steve Soter: And we're back talking with Ben Taylor, CEO and co-founder of SoftLedger, who's telling us a little bit more about crypto accounting rules that the FASB is expected to propose.

Catherine Tsai: So if we go back to cryptocurrencies, you're mentioning the existing guidance right now is to treat it like an intangible asset. Do you expect FASB to deviate from that at all, and if so, how?

Ben Taylor: Yes. I think that what Fred was referring to, that that might need to be updated. I can only assume that that covers bitcoin only being able to be impaired down. So I would expect that you would be able to record bitcoin at fair value or something like that to reflect movements in the market.

Steve Soter: And to be clear, there are different types of -- so if you think about securities, for example, like stock that a company might hold. There is accounting guidance that lets you treat it differently based on what the intention is. If you're holding it with the intent to sell or you're holding it with the intent to hang on to it for a long time, that might be one other avenue, I think, that the FASB could use in order to distinguish between weird outcomes on your balance sheet based on the volatility of bitcoin and cryptocurrency generally. So I think that might be some other avenue. I don't know that, but I would suspect that that would be at least something that I would consider.

Ben Taylor: Okay. Yeah, interesting point. Yeah, that's to the extent you could have some substance over form concepts here, maybe that would help to be prepared for some other assets that aren't bitcoin that look similar that may not even exist yet.

Steve Soter: Yeah. You know, when we first started holding bitcoin -- again, this was at Overstock -- there was a real question about what the accounting should be. And I won't say this is my claim to fame, but I think we may have written one of the very first technical accounting memos on how to account for bitcoin. I guess I shouldn't disclose the audit firm, but they received it. It went to their national office. I remember they were not convinced with what I thought was a very compelling argument that bitcoin should be treated as a foreign currency. We felt like that would have been a heck of a lot easier and a little more favorable accounting treatment than ultimately where we landed. Incidentally enough, Overstock at the time also had significant precious metals holding as in like gold and silver, and that was actually accounted for in nearly the same way where you wouldn't write it up, but you would write it down. So we were not happy to get that response, actually! That, you know, you could only impair it. You couldn't write it up, which is exactly what we were doing with that gold and silver.

Ben Taylor: It's interesting you bring that up because treating some of these as commodities versus securities was a topic of discussion actually for like a little bit of a jurisdictional kind of debate between the SEC and CFTC, whether it should fall to the CFTC or the SEC. And it seemed like that was an open question and there was some disagreement on that. So yeah, there's still some questions to be answered of, you know, where will this land? And based on the form that this takes, are the right agencies the ones talking about it and owning them.

Steve Soter: And in yet another wrinkle, you have, of course, Gary Gensler, current chair of the SEC, who I think actually taught a class on bitcoin and cryptocurrency and the blockchain or something right before he went to the SEC. And then prior to that, he was actually at the CFTC, that other regulator. So, you know, you could see why he might certainly have some opinions about where they should land. And, you know, what potential role either regulator might play. And it probably depends on the asset, I would imagine, right? Because you could have some tokens that are a little more like securities, right? And that, you know, probably more clearly falls under the purview of the SEC. Whereas I don't maybe bitcoin is a commodity? I mean, it probably isn't, but it could be, right? You know, depending on your interpretation.

Ben Taylor: Yeah. Yeah, exactly. That's exactly right. Yeah. Is if they are different, how do you define that distinction? That's the million-dollar question. I don't think anyone has a clear answer to that. There's lots of opinions, though. Was hearing many of those last week. It was definitely an interesting conference to go to at this time.

Catherine Tsai: Steve, do you still think bitcoin should be treated -- or a cryptocurrency should be treated as foreign currencies?

Steve Soter: Well, not necessarily. But I think it creates a useful model that accountants understand and users of financial statements would understand. And I think that's really the point, is that, you know, you had this new thing come up, this, you know, like, what the heck is a bitcoin? Like, we were literally having these conversations. In fact, as a joke we would send the intern down to be like, "Hey, we need you to go down to the first floor and go count the bitcoin so we know how many we have there." And so I think it was less about, "is foreign currency right?" And more, "hey, what can we take this new thing, this cryptocurrency, and how do we analogize that to some existing accounting model that we could apply," just so that there would be some consistency and some reliability and understanding of the users of financial statements when they were seeing this new thing show up on the balance sheet. So for my part, I actually feel like foreign currency still makes some sense. There's guidance out there about highly volatile currencies like, you know, Venezuelan currency, which I think is still an issue. But it certainly was, you know, back when I was doing this crypto stuff. So there actually are existing models out there that could kind of account for some of the oddities, I guess, of bitcoin and the price fluctuations and so forth. That's probably still as good a model as any. But again, it'll be interesting to see how the FASB takes all of these things into consideration, the securities held for sale or whatever versus a foreign currency with highly volatile characteristics. I don't know. FASB's certainly got a lot to think about, that's for sure.

Catherine Tsai: Any closing thoughts then before we get to our closing question of the day?

Ben Taylor: Well, I was just going to say that was interesting. I hadn't thought about the highly volatile currencies and how those are handled being a potential path forward. That makes a lot of sense. I initially think, maybe, I wonder if there would be some hesitation to even to use those even just for optics around now, are you calling it a currency? And does that, you know, have some implications? But that might yeah -- I could see that guidance being maybe the cleanest and easiest to capture some of these.

Steve Soter: Well, it's funny that you say that, Ben, because that was ultimately, as I recall anyway, that was ultimately their response. Is that the issue that they took with it was that we can't designate something a currency, because once you do that, there's just certain things and certain consequences and implications that kind of fall out of that. And that was like, a step too far that they weren't really willing to adopt. But if you put that to the side for a second, I think you're right. That actually makes for a very kind of neat accounting model that tends to fit crypto.

Ben Taylor: Interesting. I guess sometimes that's not enough.

Steve Soter: Yeah. Well, maybe we'll get some vindication after all these years. Be interesting to see what the FASB does.

Catherine Tsai: I know we're going on a tangent again, but isn't there a country that uses bitcoin for its official currency?

Steve Soter: Is it El Salvador?

Ben Taylor: I think several other countries have jumped on board with that as well. And so that, you know, obviously has some implications that make it a bit trickier. I don't know how widely it's used there. I don't know much about.

Catherine Tsai: You haven't been to El Salvador lately?

Ben Taylor: I have not been to El Salvador lately.

Catherine Tsai: In these COVID times.

Ben Taylor: But yeah, they've made some pretty big pushes into it.

Catherine Tsai: All right. Well, I guess we'll get to our closing question of the day. So similar to FASB, is there anything been that you have low-key declined to do in the last several years that now you're considering saying yes to?

Ben Taylor: Getting a treadmill at home. Yeah, I keep saying that I'll run outside more, but I think having a running machine sitting in my house might guilt me into actually doing so. So, we'll see. I haven't made the decision yet. Space is obviously a consideration, but yeah, that's my big thing that's been on my mind. Really, really exciting, exciting world over.

Steve Soter: If it doesn't work for the running, I mean, that's a great place to, like, hang wet laundry. You know, you run out of closet space, right? I mean, you could even maybe put hangers on it. So it's got more uses than just the running, Ben.

Catherine Tsai: Steve, do you have an answer for this one?

Steve Soter: You know what? Yes. And I'm a little bit sensitive to it because for years -- this is going to make me unpopular with a lot of people. But I'm going to go for it. For years, I declined watching the original Top Gun movie. I'm not a huge Tom Cruise fan, I'll be honest with you, even though I'd like to think that maybe in a different world I might have resembled him somewhat. He and I are both short, so we have that going for us. But I didn't feel right about seeing the new Top Gun movie until I had seen the original Top Gun movie, which I finally said yes to. I did that. And now my wife and I are ready to see the new one, which I suspect we will have seen it by the time this episode goes live. So finally saw Top Gun.

Catherine Tsai: I did see the new one, I think you'll like it.

Steve Soter: Oh yeah. Well, again, I'm also going to be even more unpopular. I was not a big fan of the original, so I'm hoping that the second one was maybe a little bit better. I've seen enough sweaty dudes playing volleyball on the beach. That was probably something I could have avoided, to be totally honest with you.

Ben Taylor: I think, you know that being such a classic, a lot of it's riding on nostalgia from when you saw it before. So if you're waiting till now to see it, I can see it being tough to play catch up there.

Steve Soter: Well, I think you're exactly right. And actually, somebody -- when I had told them that, they're like, well, you're not a child of the '80s. I said oh, I beg to differ. By age and definition, I'm a child of the '80s. But I think you're exactly right. Had I watched it back then, I probably would have had a much different reaction than I did now. So. But if the new one is good as a standalone movie, great. I enjoy a good flick no matter who's in it. So I'm looking forward to it. Catherine, how about you? What have you finally said yes to?

Catherine Tsai: I don't have a good answer for this one, but I guess I have for many years declined to use mustard with my french fries. It's just been ketchup only. I hear, though, mixing your mustard and ketchup is supposed to be good. I have no idea. We'll try it at some point.

Steve Soter: Huh? Now, you know, if instead of the mustard, you swap that out for mayo with a couple of other things, then you would be eating fry sauce, which I come from, you know, the state that invented fry sauce, I think, or so they claim. So if the mustard doesn't do it for you, maybe a little bit of mayo and you could get on the fry sauce train, Catherine. It's not bad.

Catherine Tsai: I'll consider it.

Steve Soter: You'll consider it. You're being polite. You're super grossed out right now.

Catherine Tsai: In the same way that FASB is considering a new rule, I will consider ketchup and mayo. Well, thanks for coming on the show, Ben. It's a pleasure to have you on as always.

Ben Taylor: Thanks. Yeah thanks for having me on.

Steve Soter: Good to chat with you again, Ben.

Ben Taylor: Thank you. This was great.

Steve Soter: All right, Catherine, what do you think? Have I lost all credibility now having disclosed my non-fan status of Tom Cruise?

Catherine Tsai: Do you ever have any credibility with me anyway? Actually, I was hoping we could bring in Off the Books producer Mike, because I'm sure he had thoughts in the booth back there.

Steve Soter: Sounds like he might not be a fan of crypto himself.

Mike Gravagno: Yeah, you guys had to restrain me when Ben was here. And Ben is a much smarter guy than me. I want to say that. I think the conversation was brilliant. Ben is brilliant. I just think I'm sure someday there will be valuable uses for blockchain technology. But with NFTs and cryptocurrency, I think they're disgusting. They're bad for the environment. And NFTs are ugly as hell. It's definitely stupid to be like, I sort of pretend to own this digital art. That's foolishness. And that the crypto, the downsides of it. We were told it would, you know, break open and anybody could own anything. But it's just this pump and dump thing for stock bros and the environmental impacts are bananas. Yeah. I'm sorry. This is me trying to not rant.

Steve Soter: Like, how do you really feel? Well, you know what, though? You bring up some interesting points, and actually, I wonder if maybe at the heart of what you're saying might be why perhaps the FASB has just not wanted to consider this for a long time in general, just sort of dismissing it for maybe some of the same reasons. And who knows, maybe it's gotten to the point where not addressing it in the accounting rules might actually just be adding to the risks that you're talking about.

Mike Gravagno: I think so. I, in my perfect world, it would just not exist. But I think FASB has to come in and lay down some ground rules to make it less wild. Wild west doesn't always mean good things people, and I think we need some actual structure.

Catherine Tsai: This is fodder for more conversations to come.

Steve Soter: Yeah, sounds like it for sure. Well, Mike, we appreciate you weighing in from the booth there and on the spot. Thank you. Big thanks to you and big thanks to Ben Taylor from SoftLedger for joining us.

Catherine Tsai: And big thanks to you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter and Mike Gravagno. And this has been Off the Books presented by Workiva. Please subscribe, leave a podcast review, tell your buddies if you liked the show, and feel free to drop us a line at offthebooks@workiva.com. Surf's up and we'll see you on the next wave.

Off the Books season 3

Duration

29 minutes

Hosts

Steve Soter, Catherine Tsai, Ben Taylor

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