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How to Choose A Crypto Accounting Solution

May 11, 2023

Crypto accounting is a complex and evolving field. Finance and operations leaders who deal with digital assets need to know how to choose the right crypto accounting software for their needs.

We spoke with leading experts on the topic from the Web3 CFO Club. In this article we cover:

- Best crypto accounting software (2023)
- The importance of a crypto accounting software

- What makes a good crypto accounting software?

- Best practices when evaluating different crypto accounting software

The importance of a crypto accounting solution

Much of the complexity in accounting for crypto relates to the rate of technological developments in the blockchain space. 

Current blockchain networks like Ethereum are constantly being upgraded, with new alternative Layer 1 and 2 scaling solutions coming on the scene. These mean changes to underlying data sources for on-chain transaction data.

Then there are new types of digital assets like options vaults, or liquid staking derivatives are also introduced each year. New revenue models and asset classes make the task of accurately classifying transactions according to the chart of accounts increasingly complex.

These new data sources, and new asset classes mean new challenges for reliable mark-to-market pricing, and accurate reconciliation of transactions, and wallet balances by the close of each accounting period.

Thus, choosing the right crypto accounting subledger softwares can impact the amount of time that Web3 CFOs must spend on working with accountants and auditors!

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Best crypto accounting software compared (2023)

To help you understand what your options are, we've produced a handy visual overview of some of the most popular crypto accounting software today.

The infographic below summarizes some of the key differences in pricing, features, and integrations across various crypto accounting apps.

But here's the thing: the ingredients on a restaurant's menu alone, doesn't tell you how much you'll enjoy eating at the establishment. Similarly these features alone, don't tell the full story!

Be sure to refer to the seven points discussed below when evaluating different crypto accounting software providers.

What makes a good crypto accounting software?

Here are seven key considerations for Web3 CFOs when evaluating different crypto accounting softwares:

1. Data coverage and quality

2. Transaction classification and reconciliation

3. Integrations and scalability

4. Reporting and analytics

5. Accounting methods and standards

6. Security

7. Price

1. Data coverage and quality

When evaluating the data quality of a crypto accounting software, Web3 CFOs can consider three main criteria: (i) quality, (ii) coverage, and (iii) recency.

Coverage. Does the software cover all the data sources that are relevant for you such as blockchains, non-custodial wallets and custodial accounts?

Most crypto accounting softwares can support any data source that you require, upon request. However it is worth noting that sometimes it can take a significant amount of time to get a requested data source like a new blockchain network, to work. 

If it takes 1-2 months to add a new blockchain network, this could make it challenging for your project to scale its operations across chains, without introducing new problems for financial reporting”, says Jay Geeth, co-founder of Cryptoworth, a crypto accounting platform.

Quality. Many software providers advertise the hundreds or thousands of different data sources that they support. But equally important as how many data sources are supported, is how they source that data. 

Beware of softwares that are “black boxes”! A good crypto accounting software should have full transparency on its data sources, and easy to use audit trails for principal market and exit price determination, and all calculations and reports. 

The first point of consideration is the source for on-chain data. You want to pick a software that is getting on-chain data from a trusted data provider that is able to accurately tell you how much is being spent each transaction.

The next point of consideration is pricing data. Fair value is crucial to numerous subsequent accounting measurements, and is not limited to the valuation of holdings, so a robust and externally well-vetted fair value methodology is vital. 

Most accounting softwares can provide automatic spot price calculations of the historical exchange rate between the cryptocurrency and the fiat currency at the time the transaction occurred.

But you should make sure to pick a crypto accounting software that gets its pricing data from providers, or oracles that are resilient to market manipulation, while also assisting you in determining your principal market for crypto assets.

For instance, if you acquired some ETH via Binance, you would still need to price assets at fair value, or obtain their cost bases based on the prices of the principal market for the asset - which may not be Binance.

A good crypto accounting software can allow you to set qualitative parameters in the system around what markets you can access, and then a final decision based on quantitative factors like liquidity can be made automatically. 

Automating the principal market assessment this way can help to reduce the volume of manual work Web3 CFOs must do in justifying their principal market.

Recency. Web3 CFOs should also consider the resolution of these prices and how frequently they are updated: by the minute or at daily close? 

Note that pricing data applies equally for both crypto to fiat pairs, as well as the exchange rate for fiat pairs such as when pricing stablecoins like USDC in local currencies like Euros.

How it sources pricing data will also impact how it handles other areas of accounting like revaluations and impairments, striking NAV, unrealised gains/losses, realized gains/losses, crypto for commerce, and other areas.

2. Transaction classification and reconciliation

Crypto accounting softwares should be able to differentiate blockchain events (staking, minting, deposits, withdrawals etc), asset classes (token types) and simplify accounting for crypto wallets where transactions can have multiple inputs and outputs. 

Crypto accounting softwares should be able to accurately represent the different types of transactions like identifying smart contract interactions like approvals, or correctly identify gas fees.  It should also be reliable and consistent in capturing and processing crypto transactions, especially those involving complex scenarios such as forks, airdrops, swaps, staking, mining, etc.

This is particularly important for crypto payouts like batch transactions to multiple wallets, or when paying a crypto invoice with different line items that fall into different categories in the chart of accounts.

To reduce the amount of manual accounting adjustments for these types of crypto payments, Web3 CFOs should choose crypto accounting softwares that can enable you to split transactions this way”, says Geeth. 

Another common issue is reconciliation when dealing with multiple tokens and gas fees. A good crypto accounting software should enable you to reconcile the totals of your journal entries, to totals of wallet and exchange transactions.

They should also identify transactions occurring when exchange purchases are moved to wallets you own, ensuring those transfers are not subject to taxation.

Ideally, a good crypto accounting system should be able to produce the full roll-forward from the beginning to ending balances that can be broken down by cryptoasset type, custodian, wallet, blockchain network, and specific types of activity (sale, purchase for cash, exchange for other cryptoassets, mining income, etc.) in both dollar and native token units”, noted Belonogov.

3. Integration and scalability

Crypto accounting softwares should integrate seamlessly with your existing accounting and tax software, such as QuickBooks Online, Xero, Netsuite, etc. But these legacy general ledger tools were not designed to read blockchain data.

Crypto accounting tools usually act as the middleware between blockchain ledgers and other general ledger tools. The role of a crypto-accounting software is to reconcile on-chain transactions and assets, in an automatic fashion wherever possible, into the main ledger of the entity.”, says Sharon Lourdes Paul, co-founder of HQ.xyz

"Most entities even in web3, have fiat assets and transactions, and many accounting standards still use fiat-currencies as the primary unit of account for financial reporting”, noted Paul.

A crypto accounting software should be able to synchronize with the Charts of Accounts in the general ledger, and easily import the on-chain subledger into your main ledger’s journal entries.

They should also be able to handle large volumes of data and transactions without compromising performance or security. You should also consider whether it supports seamless data import and exports, or if they have to be done manually.

It is also important to see that the app can generally provide verifiable and testable data that can be easily exported to via .csv files, with parameters and verifiable control totals”, says Andrew Belonogov, the head of financial reporting and accounting policies at Figment, a proof-of-stake validator.

4. Reporting and analytics

Crypto accounting softwares should provide comprehensive and customizable reports and dashboards that help you monitor your crypto financials, track your tax liabilities, analyze your portfolio performance, and optimize your crypto operations.

Crypto accounting softwares should be able to capture transactions in real-time from crypto exchanges and crypto wallets and offer a consolidated view of account balances and crypto financials. 

It is important to choose crypto accounting software that can show wallet balances that can be directly - or sometimes after some manual adjustments - reconciled to the trial balance sheet, at the level of detail required to be disclosed in the financial statements.

In particular, for crypto assets, we would want a system capable of generating totals of the cost basis, cumulative impairment related to crypto assets that remains on the company’s balance sheet, and the net total of digital assets, says Belonogov.

5. Accounting methods and standards

Crypto accounting softwares should support multiple accounting methods including FIFO, LIFO, AVCO, and ACB. They should also comply with the most relevant accounting standards and regulations in your jurisdiction, such as GAAP, IFRS, etc. or their local equivalents. 

At the same time, a good crypto accounting software should be flexible enough to accommodate variations in auditor views on access, cut-off, and other fair value measurement principles with respect to ASC 820 and IFRS 13. 

Regulations or auditor viewpoints change or vary. Remember that in many cases, there is variance among audit firms and advisors about how to apply the existing standards or regulations”, explains Suzanne Morsfield, Lukka's Global Head of Accounting Solutions.

Hard-coded, one size fits all solutions, reports, and calculations are therefore not the best approach. Customized reports and adaptable software that allows you to toggle between treatments or calculations are both critical and not nice to haves“, says Morsfield.

6. Security

How secure is the crypto accounting software in terms of data protection, encryption, authentication, and audit trails? 

Web3 CFOs should look out for crypto accounting softwares which have secured external validation of expertise and governance, with attestations and certifications by recognised bodies like the AICPA, or ISO.

At a minimum, AICPA SOC 2, Type 2 should be the minimum threshold for SOC reports in accounting solutions providers, because it is the only attestation that covers how a service organization is performing over an extended period of time”, explains Morsfield.

7. Price

Many crypto subledger softwares today cost significantly more than their general ledger counterparts. This can be difficult to swallow for many smaller teams. Most crypto accounting softwares offer different plans and packages to suit different needs and budgets which charge based on transactions, users, assets, and features.

Best practices when evaluating different crypto accounting software

Just like any good shopper, when choosing the best crypto accounting software for your organization, there are some general rules to follow.

Firstly, ensure that you have met with multiple softwares providers, and have a thoughtful discussion with them about the different evaluation criteria discussed above.

Secondly, Web3 CFOs should consider the level of their needs versus what the software can provide. Some softwares are more institutional grade, while others are tailored for smaller firms or individuals.

Thirdly, software should not be blindly relied upon. Work with external accounting and tax professionals, or hire strong ones in house to monitor, and conduct quality checks on software vendors.

Ivan

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