3 Ways Web3 May Impact Accounting (and How to Prepare)
Anna Masker, an Entrepreneurs’ Organization (EO) member in New York, is a founding partner of ProfitLinq, a scalable outsourced finance and accounting solution for fast-growing crypto and blockchain companies. We asked Masker, a member of the Accounting Blockchain Coalition, how the decentralization of banking will impact the accounting industry. Here’s what she shared:
Seldom does a person use the words “accountant” and “innovation” in the same sentence. However, with the evolution of Web 3.0, accounting firms must adapt to the innovations coming with blockchain technology or risk getting left behind.
What is Web 3.0?
Web 3.0 (also referred to as Web3) refers to the evolution of decentralized, blockchain-based applications that bring trade and commerce to a new level. Blockchain, simply put, is a distributed ledger technology that provides an immutable record of transactions between parties. Once a transaction is cryptographically recorded to a blockchain, the transaction cannot be altered, modified, or removed. Copies of the ledger are stored among many computers across the world, enhancing trust and providing transparency to the transactions on the ledger.
Web 3.0 decentralizes information storage but also allows peer-to-peer transactions through programming of “smart” contracts, which can transfer money, rights, and property between parties very efficiently. The evolution of smart contracts eliminates many of the middlemen–like banks–that facilitate transactions between parties. As a result, an entire financial system exists outside of the current traditional banking system. In this blockchain-based ecosystem, individuals and businesses are transacting among themselves, buying, borrowing, lending, and investing without needing to use a bank.
In addition to the evolution of smart contracts, a new class of digital assets has evolved in Web3, including cryptocurrencies and non-fungible tokens (NFTs). The underlying blockchain technology has allowed these digital assets to take on many different use cases, from governing decentralized organizations to payments, investments, or currency and collectibles in virtual reality metaverses.
How Web 3.0 Impacts the Accounting Industry
For accountants who have been in the industry a long time, Web 3.0 innovations may seem like something out of a sci-fi movie. Web 3.0 applications generally do not use traditional banking “rails” to facilitate transactions. Accountants may find this industry confusing because digital assets are stored in wallets and exchanges, not bank accounts. Trade and transactions flow quickly, are powered by artificial intelligence, and use machine learning. In other words, the industry moves quickly and evolves almost daily. That means accounting firms need to evolve as well.
Here are three areas where accounting must evolve to keep up with industry changes.
Master New Crypto Accounting Software
Because many Web 3.0 transactions happen outside of the traditional banking system, accounting firms need new tools. Traditional accounting software used by firms from startups to large enterprise systems seldom has the capability to handle digital asset accounting with the precision that is required.
Because digital assets are generally treated as intangible assets, the cost basis of each token must be tracked as well as the price when they are earned, sold, or traded. This detail requires data to be pulled from many places and the proper tax treatment applied to each transaction. So accountants must learn to use the new software tools coming to market such as Bitwave, Cryptio, Gilded, Legible, and Lukka. Each of these software programs has unique strengths and abilities to handle the many different industry verticals within crypto. Some are better with crypto bookkeeping; others are stronger with tax. In any case, understanding these new tools is critical to serving this market.
Navigate Lagging Regulations and Tax Guidance
With the speed at which innovations are coming in Web3, tax and legal regulations are lagging far behind. New digital asset types are evolving every day and are being used in ways that don’t fit nicely into existing tax and regulatory frameworks. Accounting firms need to stay on top of the latest developments and court cases to understand the risk and regulations that may impact their clients.
Attract Scarce Crypto Accounting Talent
One of the biggest impacts of Web 3.0 on the accounting industry will be the race for talent. Most accounting firms already feel the pinch of the tight labor market; however, in crypto, it is even harder to find experienced crypto accountants. Developing expertise in crypto accounting, auditing and tax is often a learn-by-doing exercise. Accounting firms need to develop a strategy to either build the expertise in-house or aggressively recruit for this scarce talent. Not only does Web 3.0 require crypto accountants to know the tax and legal regulations, but it also requires an understanding of the unique infrastructure, ecosystem, and language of the industry, all of which takes time to learn.
As Web 3.0 continues to evolve, it is important that accounting firms adapt to this new era of the digital economy. Despite the challenges of limited tax and regulatory guidance and the need for new talent and tools, accounting firms must start putting plans in place to participate in Web 3.0. Between individual investors getting into crypto and the explosion of well-funded startups in the space, accounting firms that aren’t planning for Web 3.0 and the impact on the industry run the risk of becoming obsolete.
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