Celsius had ‘insufficient’ accounting and operational controls, says examiner

November 21, 2022 Coin Telegraph

accounting

The examiner revealed that Celsius’ digital assets in its customer’s Custody wallets account officially became underfunded on Jun. 11.

The independent examiner in crypto lender Celsius’ bankruptcy case has alleged that the company failed to set up “sufficient” accounting and operational controls in its handling of customer funds.

In an interim report released on Nov. 19, examiner Shoba Pillay made a number of stark observations in her court-appointed investigation into the bankrupt cryptocurrency lending platform.

One of the main revelations in Pillay’s report was that Celsius’ “Custody” program was launched “without sufficient accounting and operational controls or technical infrastructure,” which allowed shortfalls in Custody wallets to be funded from its other holdings.

“[...] no effort was made to segregate or separately identify any assets associated with the Withhold accounts, which were commingled in the Main wallets.”

When it was launched on Apr. 15, Celsius’ Custody program allowed users to transfer, swap and use coins as loan collateral. It was introduced after the firm was ordered by the New Jersey security regulators to create a product that was distinguished from Celsius’ “Earn” product, which receives rewards.

This co-mingling of wallets means that there is now uncertainty on which assets belonged to the customer at the time of the bankruptcy filing, said Pillay, noting:

“As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.”

The interim report has also shed light on what ultimately forced the lending platform to halt withdrawals on Jun. 12.

Pillay said the breaking point came around on Jun. 11, when customers’ Custody wallets became underfunded. By Jun. 24, this fell a further 24% to $50.5 million in underfunding.

Celsius’ Surplus and Deficit of Digital Assets in Custody Wallets. Source: U.S. Bankruptcy Court.

The revelation comes as a filing with the New York-based bankruptcy court last week states that Celsius customers must file claims against Celsius by Jan. 3. 2023 in order to be eligible for distributions from the case.

However, customers who agree with Celsius’s scheduling of their claims do not need to submit proof of claim, according to a Nov. 20 Twitter post from Celsius.

Pillay said that Celsius’ Custody and Withdrawal programs were created on short notice following “intense regulatory pressure” from New Jersey’s Bureau of Securities, who started an investigation into whether Celsius’ “Earn” accounts constituted securities pursuant to U.S. securities laws in mid-2021.

Other accounting insufficiencies highlighted in the report include a revelation that Celsius, founded in 2017 by Alex Mashinsky and Daniel Leon, didn’t start tracking its balance sheet until after this confrontation with regulators in May. 2021, which it then used Google Sheets.

The collapse of the Terra ecosystem was one of the main factors that led to Celsius’ financial troubles in May. 2022, which saw its native coin, Luna Classic (LUNC), formerly LUNA, and the network’s algorithmic stablecoin TerraClassicUSD, USTC — previously TerraUSD (UST) — fall north of 98% in value.

Celsius also stated on Nov. 20 that its next court date is scheduled for Dec. 5, where they plan on advancing discussions around its Custody and Withhold accounts, among other matters.

Russia’s Central Bank report examines crypto’s place in the financial system

November 8, 2022 Coin Telegraph

accounting

Russia's Central Bank has released a report on digital assets which looks at how the technology could be integrated into its traditional financial system.

The Central Bank of Russia (CBR) is looking at ways to integrate crypto assets and blockchain technology into its local financial system amid a pile-on of global financial sanctions.

In a Telegram post by the CBR on Nov. 7, the central bank shared a public consultation report titled "Digital Assets in Russian Federation."

It considers how the sanction-hit state may possibly open up its domestic market to foreign issuers of digital assets — particularly those from “friendly countries.”

Other areas of focus in the report are digital asset regulation, retail investor protections, digital property rights related to smart contracts and tokenization, as well as reformed accounting and taxation proposals.

The CBR stated that it strongly supports the “further development of digital technologies” provided they don’t create “uncontrollable” financial or cybersecurity risks for consumers.

Despite the nascency of blockchain technology, CBR said the same regulatory rules concerning the issuance and circulation of traditional financial instruments should also extend to digital assets.

The CBR said regulation over the short term should focus on protecting investor rights, strengthen rules for admitting a digital asset into circulation, ensuring the issuer is accredited and ensuring the issuer discloses all relevant information to investors.

The Central Bank's message on Telegram, originally written in Russian, said while the legal framework for digital assets has been created, improved regulation is required for its continued development.

“Russia has created the necessary legal framework for the issuance and circulation of digital assets [...] But so far the market is at the initial stage of its development [...] and is many times inferior to the market of traditional financial instruments. Its further development requires improved regulation.”

As for smart contract regulation, the central bank acknowledged that a legislative framework was already in effect — however, it proposes that Russian-created smart contracts be independently audited before being deployed.

CBR was also positive about the potential for tokenized off-chain assets. However, the bank noted that legislation would need to be put in place to ensure a “legal connection” exists between the token holder and the token itself.

The report comes as the Russian Ministry of Finance recently approved the use of cryptocurrencies as a cross-border payment method by Russian residents on Sept. 22.

However, the CBR’s 33-page report made no reference to the increase in sanctions that have been imposed on Russia and the crippling effect it has had on its economy — nor did it discuss the Russia-Ukraine War that is currently taking place in Ukraine.

It however mentions a separate report it is working on, which focuses on Russia’s new central bank digital currency (CBDC) — the digital ruble —which is expected to be piloted in early 2023.

In Aug. 2022, The CBR stated that they plan on rolling out the digital ruble to all Russian-based banks in 2024.

Crypto notches a win among professional accountants

November 7, 2022 Coin Telegraph

accounting

The Financial Accounting Standards Board made a change in October to help public companies that hold cryptocurrencies on their balance sheets.

In his regular column, J.W. Verret, a law professor, attorney, CPA, and head of the Crypto Freedom Lab covers law and regulation of cryptocurrency with a focus on decentralized finance (DeFi) and financial privacy.

Institutional adoption is an exciting yet frustrating topic in crypto. The true modern-day crypto inheritors of the 90s cypherpunk legacy have a vision for crypto as human empowerment through decentralization. That vision includes breaking down the intermediaries that charge rents and threaten human freedom and privacy. On the other hand, Crypto Twitter becomes abuzz when a large financial institution makes new moves into crypto.

Dogecoin (DOGE) mooned on the hopes that Elon Musk would use Twitter to help the cryptocurrency’s adoption. The cognitive dissonance extends to the institutions themselves, as banks start crypto projects without considering how a crypto payment system built on the Bitcoin Lightning Network or an Ethereum layer 2 is intended to make that very bank obsolete.

Those broader philosophical questions aside, the United States-based Financial Accounting Standards Board, or FASB, instituted a change to accounting standards in October that will help public companies hold digital assets on their balance sheet. For now, that’s good for both institutions and crypto.

The old method of accounting for crypto on company books was to account for it as software. It went on the balance sheet at its historical cost and then was written down as a value impairment on every price drop (but not written up again when prices went up). This was a deterrent to public company holdings for anyone but the die-hard Michael Saylors of the world. It’s hard to hold an asset that might remain recorded on your books at the bottomed-out price of the last bear market.

The new rules take a more reasonable approach and implement the same fair value accounting rules that apply to company holdings of publicly traded stock. Crypto covered by the rule will simply be valued at the publicly listed price.

This shouldn’t be the end of accounting standard deliberation over crypto, however, and there are still many questions left to consider. For one, stablecoins backed by other assets are not included in the new accounting methodology.

Many public companies that are willing to accept crypto from customers do so to humor the customer and immediately convert that crypto into fiat dollars. That may not always be the case, and if companies start using crypto as currency themselves, then inclusion in some kind of new balance sheet quasi-case or digital cash category would be appropriate.

Another thing to consider is the differences in asset-backed stablecoins. USD Coin (USDC) is basically just a cash equivalent and would readily fit the standard cash equivalent category in generally accepted accounting principles, or GAAP. Tether (USDT) is a closer case and was historically backed by riskier commercial paper, though that is changing. Maker’s Dai (DAI) is a very different form of stablecoin, partially backed by USDC and partially by other cryptocurrencies. Dai seems like it would need a novel quasi-cash or quasi-currency category.

And what about cryptocurrencies such as Bitcoin (BTC) or Ether (ETH) that a company holds for the purposes of using it to pay for things, like cash, and not for investment purposes? Will Bitcoin used as a means of payment be accounted for in a new quasi-currency category, or will it remain in an investment category despite its partial payment use case? While it is designed for payments, it is highly volatile, unlike stablecoins.

Fair valuation methods will be relatively straightforward to apply to liquid, highly traded currencies like Bitcoin and Ether, which is most of what companies are holding. But as companies start holding and using other types of cryptocurrencies, there will be a wealth of questions to consider.

For those digital assets not in actively traded markets, it will be a challenge to apply classic financial valuation models to their valuation. Existing financial valuation methods for assets like stock in public companies may not entirely carry over to cryptocurrencies because of the unique design of the asset class.

The FASB should be saluted for its thoughtful adaption of accounting principles to this new technology, an approach the Securities and Exchange Commission and other financial regulators might learn from. The FASB hired crypto-native experts and adapted their rules to the reality of this new technology in a short period of time, ensuring that in the crypto revolution, GAAP is going to make it.

Many questions remain in GAAP accounting for crypto. Crypto natives will need to continue to develop their own accounting methods once we decentralize finance. For now, it’s a helpful change to encourage institutional crypto holding.

J.W. Verret is an associate professor at the George Mason Law School. He is a practicing crypto forensic accountant and also practices securities law at Lawrence Law LLC. He is a member of the Financial Accounting Standards Board’s Advisory Council and a former member of the SEC Investor Advisory Committee. He also leads the Crypto Freedom Lab, a think tank fighting for policy change to preserve freedom and privacy for crypto developers and users.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Portfolio in the red? How tax-loss harvesting can help stem the pain

June 17, 2022 Coin Telegraph

accounting

“If you've made a sale during the tax year, and you've sold at a loss, there's basically a benefit there,” says Koinly’s head of tax.

Crypto investors — particularly those that bought in toward the top of the market in 2021 — may be able to find some salvation through a tax-saving strategy called “loss harvesting” according to Koinly’s head of tax.

Koinly is one of the most widely-used crypto tax accounting firms online. Head of tax Danny Talwar told Cointelegraph that while most retail investors are aware of their obligation to pay capital gain taxes (CGT) when they make profits, many are unaware that the opposite holds true and that losses can be used to reduce their overall tax bill by offsetting capital gains elsewhere.

“Most people are familiar with the concept of tax on gains [...] But what they're not doing is realizing that they can recognize that loss on their tax return to then offset against gains.”

Loss harvesting

Loss harvesting, also known as tax-loss harvesting or tax-loss selling is an investment strategy where investors either sell, swap, spend or even gift an asset that has fallen into the red — also known as making a “disposal” — allowing them to “realize a loss.” Investors typically do it in the final weeks of the tax year — which in Australia is right now. Talwar notes the strategy works in many jurisdictions with similar CGT laws, including the US.

“Countries like the U.K., U.S. Canada, follow very similar capital gains tax regimes to Australia or have a kind of loss harvesting,” he said.

The concept is also embraced by traditional investors in stocks, bonds, and other financial instruments. In the crypto world, a loss can be realized by converting it to fiat, or just trading for another crypto token on the exchange.

Talwar believes that the surge of new crypto investors over the last few years will likely have produced quite a number of loss-making portfolios given the current bear market.

“A lot of crypto investors got into the market around 2020 and 2021 [...] what that means is the majority of these people are actually going to be sitting on losses, so their portfolios are in the red.”

Will it work?

Talwar noted there are specific nuances in each country’s tax regime such as the treatment of “wash-sales” which could impact an investor’s ability to benefit from tax-loss harvesting, and suggested that investors reach out to their accountants to see how to best execute this strategy.

“A wash sale basically means you're selling the same asset and reacquiring it in the same space of time, just to recognize a loss for your tax return.”

This is illegal in some countries or the tax authority could deny the claimant from realizing a tax loss.

Koinly has published guidance explaining how the rules regarding wash sales can differ from country to country.

As a general rule, Talwar suggests that anyone that has a portfolio in the red should be thinking about loss-harvesting.

“The more relevant point is if you've made a sale during the tax year, and you've sold at a loss, there's basically a benefit there that people might miss out on if they don't put it in their tax return.”

One “extreme exception” to the case would be if an investor’s portfolio only contains loss-making crypto and nothing else. In that case, they won’t have any gains to offset.

“They should talk to their accountant, do they have other assets that they can offset a lot against? You know, there's no point recognizing a loss if crypto is your only investment, you have 99.8% of your savings in the bank and you're never going to invest again.”

Tax authorities playing catch up

Talwar believes that while global tax authorities have made huge strides over the last three years to keep up with the rapidly evolving crypto industry, there’s still a lot to catch up on as more retail investors pile into the market and crypto accessibility continues to rise.

“Three years ago, it was rare for a tax authority to actually have some type of guidance on crypto out there. And the crypto space three years ago is a completely different beast from what it is now. It's become a lot easier to buy and sell crypto for everyday investors.”

However, Talwar noted that “not many” tax authorities have yet released guidance on how investors can record and report the use of decentralized finance (DeFi) protocols despite it gaining strong adoption in 2020.

“The UK is probably leading the way in some respects because they've just released guidance on decentralized finance. Not many tax authorities have released guidance on DeFi.”

Bitcoin a Starting Point for Developing Central Bank Digital Currency, Says Big Four Firm Deloitte

March 21, 2022 The Daily Hodl

Our open letter to the Financial Accounting Standards Board: “We believe there is a pervasive need…

September 23, 2021 Coinbase

accounting

Our open letter to the Financial Accounting Standards Board: “We believe there is a pervasive need to improve the accounting for crypto assets”

Tl:Dr: Coinbase is actively seeking clarity around crypto accounting standards. Recently, we shared our thoughts with a key industry body, the Financial Accounting Standards Board.

On June 24 2021, the Financial Accounting Standards Board (FASB) issued an invitation to comment, seeking feedback about future accounting standards to address topics that are of the highest priority to investors, businesses and other stakeholders. As a leader in the crypto space with more than 68 million retail customers and 9,000 institutional clients, we saw it as both a privilege and responsibility for us to provide our input.

Today, we responded to the request with an open letter. Here are some of the highlights:

Not being able to account for crypto assets at market values because of current standards does not provide useful information to our investors.
Crypto is quickly gaining mainstream adoption. Over the last year, the total crypto assets’ market capitalization grew more than 5x with a total market value over $2 trillion* as of September 15, 2021. More importantly, the innovation is just beginning. Now is the time to improve the accounting for crypto assets.
We proposed two projects for improvements to US standards with respect to accounting for crypto assets. We believe the FASB should add both proposals to its agenda for future standard setting:
Broadly improving the accounting and reporting by holders of crypto assets
Clarify that specialized accounting guidance for broker-dealers should also apply to entities making a market in digital assets

Our mission is to increase economic freedom in the world, through a fair, accessible, and efficient financial system. We are furthering this mission through a constructive relationship with the FASB, enabling us to address the challenges in accounting for crypto in a collaborative way. Our letter is a step towards driving progress and providing relevant and useful accounting and reporting information to the public. As always, we look forward to an ongoing, constructive dialogue with FASB and its staff.

*Per CoinMarketCap, total global market capitalization for crypto assets was $350 billion during September 2020, compared with over $2 trillion as of the date of this letter.

Our open letter to the Financial Accounting Standards Board: “We believe there is a pervasive need… was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

accounting

Loss harvesting

Will it work?

Tax authorities playing catch up

Our open letter to the Financial Accounting Standards Board: “We believe there is a pervasive need to improve the accounting for crypto assets”

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