Accounting for Web3 business models

As Web3 businesses emerge with decentralized, blockchain-based operations, corporate accountants are being pushed into unfamiliar territory.

Traditional accounting methods are becoming outdated as digital assets, decentralized finance (DeFi) models, and smart contracts reshape how transactions are conducted and recorded. For UK accountants tasked with keeping financial records accurate and compliant, the challenges are clear, but the guidance isn’t.

How should revenues from smart contracts be recognised? What about accounting for volatile digital assets like cryptocurrencies?

When Does Revenue Occur?

One of the most significant challenges Web3 poses to corporate accountants is determining when to recognise revenue. Traditionally, revenue recognition depends on meeting certain conditions—like the delivery of goods or services—under established standards like IFRS 15. But in Web3, smart contracts, which automatically execute financial transactions once pre-set conditions are met, introduce new variables.

Take the example of DeFi protocols such as Uniswap or Compound. These platforms allow users to lend, borrow, and trade cryptocurrencies in decentralized markets. The income generated through these smart contracts is often instantaneous and continuous, complicating the process of revenue recognition. Accountants must determine the exact point when revenue is realised, a task that is far from straightforward given the speed and automation of decentralized transactions​.

The International Accounting Standards Board (IASB) has not yet issued specific guidance on revenue recognition in Web3 contexts, leaving UK accountants to interpret existing frameworks in new ways. This uncertainty adds complexity and risk to accounting for Web3 businesses.

Accounting for Digital Assets

Another significant hurdle for corporate accountants is the management and reporting of digital assets like cryptocurrencies and non-fungible tokens (NFTs). In the UK, there is still no clear, standardized way to classify these assets in financial reports, which raises questions about their proper treatment under accounting standards like IFRS.

Cryptocurrencies, whether used as payment for goods and services or held as investment, present valuation challenges. Their volatile nature makes it difficult for accountants to establish fair values. Current guidance suggests classifying cryptocurrencies as either intangible assets or inventory depending on their use​. But with fluctuations that can range from minor shifts to major crashes, digital assets expose companies to significant risks, including impairments and write-downs that could have drastic effects on financial statements.

In addition to cryptocurrencies, NFTs bring their own complexities. These unique digital assets are often used as proof of ownership for virtual goods, art, or even real estate. Accountants need to understand how to account for these assets, whether through fair value assessments or historical cost, particularly as their worth is often determined by fluctuating market demand.

Decentralization

Decentralized business models present fundamental challenges to traditional financial reporting frameworks. In Web3, intermediaries like banks or clearinghouses are replaced with peer-to-peer networks, leaving a gap in traceability and control. For accountants accustomed to reconciling transactions through established financial institutions, decentralized transactions demand a rethink of internal controls and auditing processes.

One of the main risks is that decentralization can make it harder to ensure transparency and compliance. Blockchain’s inherent transparency can provide a public, immutable record of transactions, but this also creates complexities when verifying the authenticity of assets, ownership, or contractual obligations. This makes auditing decentralized businesses especially tricky​. Without trusted intermediaries, auditors must rely on the integrity of blockchain systems and develop new techniques to track decentralized assets.

Moving Target for Web3 Standards

Regulatory frameworks for Web3 are in a state of flux globally, and the UK is no exception. The UK’s Financial Conduct Authority (FCA) has taken a cautious approach, particularly with cryptocurrencies, warning of the high risks involved. While there is hope that regulations will eventually catch up to technological developments, accountants are left in a grey area for now, having to apply existing standards that don’t necessarily fit Web3 business models​(

The rapid evolution of decentralized business models also adds to the uncertainty. Web3 adoption has sparked new regulatory discussions, particularly around issues such as anti-money laundering (AML) and know-your-customer (KYC) obligations. Accountants will need to remain vigilant about regulatory developments in the UK and beyond to ensure their firms remain compliant​(

Volatility and Controls

Managing the financial risks associated with Web3 is another pressing issue. Cryptocurrencies and other digital assets are notoriously volatile, meaning accountants must establish robust risk management strategies. Companies operating in the Web3 space often have significant exposure to fluctuations in the value of digital assets, and the financial consequences of a market crash can be severe.

To manage this risk, many companies are developing internal controls tailored to the decentralized nature of Web3 businesses. Automated monitoring and governance systems are critical for tracking transactions and ensuring that decentralized financial activities remain compliant with regulations​.