In late December, several members of Congress on the US House Financial Services Committee introduced legislation that would exempt cryptocurrencies from US securities laws and provide new regulatory oversight technologies like XBRL to bring transparency and accountability to the blockchain technologies marketplace.
Cryptocurrencies are being used in Singapore and Switzerland, who are aggressively growing their blockchain economies through adoption of cryptocurrencies to become thriving global financial centers. This legislation was introduced as an essential first step to keep this growing market alive in the United States.The legislation would require use of technologies like XBRL to enhance adoption in the United States and promote new innovations to support blockchain, cryptocurrencies, distributed ledgers and smart contracts technologies.
Background
Cryptocurrencies, requires the use of blockchain technology that makes its transactions secure. Cryptocurrency transactions happen directly between individuals. Every time a person makes a transaction using a cryptocurrency — for example, using funds stored in his or her crypto wallet to send bitcoin to someone else — the transaction is recorded on a digital ledger called a blockchain. Every cryptocurrency has its own blockchain, and computers doing complex math in a large network maintain it.
Currently the U.S. Internal Revenue Service treats cryptocurrencies as a kind of property, transactions involving cryptocurrencies trigger a capital-gains taxable event when spent, even in trivial amounts making adoption in the US a major obstacle/barrier as Singapore and Switzerland move forward as global blockchain hubs supporting millions of users.
The legislation introduced is desire to advance cryptocurrency/blockchain adoption within the U.S. by alleviating some of the issues resulting from the IRS ruling and lack of technology financial transaction oversight by regulators to provide better transparency and accountability in this new marketplace.
The proposed legislation would mandate regulatory oversight using technologies like XBRL to provide greater transparency and accountability in blockchain marketplace at the transaction level:
The bill defines “digital tokens” as “digital units created… in response to the verification or collection of proposed transactions” (mining, basically) or “as an initial allocation of digital units that will otherwise be created” (as in a pre-mine). These tokens must be governed by “rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control.”
Going deeper, a “digital token,” according to the text in the legislation:
“…has a transaction history that…is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process; and…after consensus is reached, cannot be materially altered by a single person or group of persons under common control;…is capable of being traded or transferred between persons without an intermediate custodian…”
Data elements when tagged in XBRL provides various properties that provide better accountability as demonstrated as shown below to support cryptocurrencies and blockchain technologies:
By using freely-available, open technology like XBRL to tag specific data elements “XBRL fact” the data is permanently linked to various elements as listed in the diagram above and extracted and analyzed using state-of-the-art data analytical tools because the data elements are in a machine-readable format with various reference links such as currency calculations and accounting definitions.
The proposed legislation provides both the legal and technical clarity that can help the US startups better compete in this rapidly growing global marketplace. Otherwise, many startups may choose to set up shop in other friendlier country to avoid facing penalties for potential legal violations.
The United States is the largest capital markets in the world.
It is clear that transactions that occur through the use and exchange of these cryptocurrencies are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track. But deploying open, freely available technologies like XBRL can help provide transparency and accountability in this growing and increasing complex marketplace.
I wrote an article in Strategic Finance Magazine in January 2018 regarding the use of XBRL to assist blockchain, distributed ledgers and smart contracts and support management accountants in this thriving global marketplace.
At a high level, XBRL can allow participants and regulators using blockchain technologies to access and store transaction data simultaneously, pushing any updates to stakeholders in near-real time – in a more accurate, transparent and highly efficient system.
By combining distributed ledger and smart contracts with iXBRL’s machine-readable “smart data,” data can be automatically validated and verified, with invalid data rejected from the database, further reducing errors and providing greater regulatory oversight.
(Legislation introduced states: …digital data structure in which consensus is achieved through a mathematically verifiable process.)
By using iXBRL to tag smart data over human-readable contracts, and a distributed ledger ensure all parties have access to the same XBRL tagged data at the same time, XBRL technology can create accurate, trusted “smart contracts”.
XBRL is used by more than 100 regulators in more than 70 countries around the world to provide greater transparency and accountability in the capital markets. This same freely-available, open technologies - created by and support by the IMA as a founding member of the XBRL Consortium can help create more opportunities for management accountants.
By moving XBRL over to other asset classes (like blockchain technologies) by the US SEC and other US regulators – this can help technology start-ups in the United States move into this growing marketplace and compete on a global basis. Creating this legal and technology changes can also stimulate greater financial innovation and opportunity and create new opportunities for management accountants to enter this growing marketplace via implementation and data analytics of blockchain technologies.