Cryptocurrency (e.g. Bitcoin, Dogecoin) has become a hot-button issue in the financial and technology industries as of late. It is a completely decentralized form of digital cash. Unlike, say, cash that is sent around PayPal, Cash.me, and other money service accounts, you can't physically withdraw a Bitcoin or other form of cryptocurrency.
There's no server or central authority like a mint. Unlike DigiCash and similar failed digital cash movements of the past, cryptocurrency is totally peer-to-peer (to prevent double spending) and not a trust-based system. Each peer in the network has a list of transactions to ensure that each one is valid and not an attempt to double spend. Unlike a transaction that goes wrong with your bank, credit card, PayPal, or other form of cash that has a central authority involved in checking the transactions, if something is off with a cryptocurrency balance then the entire system could come crashing down if the parties involved in the transaction can't reach consensus-- yet this hasn't transpired in spite of there being no central authority.
In an era of sophisticated hackers easily gaining access to hundreds of thousands of peoples' sensitive financial data, people have been looking to alternatives to parking their assets in a bank or using a credit card to make online purchases. They are looking to cryptocurrency for solutions, particularly those with enhanced privacy features such as Dash and Monero. But even without these additional safeguards that both types offer, the "crypto" part comes from math-- not trust-- securing the location of your Bitcoins, Litecoin, Monero, or other cryptocurrency of choice. It is much easier to get into a bank account following a transaction trail or using other PII (personally-identifiable information) than it is to find the addresses of cryptocurrencies.
Cryptocurrency has taken off to the point that "miners" have taken the place of day traders, and there are actual exchange for cryptocurrency just like stock exchanges.
Two major events recently took place in the cryptocurrency world: both a boom and a crash. Dubbed "The Slippening", the Chinese government is preparing to ban cryptocurrency exchanges after Bitcoin and Ethereum completely free-fell on September 14, 2017. The Shanghai-based BTCC crypto-exchange stated it will suspend trading activities at the end of September and other exchanges began to follow suit, resulting in a $25 billion decline in cryptocurrency value. The price of Bitcoins fell below $3,300, eventually going up to $3,493 post-recovery then back over $3,500 on non-Chinese exchanges. While alarming for the Chinese markets, cryptocurrency is becoming a major going concern for other countries. This could signal further changes and regulations to come in other countries that may be quicker to enact bans, suspensions, or strict regulation of cryptocurrencies.
In response to the The Slippening, cryptocurrency trade volume reached a record high of $11 billion less than a month after the last record high of $10.5 billion on August 19, 2017. As Bitcoin retains the highest market share, it topped the charts at $4.2 billion in trade volume with Ethereum posting $1.9 billion and Litecoin $1.5 billion. The boom resulted in 10 different cryptocurrencies posting over $100 billion in trade volume.
Even in spite of the downturn, these are no trifling amounts of trade volume. In addition to regulatory challenges, there are also other concerns that cryptocurrencies bring to the table.
A growing number of retailers are now accepting cryptocurrencies, even the local corner store. Major retailers like Overstock.com have partnered with ShapeShift to give their customers more options at checkout like Bitcoin and Ethereum. Overstock.com estimates they make $50,000 in Bitcoin sales per week, and the introduction of more cryptocurrencies is making more retailers consider accepting them although Bitcoins themselves are only accepted at a tiny number of large online retailers. Accounting for cryptocurrency is going to become a major concern for small and large retailers alike even if the transaction volume is relatively small. GIven that this area is a relatively wild yonder as far as both GAAP and iFRS are concerned, retailers receiving payments in cryptocurrency is just one piece of the puzzle. What about retailers and other businesses that also make payments using Bitcoin and other cryptocurrencies? Tax compliance becomes another major hurdle for payments sent and received this way due to the market fluctuation elements not present in day-to-day cash handling.
Privacy concerns and buying and selling aren't the only transactions representing recordkeeping and regulatory challenges. Transaction costs alone are another reason that people have been looking to cryptocurrency. Because one also does not need permission to use and send cryptocurrencies, they are presenting viable solutions for people who are outside the mainstream financial system. This would encompass the 1 in 12 Americans who are underbanked, or about 2.5 billion people globally. Remitting money around the world can have a massive transaction cost with is dramatically slashed using cryptocurrency: a $200 transfer to the Phillippines would average $12 through traditional channels, but "pennies" through Bitcoin. Depending on the amount being sent and the reason for the transfer, this can present challenges in not just accounting for cryptocurrency but also in the reach of regulatory bodies. For people who have no choice but to stay underbanked, Bitcoin and the like can help them participate in society and without the risks and fees that come with physical checks and cash.
However, despite the opportunities that cryptocurrency presents, there are still significant obstacles. Starting and maintaining a crypto wallet isn't as easy as a traditional centralized digital wallet like PayPal or Square. The volatility is driven partially by market forces but also by the technology itself. Bitcoin was forked to split into both Bitcoin and Bitcoin Cash, which are now two different cryptocurrencies. This was intended to facilitate transaction processing by creating larger blocks in the blockchain (the digital ledger in which cryptocurrency transactions are recorded both publicly and chronologically.)
The safety features also aren't thoroughly ensured, either: 30,000 accounts were compromised in a South Korean exchange over the summer and they lacked the kind of protections that a federal regulation like the FDIC promises for up to $100,000 per depositor.
As developments ensue with cryptocurrency, security measures, regulations, and their adoption by more services, retailers, and consumers, there will be increased participation by the financial professional community in how to handle these transactions. The inherent volatility makes for vast challenges that cash alone does not present, and in spite of the protection by math and peer oversight, these transactions aren't completely breach-proof. Accounting for cryptocurrency remains largely a "wild west" phenomenon at the moment that is facing more widespread adoption quicker than governing and oversight bodies can react.
