Accounting and Auditing Challenges of Crypto Currency: A Case Study of PayPal

This report discusses the usage and advantages of crypto currency, accounting for crypto currency under GAAP, accounting for crypto currency by PayPal, and the challenges introduced in context of accounting and auditing governing bodies because of introduction of crypto currencies.

Report writing
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Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Crypto currencies....................................................................................................................3
Advantages of crypto currency...............................................................................................5
Crypto currency under GAAP................................................................................................5
Accounting for crypto currency by Paypal.............................................................................6
Accounting and Auditing challenges......................................................................................6
CONCLUSION................................................................................................................................8
REFRENCES...................................................................................................................................9
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INTRODUCTION
Crypto Currency is the new and popular form of digital currency, which is acting as a
replacement for going ownership and physical forms of currency. It has gained wide popularity
in recent years and this affecting accounting and business practises across industries. Many
start-up businesses have also opened up offering crypto currency exchange and usage facilities.
In addition to this financial institutions and businesses are also entering the crypto currency
market by enabling their consumers to exchange crypto currencies (Antonakakis, Chatziantoniou
& Gabauer, 2019). The company selected for this report is American company PayPal. It is an
American multinational financial technology company which supports online payment systems
in different international markets and act as an alternative for traditional methods of transferring
finance such as checks or money orders. This report looks at the current usage of crypto
currencies along with the benefits of using crypto currencies. The ways in which crypto
currency is accounted under generally accepted accounting principles issued by the financial
accounting Standards Board is also included in this report. The accounting standards for crypto
currency by PayPal and the challenges introduced in context of accounting and auditing
governing bodies because of introduction of crypto currencies is also included in this report.
MAIN BODY
Crypto currencies
The basic features of crypto currency include she decentralization of digital money which can be
used over the Internet so that money transfer and transfer of financial assets becomes easier. The
aim of crypto currency is to revolutionize the ways in which people invest bank and utilize
money by helping create a decentralized medium for transfer of money and finance. The first
crypto currency was launched in the year 2008 and termed as Bitcoin. It is currently the most
popular crypto currency in the world and is considered the most influential crypto currency
paving the way for formation of other types of crypto currency (Borri, 2019).
Apart from Bitcoin other types of crypto currency are etherium Bitcoin cash Litecoin,
EOS Tezoz and Zcash. The commonality between different type of crypto currency is that they
are all formed to support decentralized exchange and transfer of money so that they can act as an
alternative form traditional mediums which are under the centralized system supervised by
governments and financial institutions. Different crypto currencies utilize different technologies
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and have additional features which can provide the user additional value of art from the simple
exchange of money.
The main feature of crypto currency is that it makes transferring value through digital
channels easier without the requirement of a mediator such as financial institution or payment
processor. This enables users to easily transfer money on an international scale at a better speed
without the requirement of a third party (Bouri & et. al., 2021). Users are able to exchange or
transfer financial assets or money at any time at a lower fees compared to traditional mediums.
Crypto currencies enable individuals to take complete control over their assets and make
transactions with other seamless similar to payment of groceries in a store while also improving
the privacy of the individual.
The different types of crypto currencies are provided below:
 Bitcoin: This is the most popular type of crypto currency as it was the first crypto
currency to be launched on a global scale. This type of crypto currency was created on
order to support intermittent movement of finance or money without the need of
government central banking institutions. This crypto currency is dependent on the usage
of block chain technology which is a decentralized public Ledger that contains the digital
recordings of various transfers made through the users buys Bitcoin. Bitcoin helped
create a foundational system for crypto currencies and peer to peer verification which is
used in other types of crypto currencies currently available in the market. The
transactions made between individuals by usage of Bitcoin are permanently logged on the
block chain which acts as a system for validating and securing Bitcoin transfers and
protecting the network from any kind of discrepancies or digital attacks.
 Etherium: Etherium also utilize is similar technology to Bitcoin and conduct transfer of
financial assets or money by using the block chain technology. The difference between
ethereum and Bitcoin is that while Bitcoin does not utilize a programmable block chain
etherium has the availability of a programming will block chain which means that it is
not utilized for supporting a specific crypto currency but acts as a network where users
are able to create published monetize and use application (Katsiampa, Corbet & Lucey,
2019). In this way etherium has a wide number of uses in comparison to Bitcoin and
takes the concept of crypto currency to an improved stage. The native ethereum crypto
currency is called ETH or ether, which is developed by usage of proof of work system
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and a like Bitcoin there is no limit to the number of ethers generated. This feature
increases the accessibility of tedium in comparison to Bitcoin as there are only limited
number of bit coins generated.
 ADA: This crypto currency utilizes is proof of stake in order to support exchange of
finance and money which means that complicated calculations conducted for proof of
work are eliminated and high electricity required for completing exchange lower (Liu,
Tsyvinski & Wu, 2022). In this way ADA or otherwise known as Cardano is referred to
as a sustainable option of crypto currency because it does not utilize as much electricity
as other crypto currency options. The main application of this crypto currency involves
identification of crypto currency management and traceability. This crypto currency and
will streamlining the collection of data from various sources so that the user is able to
audit the manufacturing path of a specific crypto currency transfer and potentially prevent
any kind of fraud or counterfeiting.
Advantages of crypto currency
The main advantage of crypto currency is that it enables users to have full control over
their financial messages as there not obliged to take the services of a third party in order to
complete exchange of money or transfer of financial assets.
In addition to this another advantage of crypto currency is that it helps consumers
conduct transfer of money through online mediums at any time of the day without the need of a
banking institution which saves times of the users.
Decentralization is another advantage of Bitcoin and other types of crypto currency
because it helps consumers avoid disadvantages of using financial institutions and traditional
methods for exchanging money such as giving up their private information.
The privacy provided by crypto currencies is essential for supporting improve digital
protection of consumers in the current age as cyber-attacks on banking institution can lead to
leak of private information of consumers which is a common occurrence (Makarov & Schoar,
2020).
Crypto currency under GAAP
There are no specific rules of accounting for crypto currency under generally accepted
accounting principles found by the financial accounting standard boards. According to the white
paper issued by AICPA crypto currency cannot be classified as cash or cash equivalents on
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generally accepted accounting principle financial statement. The reason for this type of
guideline is that crypto currency is not supported by a sovereign government or considered a
legal tender (Mikhaylov, 2020). It is also stated that crypto currency is defined as an intangible
asset with an indefinite life and that is how it is classified under generally accepted accounting
principle financials.
Accounting for crypto currency by Paypal
 PayPal has created sophisticated channels to process the usage of crypto currencies in its
application. Consumers are able to access their public address key for their crypto currency
wallets through PayPal which can be used to support transaction of crypto currency under
the PayPal ecosystem. However there is a limit to transferring crypto currency as consumers
are not able to transfer the crypto currency to cold storage or other accounts outside the
PayPal ecosystem.
 This way of accounting for crypto currency reduces know your customer anti money
laundering issues which can be faced by larger players while managing wallet to wallet
transactions later not within the platform and also utilize crypto currency. The storage of
Bitcoin or any other type of crypto currency under PayPal involves the usage of public or
private key for the crypto currency wallet which can also be delegated to the PayPal
platform so that it remains safe from any kind of counterfeiting or digital attacks.
Accounting and Auditing challenges
Crypto currencies have begun gaining rapid popularity worldwide as currencies such as
BitCoin provide a much safer and more reliable way of conducting digitally sanctioned
transactions with low costs involved which is why firms like PayPal have not only allowed
people to buy and hold crypto currencies in their portfolio offered by the company but they have
also spread the service globally to far corners of the world in major markets. Despite this
growing popularity, the new digitized currencies carry a fair share of drawbacks as it has given
multiple headaches to major governmental and centralized accounting bodies as auditing as well
as accounting for crypt currencies is very hard (Patel & et. al., 2020). Some major challenges
have been highlighted herein regarding the audition and accounting of crypt currencies faced by
companies like PayPal and major authoritative bodies.
 The emerging nature of currency – Despite the current fervour that such digitized
currencies enjoy in the minds of social media users and enthusiasts, they are a relatively
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new occurrence and they have still not found mainstream usage in many countries. One
of the major reasons as to why accounting and auditing of such currencies is hard is
because their usage, treatment in the books of accounts and the way governments treat it
globally is a mystery for many. The emerging nature also makes it tough to properly
regulate the currency as its use in officially sanctioned channels is still banned in
countries which has made it that professional curriculums of accounting do not include
provision for such currencies (Sartipi, 2021).
 Lack of guidance and frameworks – Another major reason as to why auditing of
cryptocurrencies such as BitCoin and Ethereum is very hard and taxing for PayPal and
for governments worldwide is because there are no official bodies of accounting or
auditing which specialise in the field of digitized currency accounting. There are also no
solid frameworks which can be used to analyse the transactions done by multiple parties
through their crypto-wallets and the current technologies that accountants of many
countries are exposed to and use regularly are very outdated to properly process crypto
induced transactions.
 Anonymity – One major drawback of the increased usage that cryptocurrencies have
registered in past few years is that the personal information and identity of the parties
involved in such digitized and non-centralized transactions is very mysterious and non-
reliable in most cases as the transactions are recorded in multiple wallets. Without proper
knowledge of the people which have executed the transactions, the debit and credit
balancing of such currencies is not only difficult to register in accounting books but also
unreliable for the sake of accounting.
 Volatility – It is a well-known fact that the reason as to why governments have not
authenticated crypto currencies despite their popularity is due to their volatile nature.
Accounting and auditing are both traditional processes which only take into account
variables which can be valued correctly at any given time and crypto currencies change
with the slightest change in market and societal conditions. PayPal will have major
challenges in properly accounting for its crypto services as identifying and analysing
crypto-wallets and users worldwide is a task which has no current technological solution.
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CONCLUSION
From the above report it is determined that businesses and financial institutions are utilizing
crypto currency such as Bitcoin or ethereum because it offers advantages such as
decentralization. The popularity of crypto currency can be attributed to wide number of
advantages offered by this digital currency medium such as lightning-fast transactions and ability
to conduct transactions easily at any time of the day. In addition to this there is also the benefit of
avoiding any third parties affecting financial transactions between individuals as there is no need
for banking institutions or governing institutions to supervise financial transactions under crypto
currency. Until now there are no specific regulations for accounting crypto currency decided as
per general accepted accounting principles but there are regulations on where cryptocurrency
need to be stated. Finally there are various challenges associated with accounting and auditing
crypto currency which includes the challenge of lack of guidelines and frameworks along with
anonymity.
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REFRENCES
Books and Journals
Antonakakis, N., Chatziantoniou, I., & Gabauer, D. (2019). Cryptocurrency market contagion:
market uncertainty, market complexity, and dynamic portfolios. Journal of
International Financial Markets, Institutions and Money, 61, 37-51.
Borri, N. (2019). Conditional tail-risk in cryptocurrency markets. Journal of Empirical
Finance, 50, 1-19.
Bouri & et. al., (2021). Quantile connectedness in the cryptocurrency market. Journal of
International Financial Markets, Institutions and Money, 71, 101302.
Katsiampa, P., Corbet, S., & Lucey, B. (2019). High frequency volatility co-movements in
cryptocurrency markets. Journal of International Financial Markets, Institutions and
Money, 62, 35-52.
Liu, Y., Tsyvinski, A., & Wu, X. (2022). Common risk factors in cryptocurrency. The Journal of
Finance, 77(2), 1133-1177.
Makarov, I., & Schoar, A. (2020). Trading and arbitrage in cryptocurrency markets. Journal of
Financial Economics, 135(2), 293-319.
Mikhaylov, A. (2020). Cryptocurrency market analysis from the open innovation
perspective. Journal of Open Innovation: Technology, Market, and Complexity, 6(4),
197.
Patel & et. al., (2020). A deep learning-based cryptocurrency price prediction scheme for
financial institutions. Journal of information security and applications, 55, 102583.
Sartipi, F. (2021). Publicizing construction firms by cryptocurrency. Journal of Construction
Materials, 2(3), 1-8.
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