Automating Your Way Out of Manual Crypto Accounting

Crypto accounting subledger tools are a must for Web3 start-ups and companies using digital assets, for more efficient, accurate and reliable financial reporting.

The task of integrating crypto transactions into standard accounting systems has been a persistent challenge for accountants, Web3 start-ups and crypto company CFOs alike.

At Electra Frost Accounting (my original practice) we first encountered Bitcoin in 2013, with an animated film production client who was paying overseas artists with BTC. In these early days prior to any official tax and accounting guidance, we exercised professional judgment to apply FOREX accounting and found that our traditional accounting software did not support cryptocurrency (it still doesn’t).

We were excited by this innovative new form of money and curiously prepared complex Excel spreadsheets with currency conversions to post journals into Xero, to complete our clients’ Profit and Loss and Balance Sheet. Some years later, crypto portfolio tracking and tax calculation software became available but it was only suitable for individual tax clients and simple operators. For businesses with double entry accounting requirements and millions of transactions, we created Excel workbooks with so much data that they crashed!

With the basic tools available to us we did our best to make our clients’ company financial statements balanced, audit-proof and lender-friendly. While our SME clients’ crypto usage was largely confined to payments, mining rewards and basic investments, this approach with Excel and manual journals was fairly manageable. In recent years, however, with clients channelling more exotic crypto activities through their companies, involving new tokens, transacting with NFTs, yield farming and DeFi, we’ve been exploring more innovative accounting tools developed by start-up founders in this space.

Accountants On-Chain project exploring crypto accounting

In recent years our accounting and tax focus has expanded from managing crypto payments and investments to more customised crypto accounting for issuing digital collectibles and utility NFTs, and for crypto-native Web3 start-ups, DAOs and exchanges.

This new scope necessitated a deep dive into the capabilities of various crypto accounting subledger and back-office software, with our Accountants On-Chain project interviews with lots of crypto accounting software experts to share their knowledge with us. As a result of this project in 2021 to 2023, we surfaced a number of new software options and accounting approaches to support our clients entering web3.

New regulations calls for better digital asset accounting

The Australian government recently proposed a regulatory framework aimed at protecting consumers within the crypto ecosystem, with draft legislation anticipated in 2025 following further consultations. This framework seeks to apply to digital asset platforms, aligning them with the risks and regulatory standards of traditional financial systems, with asset holding as the regulatory anchor point. Financial services licensing would apply to certain asset holding arrangements where a ‘financial product’ is identified, whilst a ‘financialised functions’ regime would cover specified activities that involve digital assets that are not financial products but still need to meet additional minimum standards. Such functions would include token trading, token staking, asset tokenisation and funding tokenisation.

The proposed regulatory framework considers tokens with various utilities—ranging from membership attestation and service or goods redemption to access rights and resource management—under a regime designed for financialised functions. This approach calls for accountability in token sale and distribution processes, and will necessitate careful record keeping and quite sophisticated reporting for regulatory compliance. Therefore, the blockchain industry will need to up its game in the accounting department and will need accountants to guide them.

One critical area of our latest explorations in crypto accounting subledgers is understanding how these systems handle the custody of customer assets and associated liabilities, particularly through "For Benefit Of" (FBO) accounting. This capability is crucial, as it directly addresses the complex accounting principles and regulatory risks associated with crypto assets and tokens with various utilities.

Crypto tax software vs accounting solutions

Contrary to common assumptions, crypto tax software is cut out for the job, especially when businesses scale beyond occasional crypto payments. The intricacies of DeFi, NFTs, and smart contracts, combined with the need to track multiple wallets and apply various accounting methods specific to how the assets are used, demand a more crafted solution. Crypto subledger tools stand out by offering the automation needed to manage these tasks at scale, ensuring consistency, integrating with tools like Xero or QuickBooks, and facilitating detailed reporting without necessitating two sets of accounts for both accounting and tax.

The challenge often begins with setting up an efficient and compliant accounting system. This involves not only choosing the right tools but also updating internal finance policies and processes to accommodate the unique aspects of crypto transactions, including digital asset registers and statements of ownership and control over wallets.

Despite the automation these tools provide, the initial setup, data importation, verification, and reconciliation processes still require a significant amount of manual effort. However, once configured, these systems can significantly streamline the monthly financial reporting process, making it more manageable to produce accurate financial statements.

This operational efficiency is critical not only for internal management but also for demonstrating control and transparency to investors and regulators. The need for such systems becomes even more apparent for crypto exchanges, which require software capable of handling extremely high-volume transactions and separating customer assets from the company's assets, all while providing detailed reports for auditing and compliance purposes.

From our experience, while many start-ups initially attempt to manage their crypto transactions through manual methods like Excel and crypto tax tools, the transition to a dedicated subledger system significantly improves their reporting efficiency and accuracy, managing burn rate and runway, and ability to attract further investment.

Having navigated clients with various crypto accounting software set-ups, we've observed a range of functionalities and implementation challenges, particularly with so many new blockchains and token standards. Yet, we’ve found most software providers are willing to introduce integrations for new customers and support the implementation process in a structured way, and the overarching takeaway is the positive efficiency impacts these tools have on managing crypto transactions in a business.

Whether it's a start-up crypto exchange or an e-commerce operation accepting crypto payments - systemising this in Excel is a wildly inefficient and error-prone way to handle digital asset transactions. If transitioning from manual to automated crypto accounting processes seems daunting, you may discover that recent advancements in specialised software and refinements of internal finance processes and policies for other crypto business have made it more feasible.

For crypto businesses, founders and their accountants, engaging an experienced crypto accountant can help to guide the process, and set a solid foundation for your company’s growth and compliance.

Please share your experiences and thoughts in the comments below, we’re interested!