Challenges in Audit, Accounting, and Taxation of Digital Assets

Just as I thought that Day 1 was fantastic for Propine, Day 2 was even better: We had a full house for the panel discussion!

We started the day with three experts in their rights: our CEO, Tuhina Singh, Ashish Malhotra, CFA from Formidium, and Wei Jie Chan (Wave) from PwC Singapore shared their views on how to navigate the challenges dealing with audit, accounting, and taxation of digital assets at the Blockchain Association Singapore (BAS) Pavilion during the Singapore FinTech Festival 2022.

In his introduction, Wei Jie emphasized the importance of applying the substance over form principle to ensure that the financial statements provide a complete, relevant, and accurate picture of transactions.

He stated that we should take a holistic approach to determining ownership of digital assets, including how they are valued and the risks associated with them. There cannot be a one-size-fits-all approach. From an audit standpoint, ownership cannot be determined by recording transactions alone but by the stakeholder with the most control.

To determine the actual owner, KYC is necessary, as Ashish explained. Custodians like Propine play a crucial role in traceability and accessibility, and help managers confirm ownership by providing these reports.

Three critical aspects of risk management to consider are the quality of data, risk frameworks and scope of auditing, and technology with natively digital infrastructure built from the ground up. As a result, traditional infrastructure and legacy systems cannot support these services.

In addition, Ashish stressed that clarity is imperative to the accurate calculation of value in staking, particularly from a taxability perspective. At the same time, Wei Jie said that taxonomy is crucial though it is not consistent globally, and more efforts need to be made to promote these conversations.

As data aggregators determine liquid investments’ value at a set cutoff time, illiquid investments pose a more significant challenge as only specialized service providers can assess their value. Most are reluctant to sign off on the value of digital assets and rely instead on cost.

In a nutshell, Tuhina asserted that accounting isn’t a moot point because digital assets are on an immutable ledger. Ultimately, custodians, auditors, and administrators will have to work very closely together to determine the best way to move forward, with custodians being the aggregator and the enforcement of KYC, AML, and travel rules providing the congregation of flows.

For those of you who have missed out on this session, fret not; we will be organising a webinar on this topic in the near future. Those interested, please contact us here.

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