The rapid rise of blockchain technology has paved the way for an increase in cryptocurrency transactions, placing demand on the accounting industry. While this disruptive tech offers the sector a golden opportunity, it also calls for more understanding by accountants in the fight against money laundering. John Edwards, CEO of the Institute of Financial Accountants (IFA) addresses the issues as well as opportunities around cryptocurrency, amid the need for solid industry guidance.
A staggering $8.6bn was laundered through cryptocurrency in 2021, representing a 30 percent increase in money laundering activity during 2020. While it is a secure method of carrying out currency exchanges and transactions, this alarming statistic calls for more due diligence; it’s why accountants and lawmakers are urging standard-setters to fill a void and write concrete rules telling companies and high-net-worth individuals how to account for bitcoin and other cryptocurrency assets to prevent fraud.
CFAAR tackles crypto crime
As an accounting technology, blockchain is being hailed as a gamechanger. Cryptocurrencies and other digital assets are receiving a growing amount of attention and interest from consumers, corporations, and governments, which is driving demand for blockchain. While mainstream adoption hasn’t taken hold just yet, it’s becoming increasingly important to understand how blockchain technology and cryptocurrency can impact many aspects of an accountant’s role, and the risks involved.
Crypto-related frauds, such as those involving cryptocurrency theft, initial coin offerings (ICOs), and ransomware attacks, continue to increase in number and become more sophisticated. There is a need therefore, for the legal industry and authorities to adopt a robust approach in tackling it.
In response, last year saw the launch of CFAAR – the ‘Crypto Fraud and Asset Recovery’ network – fronted by a group of legal industry professionals comprising of lawyers, barristers, forensic accountants, corporate intelligence and asset recovery experts, to develop and share best practice in crypto disputes, with the aim of “placing the UK and common law jurisdictions at centre stage for global crypto dispute resolution”.
The network’s founding members include “practitioners leading the first crypto-related disputes before the English courts, as well as those actively involved in pioneering approaches to global crypto fraud investigations, forensics, advocacy and the tracing and recovery of cryptoassets”.
Industry regulation
While this is encouraging, for blockchain to become embedded as an integral part of the financial system requires further development, standardisation, and optimisation of the technology; a process that won’t happen overnight. Creating blockchain regulation and standards will take some time, something which leading accountancy firms and bodies such as the IFA can lend its expertise to.
This current ‘grey area’ means that when it comes to all things crypto, the reliance on accountants and agents to exercise their due diligence is as critical as ever. For smaller firms, “competing priorities” can potentially present a challenge to following existing procedures and keeping on top of any new legislation. However, if accountants and firms don’t manage these priorities, when it comes to anti-money laundering (AML), the biggest risks are criminal convictions, fines and irreparable damage to careers. While a lack of a legislative framework may present an opportunity for legitimate clients to save administrative costs, failure to understand the risks of engaging with clients in a high-risk sector and failing to implement appropriate procedures to mitigate those risks is no excuse.
Approaching cryptoassets
Despite cryptoassets often being deemed “highly disruptive and risky”, when considering the AML risks associated with them, it is important to remember that there are many similarities with traditional assets, such as cash. Whilst cryptoassets may allow greater anonymity than traditional payment methods, they are, because of distributed ledger technology (DLT), often fundamentally more transparent than cash. The blockchain technology that underpins them creates a uniquely identifiable code to determine current and previous ownership – a.k.a. a chain of custody or blockchain.
In terms of potential clients, it may be helpful for accountants to consider the capacity in which they are being approached and to attempt to ascertain the relevance of cryptoassets to the work. When dealing with clients who hold cryptoassets, determining the source of wealth and funds will be priority. Just because it exists in a client’s portfolio does not necessarily equate to a high AML risk.
The sector’s opportunity
While there is an element of high risk and the clear understanding that legislation needs to be in place sooner rather than later, blockchain and cryptocurrency offer an opportunity for agents and firms, confidently positioned as experts in their field, to guide and affect how blockchain is embedded and used in the coming years, and to develop blockchain-led solutions and services.
There is also the opportunity for accountants to take on an advisory role offering guidance on assessing the costs and benefits of the new system to companies that are considering joining blockchains themselves. With a combination of business and financial know-how, accountants are ideally placed as key advisers serving as the glue between those who develop and apply the blockchain technology and their business stakeholders.
However, for firms to seize the golden opportunity presented by blockchain it’s crucial that they address the knowledge gap which currently exists around emerging tech in this area.
The good news is that blockchains are becoming increasingly more user-friendly, with straightforward applications for transactions, logging, and transparency. While the system may sound complex, most blockchains ‘look’ like normal software and have a functional user interface, as most of the technicalities are hidden.
While blockchain is poised to revolutionise the accounting profession, now is the time for accountants to exercise vigilance with crypto-related matters while also expanding their skill sets to be armed with the necessary know-how for the future.