These are a few of the popular cryptocurrencies in circulation today.Our guest, Dr. Sean Stein Smith, who is an assistant professor in the business and economic department at Lehman College and expert in cryptocurrencies, has some guidelines on how they might work in the accounting and bookkeeping worlds.
Cryptocurrencies are slowly launching their way into the real world and it is best to know the basics about them before they become more widely used.
During this interview, you'll discover...
What is cryptocurrency?
How will cryptocurrencies affect accounting and bookkeeping firms?
Negative and positive outcomes
For Dr. Smith's LinkedIn, visit here.
For his Twitter, click here.
For his YouTube channel, go here.
Michael Palmer: 01:03 Welcome back to The Successful Bookkeeper podcast. I am your host, Michael Palmer, and today's show is going to be a very interesting one. Our guest is an expert in cryptocurrencies and is an assistant professor in the business and Economics Department at Layman College. During his career, he has worked in several corporate financial planning and accounting roles, both for the for profit and nonprofit sectors. He is also on the advisory board of the Wall Street blockchain alliance. Dr. Sean Stein Smith, welcome to the podcast.
Dr. Sean Steain Smith: 01:37 Thank you, Mike. Happy to be here.
MP: 01:38 Hey, it's our pleasure to have you here in such an interesting, exciting topic in the world today. I can't wait to get into this and help our listeners understand this a bit more because this is, this is definitely going to be a part of their future. I am sure.
DSSS: 01:56 Absolutely right. I mean, and I really say that honestly, while the whole blockchain ecosystem and conversation is obviously a very high profile, new topic at the corporate level and at the AI CPA level and at CPA Canada, that that honesty, really the touchpoint for bookkeepers, accountants to anybody working in the accounting or finance space is going to be through the field of cryptocurrencies.
MP: 02:24 Yeah, that's exciting. Now, before we get into all of the the, the content, tell us a little bit about yourself leading up to this point. How'd you get here talking about cryptocurrencies?
DSSS: 02:38 Sure, so probably my, my sort of a background starts. I worked in an industry, as you mentioned, in a number of roles in the for profit and in the nonprofit spaces. But in all of those roles, sort of the actual work that I did it, it was almost half accounting and half it, right? So I was always on teams that were either doing ERP reinstallations, ERP upgrades, or working with the it folks to basically make sure that our dashboards and that our reports raw mapped, accurately updated, you know, correctly and all of that fun sort of backend stuff. And so really sort of my, my interest in this whole emerging tech area, right? Be It blockchain, the AI via automation tools in general or more honing in on it, crypto, cryptocurrency, all of that sort of builds out of my prior background and my interest. So after I transitioned out of the corporate sector into higher education and into academia, I actually had the time right to actually dive, dive deeper into these areas. And really as I was doing that, I got a great understanding and a great look at really how powerful these tools are going to be going forward.
MP: 04:00 Wow. And it seems that, uh, the power of this and the, the attention that it's getting, I mean, it's had a lot of attention from both positive and negative, I would say. Where do you think the world is today when it comes to cryptocurrencies in their, their understanding of it?
DSSS: 04:22 Yeah. Cool. Excellent question there. And so actually I do have, I do have a piece of trivia that actually we are actually just passing the, the, the 10th the birthday of fit coin. That's amazing. 10 years. Yeah. Yeah. And so the official bitcoin white paper was actually first posted online on, on Halloween back in 2008. And so as that birthday sort of fades into the past, I would, I would say that we're at a good spot right now and that, that optimism no does have to be tempered with a little bit of caution because obviously all of our conversations and our analysis in this whole currency space is really intense. Right. And there's, everyone's talking about it. There were billions being put into it, but at that exact same time, there is still some uncertainty as to how ultimately these cryptocurrencies and crypto assets are going to be treated from a guidance and from a oversight point of view.
DSSS: 05:28 So I, so I do think that that right now we're probably still in the first inning of this cryptocurrency game, but still the first period, the first quarter. Right. And on top of that, in terms of cryptocurrency actually being used as a currency that is still very much a work in progress. And that really derives from the fact that from an accounting point of view and from a tax point of view, there's a lot still, again, uncertainty as to how to account for these items, how to classify them. And also frankly, what advice that you give to your customers to end your clients if they are coming to you with these questions.
MP: 06:11 Absolutely. I mean, I, I would imagine that I, I've seen a few headlines where people are, are now accepting something like bitcoin. Well, you know, it's, to me that's like, oh cool. That's neat. I mean, I don't have any of those. I know it's like I can't go and buy anything with a bitcoin. Uh, but if I'm somebody that needs to account for that in a business, that's a whole nother conversation. Right?
DSSS: 06:37 Yeah, absolutely. I mean, and I'm going to agree with you there, that basically that there are some companies who are taking payment in, in Bitcoin, but that really, for the vast majority of people, it's, it's not easy to obtain the bitcoin hold onto the bitcoin and then actually use it to pay for goods and services. Right? So as far as, as, as of that stage into Bitcoin, sort of the development goes, uh, let's still very much, I think down the road, right? But from an accounting point of view, this is a real issue and a real conversation and it's a real conversation. And by conversation, I mean both a challenge and a opportunity due to the fact that the only guidance in the US at least is a IRS memo from 2014 which is a bit dated now. And so really to build on your points and your comments, if you have to do the accounting for this, how do you do it right? From a conceptual point of view, right? Like, like what are these things that they inventory, are they, are they foreign currency, are they intangible assets? What are they? And then after that, how do you actually get it to work with your other ERP systems? Right? And it can be QuickBooks, so it can be zero or any of the other platforms out there.
MP: 07:58 So how, how are people dealing with it today? And, and I guess that the, maybe the bigger question is there's a lot of uncertainties. What are some of the certainties that we, we, we have today about where this is going?
DSSS: 08:14 So what I would say there is that as far as what people are doing today, it's a, a, a blend of approaches, right? There are some people who are according to these types of information in their accounting software programs as either foreign currency or as different types of inventory. And then, and then basically we were doing some work outside of the accounting software to actually do the math and to actually track the, the basis of these different cryptocurrencies. But that's a little challenging, right, right. Because as of right now, different platforms like Coinbase and like by Nance are not under the same obligation as a brokerage. Like if fidelity is to actually give customers and clients with a 10 99 at the end of the year. So then all of that means basically that there's extra manual labor right now on the side of bookkeepers, of Accountants, of CPAs who are trying to make sure that they're accurate and on top of all the purchases, sales and the uses of bitcoin and other types of cryptocurrencies.
DSSS: 09:26 But I would say from the point of view that, that I've seen, and I've heard folks are either doing it entirely offline in a excel workbook or they're putting a round peg into a square hole by calling it something like inventory or foreign currency in their current software. Now, as far as what we do know for sure, there were a few facts that we definitely know. One is that the cryptocurrency market is worth a lot of money as of October 31st the overall value of the market is 200 billion US dollars. That's not chump change. And, and that over half of that market, even now, even after its, its price has, has dropped quite a bit in 2018 the overall market for bitcoin is worth $110 billion. So it's a big business and it's moving very fast. That's the other fact that we know for sure. Uh, there's institutional interest now in this space.
DSSS: 10:33 So just a few weeks ago, fidelity launched the first institutional platform for institutional investors to put money into different cryptocurrencies. And I'm only bringing that up because as those bigger pools of money and more frankly influential players in the financial services space get into this market that is going to push the conversation on frameworks and guidance off the back burner and up onto the front burner because frankly, they have a fiduciary duty to know what they're doing. How to account for it and to be good stewards of their client capital. And then the third piece of, of information that we know for sure is that the market is evolving on an almost daily basis, right? B. Cause just in the last couple of years we've moved from initial coin offerings to airdrops and there are new iterations of cryptocurrencies being launched into the market, such as stable coin offerings and now a secured token altering versus a ICO. So I'd say to sum up, there are three facts that we definitely know for sure. One, it's a big market in terms of the dollars being put to work in it too, is that it's now starting to attract the focus of institutional players, which is both good and bad from an accounting point of view. And then the third is that it's evolving very quickly.
MP: 12:14 Wow. All three are Bray all three certainties bring more uncertainty.
DSSS: 12:23 Yeah. Yeah, definitely.
MP: That's crazy. So really interesting how, okay, so we've got the cryptocurrencies and now they're, they're launching other currencies into, into all of this. Uh, help, help us understand the, the how blockchain and cryptocurrencies go together.
DSSS: 12:49 Excellent question. And do you know, because cryptocurrencies and bitcoin and blockchain are all normally tossed about in the same conversation and sometimes in the same breath. So the best way to sort of imagine it, right? And different analogies work for different people. But the best way that Ali, imagine how it works is that I want to think of blockchain almost like the Internet, right? And now the internet has applications that are running on it like Facebook, Google, and Amazon, right? And on the, on the blockchain, which also don't forget, has to run on the Internet. So it's the Internet. And now on top of that, we have blockchain. Then on top of that, we have different applications like Bitcoin, like light coins, like ether. So all are those applications and cryptocurrencies run on a blockchain. Or to put it differently, blockchain is what actually puts the crypto into cryptocurrency without the blockchain. And you wouldn't have any cryptocurrencies out there.
MP: 14:03 And why is that so? Is it because the, the, the, the crypto part is that it's, it's, Oh, I'll let you, I have no idea. So I'll let you explain it. I'm trying to get sense of that myself.
DSSS: 14:16 Sure. So, so the best way to, uh, connect those dots, right, is that unlike most technology systems, which are built out with some functionality first, and then security is added at the end in the form of a password or a firewall, when, when the idea of a blockchain was first rolled out, the entire purpose of be behind it. And all of this is outlined in that white paper that was uploaded in 2008. The entire purpose of this whole blockchain idea, it was to create an alternative way for individuals and institutions to actually do business without any third party in the middle. Now, while let's a very short statement, that is powerful implications, right? Because banks, lawyers, accountants, bookkeepers, there are a whole host of third parties whose, whose primary job is to verify the identities of the customers at either end of this transaction and verify that the funds being sent from party to party.
DSSS: 15:30 B, it's actually get there. Right. And the whole idea behind blockchain and the bitcoin blockchain that there was to do away with that and to set up a peer to peer network, meaning that the two of us, for example, we can send money back and forth and do business back and forth without having to know each other at all. So, so it basically took the functions that are performed by a third party, like a bank, a PayPal, or a credit card company. And instead of having that centralized in one company or even one database, now it, now it, now it pushes that out to the whole network. And I don't want to dive too much into the computer science part of it, but, but basically in order for any piece of information, in order for any transaction to be verified and uploaded onto the blockchain, there has to be some sort of consensus-based approval or in, or in other words, if, if I'm trying to upload data, certain other members of the group of the blockchain have to basically check that that data is accurate and I'm following the rules of the blockchain.
MP: 16:47 Hmm. Amazing. So how does, how does that in your, in your understanding impact or how are lawyers, doctors, bookkeepers? Well, if I put doctors in there, it's not really the, probably a part of the professional field but not probably at this point effected by Blockchain, but maybe they are. Uh, but how's that going to affect them in the future?
DSSS: 17:11 I'd say honestly within now, now it's important to all sort of realize that right now being we're still in very early days, right? The blockchain ecosystem and that, but going forward though, the entire process of doing tax returns of doing audits, of doing financial reporting, that is going to change, right? Because, and it's going to change really for two reasons. One by the attributes brought by blockchain itself because if data is oh, approved by the group of parties who are impacted by it, if that data is encrypted after it's been approved, and if that data in the format of a block forms a permanent record that I cannot alter and that if I actually want to do any changes, I have to upload an additional block that basically means that the audit trail is already there. And as far as income taxes go, one of the key pain points in taxes, uh, for withholdings, unemployment, and payroll taxes, all of that stuff is that people don't have the same information, right?
DSSS: 18:27 So the firms, the employees and, and the tax authorities don't, don't have the same information. And if they do, it's, it's been updated at different times. And there are some instances over in Europe, for example, I end up in South America where there are countries actually at that national government level who are trying to institute blockchain programs to help basically collect taxes on an ongoing basis versus doing it once a year or every quarter. And as far as overall, right in the accounting space, lawyers, health care, it's basically any business line that has a few characteristics. One that it deals with digital information too for that a portion or all of that data is sensitive information, be it healthcare records or financial data and then three that as a part of how that business industry works, that there is a reliance on a third party to help verify and secure that information. If there's an industry that has those factors, it is going to be impacted by blockchain now even if it's not being impacted now, I'd say within five, 10 years it is going to be.
MP: 19:54 Yeah, it, I mean I think that speaks for every, for every industry how it will be impacted is a big question mark. And, and like anything, our roles will change in the, in the, in the industry. So there's going to be something to do. We just don't know exactly, uh, what that is.
DSSS: 20:15 Yeah and really I'd say your dad, I know that I give a lot of presentations and I do a lot of engagement with accounting folks and that a big fear on a big miss conception I believe is that auditors are going to be put out of work and that bookkeepers are going to be put out of work. Right? Right. Because if all of this data is verified and uploaded and it's encrypted on to continuous basis, what is actually left for us to do now, there were two big areas that are going to grow out of this. One is that as more and more information is stored in a digital format or in a cloud-based format, there are going to have to be good internal controls over every aspect of that process from beginning to end, especially if certain pieces of that process are being automated too.
DSSS: 21:15 So they were going to have to be good controls, good controlled testing and just good analysis of what the system is actually telling you and then that's where bookkeepers and accountants can really add some value instead of just having to compile and then report the data. Now going forward we have, we're going to have some more time to actually help our clients with their business, which is what they want anyway, right? Because I don't really think that that a at a tax return or that an audit or that a compilation really in the eyes of most clients adds a huge amount of value to the business and so then going forward to point number two as more and more of that base level work is either augmenting or automated or otherwise changed, we are going to have more time to actually help our clients understand how their business is doing and then help them find ways to improve that performance going forward.
MP: 22:23 It's really interesting and I think for the listener that gives them some insight into, you know, what their role might be. But I definitely experienced as a small business owner myself today and there's still, you know, we're, we're leveraging all sorts of technology today and it, whilst we removed some things that we needed to do yesterday, it brings new things. The technology provides all sorts of opportunity, but it also provides opportunity for it to break, for it to be optimized for it to be, for new technology to be adopted. You know, it's just constantly changing. And so there's almost this role of a technician that helps people understand it and make sure that it's being done correctly and make sure that it, you know, they know how it's been built so it can be fixed when it breaks and that is going to change tomorrow. So it's just interesting. But I think for the listener, they get some sense from this conversation of, Hey, number one, you need to be paying attention to this to understand how it works. And number three start to think about, well we're, where is it changing? What are the opportunities that can be taken on from it?
DSSS: 23:31 Absolutely right? I mean there are going to be changes, right? I mean, you know, I mean that is a full stop, you know, fact, but I mean things are going to change anyway, right? When we first had the internet rollout, that was a big change. When the first computer was, was introduced, that was a big change. When, uh, credit cards were first introduced, that was a big change, right? So all that we're doing now is just basically going forward into a, a new type of business environment, right? So the fundamentals of, of business and being able to understand how a company is doing from a financial point of view aren't ever going to change or go away. Right? People are, are always going to have to know how they're doing and then how to improve. And then echoing on your point, even with a new tool put into practice, I think we all know that every time you do onboard a new technology or you or you try out something new, it is never going to work perfectly right the first time.
DSSS: 24:36 There's always going to be iterations and troubleshooting and then ultimately upgrades and then changes no matter how good that technology tool is at the beginning and so really going forward, I'd say to summarize that really our role is going to have to change more from a compliance-based point of view. Just focusing on the numbers of the firm with to, as you said, more of a technician, right? Being able to one, understand how these tools work ourselves and then to having the ability to articulate this to our clients now and going forward and to also help them address issues and problems that are invariably going to come up.
MP: 25:22 Wow. So interesting and so many opportunities that you've already pointed to in this conversation around how people can take, take the next steps and understanding it and being able to incorporate it into their futures. They're so interesting. The, the, just the other day someone posted in our, uh, successful bookkeeper, Facebook group, an article about the top 25 careers that are, are our debt or something along those lines. And bookkeeping was one of them. And, and there's a whole bunch, probably the big chunk of the list that you had mentioned, but I think what it does, there's truth to it for sure. Things, you know, when you say something's dead, it's like, well, yes, parts of it are dad, but there's a re, you know, something else that, that goes in its place. But I think the, the disservice that it does to any industry that's one of those 25 is that it's been, the article has been written for to get clicks to get headlines to sell.
MP: 26:22 No know we're not selling papers anymore, but as an author. So it's not to say that there's no truth to it, but it's also to create fear in the marketplace and to have people paralyzed by, well, what will I do? And to think that their career is over so they might, you know, I'm going to shove off would be a disservice to the, to the many small business owners and medium-sized business owners there that need the bookkeepers that are listening to this right now. And so for you to come and share with, well how, you know, the more I listen, the more I pay attention to it, the more I see there is going to be even more opportunity for the bookkeeping industry because there is a lot of change going to happen. Someone's going to need to be the Stuart of that change for small business and medium-sized business.
DSSS: 27:07 Absolutely. Right. And I was just having this exact same conversation earlier this week and, and an earlier in the past month is that really, instead of, you know, being anxious cause there's always anxiety, right? Whenever there's big change in an industry, especially if that industry is the one that you happen to work in, right? But there are always going to be changes. But this whole area, right? Emerging Technologies, be it cryptocurrency, be it blockchain, be it automation. The way that I see it is it's almost a once in a lifetime opportunity for us as a field and as an industry, as bookkeepers, accountants and CPAs to rebrand ourselves. Right? It's all of us, and I'm sure all of us have, have, I've heard it, that the ultimate goal of anybody in accounting is to be a trusted advisor or to be a business partner, and up until very, very currently, it's been awfully tough for us that you get to that point because of all of the manual work and the research and the confirmations in the verifications that all of us had to actually do in order to get that base level work done.
DSSS: 28:23 But as these new tools come out, and we don't have to be experts in everything, nobody is, but as these tools come out to the marketplace and we're actually able to augment and to automate some of that lower-level work, that on top of not adding too much value, most practitioners don't actually like to do anyway. We're going to be able to actually become those business advisers. And as you said, it becomes stewards of that change and to help drive that change going forward. You know, because we're in a good spot anyway, as accountants, as bookkeepers and CPAs, we are turning to anyway as experts and as trusted advisors to help our clients manage their businesses and their business issues. And so now old, all of this change that's happening is arguably, as far as I'm concerned, it's going to make that expertise and those insights even more valuable going forward.
MP: 29:23 Thank you so much for that exciting times. And, and really I, I feel like I understand the, the landscape a bit better. I know that we didn't go very deep into the technology and all the different things that are occurring. We, we don't have all the time to be able to do that. Probably needs to go do a year-long course with you. But, uh, it, I'd love to have you back as things change, uh, and to help our audience keep up to date with where things are going and where things are. But before I let you go, please share. If people want to find out more about you and about the work that you're doing and consume more of your content, what would be the best way for them to do that?
DSSS: 30:01 Sure. I'd say probably the easiest place to find me on Twitter at Sean Science myth on Linkedin. Again, I showed Stein Smith and also on my youtube channel that I co-host with my partner. It's called the entrepreneurial CPA show and it's freely available on Youtube, so yeah.
MP: 30:24 Yep. Well, that's fantastic. Fantastic. Sounds like an incredible amount of resources and we will have, of course, those links in our show notes for our listener to go and start keeping up to date with what's happening and cryptocurrencies and blockchain and technology overall. Thank you so much for being on the show today.
DSSS: 30:43 Awesome, Michael. Thank you for having me.
MP: 30:46 Our pleasure. And with that, we wrap another episode of The Successful Bookkeeper podcast and oh my goodness, what an interesting and exciting episode that it has been. To learn more about today's guest and to get access to all sorts of valuable free business-building resources, you can go to the successful bookkeeper.com. Until next time,
MP: 31:02 goodbye.