Ghulam Ishaq Khan Institute of Engineering Sciences and

Technology, Topi Swabi. KP.

Topic:
What are the existing challenges and
recommended practices in accounting for cryptocurrencies, considering
the lack of clear guidelines?

Subject: MS151
Section: A
Group members: Zahran (2023767)
Mustafa Khan (2023565)
Zaid Abdullah (2023768)
Ahmad Yar (2023087)
Introduction:
The trend of automation and computerization of society is widely recognized as a significant
phenomenon in the contemporary day, with its impact being observed globally. New activities present
themselves as opportunities, but the information and technological landscape carries the inherent risk
of distorting the structure of an individual's personality and their methods of social integration. In this
context, it is reasonable to say that the advancement of information technologies in contemporary
society yields both beneficial and detrimental outcomes for individuals and businesses (Lokova, et al.,
2018). The management of finance is confronted with novel dangers arising from the use and
integration of artificial intelligence and digital technology.
(Makurin, A. A. 2020) states that the accounting of conventional monetary methods is conducted
through the identification of a payment instrument and the parties involved in the agreement. This
particular procedure can be depicted in the following manner: The agreement between the seller and
customer is based on the premise of exchanging money for products. This strategy facilitates the
execution of short-term transactions by matching counterparties based on their geographical proximity.
When engaging with cryptocurrencies, which may be symbolized as a sequence of bytes containing
specific data, it becomes imperative to utilize an electronic payment system that functions as an
intermediary. The primary objective of this system is to ensure accounting control by preventing the
occurrence of duplicate sets of bytes. In contemporary times, there exists a multitude of comparable
systems that contribute to the heightened susceptibility of data and information fraud. Bitcoin, a form
of cryptocurrency, eliminates the need for third-party intermediaries in financial transactions, hence
making the blockchain system relatively secure.

Research objectives:
The objective it to discover parameters for cryptocurrency to be recognized in accounting practices.

Cryptocurrency:
(Mosteanu, NR & Faccia, A 2020) state that the emergence of cryptocurrencies has coincided with the
growing significance of digital finance and artificial intelligence within the financial services industry in
recent years. Cryptocurrencies are a type of virtual digital currencies that derive their name from the
fact that their implementation relies on cryptographic techniques (He et al., 2016). The historical origins
of utilizing cryptographic procedures for the purpose of securely keeping valuable information may be
traced back to ancient times. The term "crypto" derives from the ancient Greek word "Kryptos," which
translates to "hidden." The World Bank has categorized cryptocurrencies as a type of digital currency.
According to their definition, digital currencies are digital representations of value that have their own
unit of account. They are different from e-money, which is solely a digital payment method that is
represented and denominated in fiat money. In contrast to the majority of policy makers, the World
Bank has independently established its own definition of cryptocurrencies as digital currencies that
utilize cryptographic approaches to attain consensus. The inception of cryptocurrencies can be
attributed to the rise of the initial cryptocurrency, namely bitcoin, in the year 2009. Following the
advent of bitcoin in 2009, the exploration of cryptocurrencies commenced in 2011 with the introduction
of SolidCoin, iXcoin, Namecoin, and various other alternatives. As of August 1, 2018, the market
encompasses a total of 1,737 distinct cryptocurrencies. The total amount of cryptocurrencies can be
categorized into 819 coins and 918 tokens. Based on data from CoinMarketCap, the current valuation of
the collective cryptocurrency market is $269 billion (Mohamed & Ali, 2019).
Observation:
The work of (Aysalkyn et al. 2022) reflected the challenges of integrating blockchain technology into
corporate processes and the use of cryptocurrencies in quick exchange activities. The way that
cryptocurrency was acquired and its intended usage will determine how it is accounted for. The majority
of the time, mining bitcoin results in payment for other assets or a contribution to permitted capital
(albeit legal control is still needed for this part).
According to Kostiuchenko et al. (2018), cryptocurrency should be shown alongside intangible assets.
Opinions vary most when it comes to purchasing cryptocurrency: it is suggested to list cryptocurrency as
an asset class, as a component of financial investments, or as a different method. In the case that it is
decided to sell cryptocurrencies, it is suggested that it be shown as part of reserves (Shabelnikov et al.,
2021; Zayed et al., 2022) (also as part of intangible assets).
Blockchain-based token offerings include initial coin offerings (ICOs) and initial exchange offers for these
kinds of commodities. IEOs are a new way to rely on centralized cryptocurrency exchange platforms that
serve as middlemen, following a string of scams utilizing decentralized and unregulated ICOs.
It is yet unclear, nevertheless, how this modification would impact fundraising procedures in a setting
that has historically been decentralized (Gryshchenko et al., 2020).

The accounting aspects of cryptocurrency transactions are discussed in a recent study (Makurin
et al., 2023) :

Case 1:
“Regulators are concerned about how blockchain and distributed ledger technology (DLT) are being
used in the financial industry as they shape the Internet of Money. Notably, the lack of identity impedes
accountability and poses challenges to the fight against money laundering, terrorist financing, and the
proliferation of weapons of mass destruction, even though user anonymity enabled in this domain can
ensure privacy and data protection (Bashynska, 2020). The swift growth of decentralized applications,
along with their anonymity and high expense, has resulted in a sharp rise in financial scams and
cyberattacks targeting account-based blockchain platforms (Binda et al., 2020; Gryshchenko et al.,
2020). Forecasting the degree of volatility in bitcoin and its application to trading activities on
cryptocurrency exchanges were covered by Aras (2021).”

Case 2:
“Accounting should accurately represent transactions involving the exchange of assets that are not
identical in nature.
Nevertheless, it is apparent from the encounters of prominent nations in the bitcoin industry that the
transaction of cryptocurrency, whether in the form of payment or reception. Furthermore, due to the
fact that cryptocurrency is accounted for on the balance sheet at a value that is associated with its
current fair value through periodic revaluation, it is deemed unsuitable to include the proceeds from the
sale of cryptocurrency and the cost of realized cryptocurrency as separate items, as they will be
equivalent.” Makurin, A., Maliienko, A., Tryfonova, O., & Masina, L. (2023, September 30).
Management of Cryptocurrency Transactions from Accounting Aspects. Economics. Ecology. Socium,
7(3), 26–35. https://doi.org/10.31520/2616-7107/2023.7.3-
Challenges:
Accounting professionals encounter the challenge of incorporating cryptocurrency transactions into
accounting and taxation systems due to the distinctive nature of cryptocurrency as compared to other
asset types. Moreover, variations among different types of cryptocurrencies further complicate the
management and representation of cryptocurrency transactions in accounting practices (Prokopyshyn,
2020). Ongoing debates persist surrounding the acknowledgment of cryptocurrencies, their legal
standing, and the formalization of their role as a medium of exchange. In light of the aforementioned, it
is imperative for accountants to possess comprehensive knowledge not just regarding the potential
methodologies for presenting bitcoin transactions in accounting, but also the underlying technologies
that govern cryptocurrencies. This proficiency is crucial in order to accurately execute accounting
practices. Furthermore, it is imperative to give careful consideration to professional discretion in cases
when a specific accounting matter lacks regulation by pertinent legislation and regulatory frameworks.
Simultaneously, it is imperative to consider that the exercise of professional discretion employed in
establishing accounting policies pertaining to cryptocurrency transactions can potentially be exploited as
a mechanism for manipulation. This manipulation can subsequently impact the financial reporting
metrics, leading to adverse consequences for both the recipients of financial reports and a decline in
overall confidence within financial markets (Pyroh, 2021; Ingram et al., 2022). Due to the inherent
anonymity of bitcoin and the absence of state and government agencies' ability to identify business
entities, a significant proportion of criminal activities are perpetrated within this system.

Solution :
“In order to establish cryptocurrencies as a formally recognized medium of exchange, it is imperative to
regulate the digital currency market to prevent the proliferation of privately issued crypto assets.
Alternatively, if the payment network remains unregulated, it may lead to uncontrolled circumstances.
The decentralized nature and inherent volatility of cryptocurrencies pose a potential risk in terms of
their potential exploitation for terrorist financing, uncontrolled inflation, and the absence of state
intervention in stabilizing the financial market. (Makurin et al., 2023)”.

Conclusion:
In summary, the accounting of cryptocurrencies presents significant challenges as a result of their
unique characteristics and the absence of clear legal directives. The best ways to deal with these
problems are to measure fair value, make information more clear, and work together with authorities.
As the cryptocurrency ecosystem evolves, the accounting profession, regulatory authorities, and
industry stakeholders must work together to set concrete standards for accurate and consistent
cryptocurrency reporting in financial statements. These approaches can help create a more transparent
and dependable accounting framework for digital assets in the continually changing environment. A way
for this to be possible is, the world should accept crypto currency and block chain if they let go of the
current double entry systems and adopt to a triple entry system in accounting and bookkeeping.
Accounting can become more operational and validation of information can be kept secure.

References:
 1. Makurin, A., Maliienko, A., Tryfonova, O., & Masina, L. (2023, September 30).
Management of Cryptocurrency Transactions from Accounting Aspects. Economics.
Ecology. Socium, 7(3), 26–35. https://doi.org/10.31520/2616-7107/2023.7.3-3

2. Makurin, A. (2021, November 23). Display of cryptocurrency in accounting.

Ekonomìčnì Gorizonti. https://doi.org/10.31499/2616-5236.3(14).2020.224794

3. Mosteanu, NR & Faccia, A 2020, 'Digital Systems and New Challenges of Financial
Management – FinTech, XBRL, Blockchain and Cryptocurrencies', Journal of Management
Systems - Quality Access to success , vol. 21, no. 174, pp. 159-166.