The rise of cryptocurrencies is rapidly transforming the role of the CFO. As digital assets integrate into the mainstream financial ecosystem, CFOs must adapt to emerging challenges. How? By merging traditional accounting systems with new blockchain-based software to track crypto transactions. With sizable volatile assets on the balance sheet, forecasting and modeling have become far more complex. And an uncertain regulatory environment around cryptocurrency also demands careful monitoring to remain compliant. The CFO’s job is expanding from financial stewardship to a strategist navigating uncharted territory.
To harness the potential of crypto while mitigating risk, CFOs must stay ahead of the curve on how these technologies are converging with and transforming modern finance. Those who effectively balance crypto’s benefits and pitfalls will help their companies gain a competitive edge and create new opportunities.
Managing Digital Assets and Mitigating Risks
Many organizations are exploring blockchain initiatives, ranging from cryptocurrency treasury reserves to tokenization of assets and operations. Managing these digital assets introduces new demands for CFOs.
For enterprises adopting cryptocurrency, securing assets is paramount. They must safeguard private keys that control wallets, doing so through a combination of technical solutions and robust internal controls. Multi-signature wallets provide enhanced security by requiring multiple approvals to authorize transactions, which prevents unilateral control over assets. Their infrastructure uses secret sharing schemes to divide private keys into segments held by separate servers, allowing secure risk controls for the enterprise.
Custodial services offer convenience and regulatory oversight, but some in the crypto community argue this undermines the principle of self-custody. Enterprise-grade custodians including Anchorage, BitGo, and Coinbase use elaborate security protocols such as threshold signatures to manage and release funds. They also carry insurance against theft or loss of assets.
Another concern is tax and accounting treatment of digital assets. The variable nature of cryptocurrencies complicates valuation and revenue recognition. However, standards are emerging to guide accounting practices, and organizations like the IMA have published research on accounting for crypto assets. While questions remain regarding the best way to apply fair value principles to volatile cryptocurrencies, standards are coalescing around the use of verifiable exchange prices to value holdings. For example, companies such as Crypto Compare source pricing from a large amount of centralized and decentralized exchanges to arrive at market pricing for new digital assets that might have low liquidity on any single platform.
Overall, prudent security and financial controls are essential as enterprises navigate the challenges of crypto asset management. Leveraging leading custodial and wallet providers can help overcome technical hurdles, while updated accounting policies bring consistency to financial reporting.
The Future of Treasury Management
Cryptocurrencies are here to stay, and future-focused CFOs must prepare for exponential growth. Larry Fink, chairman and CEO of BlackRock, has called a recent Bitcoin rally a “flight to quality.” Treasury departments will continue to look to Bitcoin and other digital assets as an important solution to their portfolio in an environment of high interest. As the technology infrastructure matures, treasury teams will need to manage and account for crypto alongside traditional assets.
From custody to payments, specialized digital asset-focused partners can provide the tools and services required. While crypto remains volatile, treasurers can implement strategic allocations as they gain expertise. Scenario planning will allow organizations to adapt as the landscape evolves and leads to outsized opportunities where technical insight and correct tooling can provide significantly greater risk-adjusted returns for the treasury.
Training programs and culture initiatives should also foster crypto readiness. Employees native to digital assets can provide valuable insights where traditional experience can go only as far as the individual is willing to learn and use new technology. Ultimately, organizations that embrace new paradigms will gain strategic advantage.
Integrating cryptocurrencies and digital assets requires specialized tools and systems tailored to the unique properties of these technologies. CFOs must evaluate solutions enabling secure custody, transaction processing, regulatory compliance, and data analytics.
Leading providers offer modular enterprise suites supporting asset issuance, trading, payments, and more. Such platforms provide hardware security modules, multi-signature wallets, policy enforcement, and role-based access controls.
Still, vulnerabilities persist. The decentralized nature of cryptocurrencies presents challenges for recovery from exploits or user error. Enterprises need robust protocols like multi-party computation to secure private keys. As with any emerging technology, rigorous evaluation of security architecture and third-party audits is essential.
Navigating the Regulatory Landscape
Cryptocurrency regulation remains highly complex and uncertain, requiring close monitoring and expert guidance. Governance varies significantly across jurisdictions, and strategies tailored to unique regulatory environments are critical.
In the United States, oversight is fragmented across agencies including the U.S. Securities & Exchange Commission, the Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and state regulators. Multiple efforts to establish clearer frameworks are underway, including recent stablecoin reports from the President's Working Group. The European Union’s Markets in Crypto-Assets Regulation proposal also promises more coordinated regulation.
Money services business licensing, fund registration, Know Your Customer/Anti-Money Laundering compliance, and tax reporting represent key considerations. CFOs must track evolving guidance and enforce policies to ensure compliance.
The Promise and Peril of DeFi
Decentralized finance (DeFi) aims to replicate traditional financial services using cryptocurrencies and blockchain technology. From lending to derivatives trading, DeFi platforms allow peer-to-peer transactions without intermediaries.
The total value locked in DeFi fluctuates with the value of large underlying assets such as Bitcoin synthetics, Ethereum, and Stablecoins.
Source: CoinDCX
Source: DeFiLlama
Proponents say DeFi increases access, efficiency, and transparency in financial services. However, these benefits come with substantial risks. Regulatory uncertainty is a major challenge. Policymakers are struggling to adapt existing frameworks to adequately govern rapidly evolving technologies such as stablecoins and decentralized autonomous organizations (DAOs). Complex smart contract bugs and security vulnerabilities have led to major exploits.
As with any nascent technology, volatility and scams are unfortunate realities in the decentralized space. CFOs must balance the rewards and risks of DeFi as they develop strategies tailored to their enterprise risk appetite.
How DeFi is Changing the Landscape
The leading decentralized exchange (DEX) Uniswap recorded an all-time high trading volume of over $100 billion in October 2023.
DeFi platforms are transforming traditional banking and financial services:
- Borrowing and Lending. DeFi lending platforms including Aave and Compound allow crypto-collateralized loans with algorithmically determined interest rates.
- Trading and Derivatives. Decentralized exchanges such as Uniswap and derivatives platforms including Synthetix enable direct peer-to-peer trading.
- Payments. Stablecoin payment apps provide efficient cross-border transfers, lowering the cost of B2B and cross-border payments.
- Asset Management. Index funds and robo-advisors automate portfolio management.
DeFi shows potential to increase access and efficiency, but currently remains a fraction of traditional finance.
Source: CoinDesk
As the technology matures, DeFi promises to transform elements of traditional finance. But oversight and security improvements remain imperative to realize this potential.
Cryptocurrency Accounting and Reporting Considerations
The rise of cryptocurrencies is forcing changes in financial accounting and reporting. Handling the unique attributes of digital assets requires new frameworks and processes. CFOs must ensure their finance teams are appropriately equipped to account for crypto transactions. But several challenges exist. The lack of consistency in accounting for cryptocurrencies leads to complexity in financial statements. The intangible nature of crypto assets makes valuation difficult. Volatility also impacts reporting because no common standards exist for measuring and recording gains or losses.
New guidance is emerging to clarify accounting treatment. The Financial Accounting Standards Board provided guidance on exchange transactions and indefinite-lived intangible assets. The International Accounting Standards Board is also developing global guidance.
Beyond accounting, internal controls are critical. Cryptocurrency introduces new fraud and cyber risks that demand strong processes. Privileged access management, active monitoring, and audit trails for asset movements should be implemented. External reporting also requires transparency as regulatory attention grows.
To prepare their teams, CFOs should lead training on crypto accounting and expanded internal controls. Hiring financial talent with digital asset expertise provides an advantage, and as standards develop, staying abreast of the latest guidance is essential.
Accounting and Auditing Considerations
Proper accounting and auditing procedures are essential for integrating cryptocurrencies into enterprise finance. Cryptocurrency accounting standards continue to evolve but more recently generally follow fair value principles. Gains or losses from cryptocurrency holdings should flow through current earnings, as they would for trading securities.
Auditing crypto asset transactions requires verifying ownership and existence of holdings. Auditors can examine public blockchain records and private keys as evidence of asset validity and ownership. Custodial services also provide audit confirmations to verify client holdings.
Third-party validation provides additional assurance of reserves for stablecoin issuers. More tools are becoming available as auditors also learn to navigate the complexities included with the vast number of transactions across multiple blockchains. These are all new skill sets acquired by niche teams at larger accounting firms. It’s important for a CFO to choose a team that has experience in similar engagements, given the amount of new learnings and practices that must be applied.
Auditing Digital Assets: Lessons from Early and Big Failures
The collapses of major crypto firms such as FTX and Celsius Network highlight the risks of inadequate auditing around digital assets. While blockchain transactions are immutable and transparent, validating proper controls and ownership of crypto still challenges auditors. Furthermore, when leaders mask or avoid proper ownership of finance and accounting functions, these failures can be conflated with the industry itself.
Traditional audits rely on processes like confirmation of bank balances and reconciliations of subsidiary ledgers to general ledgers. However, the decentralized nature of cryptocurrencies makes these methods ineffective. Auditors must employ new tools and skills to verify crypto transactions, holdings, valuations, and reporting.
Despite red flags, prior audits found no material weaknesses in FTX's financial reporting processes and made no mention of the lack of controls (and of a CFO)! However, confirmation methods could not reliably validate account balances on the blockchain. The problems leading to FTX’s failures were assets being held by FTX and used without proper controls across affiliates.
The Celsius Network collapse further demonstrated that volatility and liquidity risks weren’t adequately assessed. Client assets were unsustainably overleveraged, and without proper crypto-native auditing, such issues went undetected.
Enterprises holding significant digital assets must prepare for heightened scrutiny. Audit committees should vet firms on crypto experience and expertise with blockchain analytics tools. Frequent interim audits focusing on crypto wallets and holdings can supplement annual audits.
Security around private keys is critical, as improper access enables theft and manipulation of assets. Auditors must review and test controls preventing unauthorized transactions. Custody protocols should be evaluated, particularly for assets stored offline.
With crypto valuations, volatility and liquidity assumptions must be checked. Auditors should assess models and ensure current market data inputs. Though standards are still evolving, proactive enterprises can engage auditors effectively to validate their crypto processes and holdings. With the right focus and tools, major issues can be detected before failure occurs.
Broader Impacts: Crypto, ESG, and Organization Strategy
Integrating cryptocurrencies enables strategic impact beyond financials. Digital assets provide new mechanisms for aligning with values and achieving ESG goals. However, sustainability considerations around crypto's energy use continue to raise concerns.
Crypto donations expand giving options and allow traceable impact tracking. Non-fungible tokens (NFTs) also create new models for digital philanthropy and community engagement.
On the environmental front, crypto's energy footprint poses challenges. As proof-of-work energy consumption continues with networks such as Bitcoin, evaluating networks, mining locations, etc., and more can impact an organization’s environmental, social, and governance footprint. Transitions to less energy-intensive consensus models like proof-of-stake with networks like Ethereum continue to be proven out as an alternative.
CFOs should help craft a strategic crypto approach aligned with corporate values. They can provide oversight on transparency for donation flows and NFT projects. Providing guidance on mitigating environmental impact is also key.
The CFO's Role in Crypto Adoption
Finance chiefs have a crucial part to play as cryptocurrency permeates the enterprise. Their stewardship informs strategy, ensures diligent risk management, and prepares the organization for coming disruption.
As digital assets reshape finance, CFOs face a pivotal moment. On one hand, integrating digital assets adds complexity to systems, forecasting, and compliance. The temptation might be to resist these new burdens. However, the CFOs who embrace this technology and skillfully guide its adoption will unlock strategic value. Enabling crypto capabilities across treasury, accounts receivable and payable, and other functions can reduce costs through advancing technologies such as blockchain-based B2B payments. Early tech leadership can also attract key customers and partners seeking visionary, forward-thinking partners.
Proactive CFOs can position their organizations competitively in the new crypto-integrated financial landscape. This requires looking beyond immediate growing pains and taking a broad view of crypto's benefits across operations, strategy, and finance. The CFOs who effectively balance pragmatism with openness to innovation will thrive in this evolving era.
