Accounting for Blockchain
Transcript: Jonathan Gass: Now, just ignore the elevator music playing across the entire space. Hey guys, Jonathan again, with the founder sessions here, Nomad Financial. Normally, we've been fighting with fire alarms. Today, they're trying to put us asleep with some really terrible elevator music in the background. I don't know if you hear it. We definitely do. Levi Richards: It's a little bit of a slow jam, isn't it? Jonathan Gass: It's slow jam. Exactly. I have Levi here with me. Levi, why don't you introduce yourself to everybody? Levi Richards: Hi, I'm Levi. To give everyone a little bit of background, I've been with Nomad since the beginning of the year. I've been having a really good time working on some very exciting clients. I think today we're here to talk about the blockchain and some of the exciting stuff we've done with a few of our clients, as well as some of the different challenges that are going to come up, and that we can certainly help with, and some of the exciting things that the future holds for these businesses. Jonathan Gass: Yes. I think with blockchain, it's really interesting how much is going on in that space. It's such an interesting topic to cover. It feels like it's constantly changing. There's a lot of excitement around it, given, I think, where the valuation of different currencies has gone over the last year, the last month, last 15 days. What's happened with ICOs, right? There are examples of companies who've ICO'ed with ... 5 point million dollars of value to their currency at 10X from raising roughly 6 million dollars to 60 and the difference that can have on business. Super great stuff, but at the same time it raises the question of, "How do you manage a company that's touching this space, playing in this space, collecting that currency?" And I think ideally for our audience you could kind of share and give some guidance for people either on this space, just curious about the space or acting to build a business here. Levi Richards: So, the big thing about bitcoin in the blockchain at the moment is that, it's in the news because of the high valuations you're seeing and the very volatility, the very volatile nature of the currency itself. bitcoin is the big one and it's certainly what a lot of people have been talking about, because it was the first one. So it very much opened up the market and has been the pioneer in this space, and it is, at the moment, probably the most stable; because it is so regularly traded. The valuations we're seeing on new ICO's with new technology is ... for those that don't know, an ICO being an initial coin offering. So these are new currencies themselves. With the different currencies they tend to trade on a different base, which is different from bitcoin. bitcoin itself is trading off the individual tokens and then using that as a system for exchange because it's sort of agreed what those are worth and the value it takes to mine those. Systems like a theory I might try to create, like distributed networks and then you can use those as access to the networks; and this is what some of the ICO's are built off. They're essentially offering a new sort of technology that then you can purchase into and then the back end of the system sort of provides the back-up for it. This being as complicated as it is, the problem that people see with these crypto-currency business is that they might not necessarily understand the technology sitting at the top of it. So this is, in a sense, and it's why you're seeing these massive valuations. This is the new ... Facebook. It's the new ... technology boom that we saw in the early 2000s and then come through again 2006, 2008. Because the traditional ... market didn't necessarily understand the basis of the technology, people would get on board and then there would be wide-scale adoption of course. You'd see these values go from nothing up to massive. So you're skipping that middle stage of a business, where that value is getting wider and wider acceptance of the market. It suddenly sort of shoots through the roof. And then, in a sense, a lot of business are struggling because they're not getting past that first step. And that's where we can sort of help as an accounting firm. Jonathan Gass: So what are a lot of the misconceptions about blocking type companies wen you think about the back end and ... financial operations? Levi Richards: The biggest problem with ... that people have is a concept of these companies is, that they're trading in these currencies that aren't necessarily real in a sense. Everyone understands what a US dollar is worth, everyone understands what the Yen is worth. But with the valuation of these currencies fluctuating so wildly, how can I understand the value of what is standing on my balance sheet. So someone's going to come toward ... say I'm a new stage bitcoin blockchain company and I go, okay I've go this great new technology, ideal mostly with vendors that work in the same space. So we're all working off essential a currency that doesn't have a set value. How do I transfer that back into US dollars that investors speak in? So what we do ... Should I speak towards ... just the ... how that sort of translate to ... transactional places? Jonathan Gass: Yeah. I think so. I think that's helpful. Levi Richards: So, as a very basic example, say ... you go out and you buy a Mac Book. You understand that it costs 2000 US dollars ... But say you paid for it with a bitcoin, how do you translate what that bitcoin was worth onto your financial statements? Cause you may have, essentially paid $1,000 for that bitcoin traditionally, but the value that is now created so your paying half of that bitcoin for that $2,000 in the future ... How do you get that onto your balance sheet? And then how do you get that onto your income statement? So, we're recording at an expense level what that is in US dollars. Your then breaking it back into, "What is the gain I got on that coin?" So it's almost like a foreign currency exchange and then that drops into a gain or loss at the bottom. That then loops back into how you balance sheet and the assets you're holding. So, ideally you're keeping a store of these coins in a wallet somewhere. One of the more readily available ones, that a lot of people would have heard of in the news is Coinbase. So say you've got your Coinbase wallet and it's got a coin in it that you paid $1000 for it ... at each month you need to demonstrate the number of assets you own because ... these coins are so volatile, "How am I showing month on month how much my company is worth?" This is the overnight millionaire problem, with these coins. So I- Jonathan Gass: So I'm gonna kind of ... try to plain language that a little bit, right? Which it sounds to me like typically you use the example, "You buy a Mac Book, it's a credit card" ... the reconciliation on your accounting is pretty simple. Levi Richards: Yeah. Jonathan Gass: Right. It literally is making sure that the ... money out matches the expense entry, right? Levi Richards: Mm-hmm (affirmative)- Jonathan Gass: When you're dealing with bitcoin ... you mention it being like using a ... it's a foreign currency expense. Levi Richards: Yeah. Jonathan Gass: So suddenly ... it's multiple entries for what could have been a more simple transaction? Levi Richards: Exactly. Jonathan Gass: Okay. So I think that's a big thing for people in the spaces, understanding that ... using these currencies adds a layer of complexity that otherwise won't exist, and work that otherwise wouldn't exist. Levi Richards: Exactly. Jonathan Gass: Okay. Got it. Beyond stuff like that, is the typical blockchain company want to be similar to other tech companies? Levi Richards: Certainly in a sense, because the product they're providing ... they can be similar to many sort of start up companies. Cause the product they're providing isn't necessarily tested and you won't necessarily have those revenue streams. You just have an additional of complexity in potentially how you're purchasing is occurring on the back end. For companies dealing outside the traditional crypto-currencies, it can get even more complex because then you start dealing with things that there isn't necessarily an open market for. Jonathan Gass: Got it. Okay. You know there's this idea of ... you're starting out a business in space. You plan on going to institutional investors, at some point ... maybe not actually. Maybe you don't have to, but ... are there certain recommendations for founders who are planning who apply in this space, as they think about building this business, they should be really keenly aware of? Where they may have otherwise, risk ... that they could be ignoring or ... worth considering? Levi Richards: So, in a sense ... to ignore ... the biggest risk with those currencies is of course the volatility. From a business sense, it's the same as any small start-up business, the best thing you can be doing to avoid risks in your business, is to correctly set up the systems on the back end. So you want to have ... an effective accounting system. You want to be recording the transactions that you're performing on a day to day business like any other normal start-up. The more you can have your business appear to be operating normally, the more readily it is to accept as some one from outside the sphere of understanding the blockchain. You also want to have ... a solid accounts payable tracking system. You want to be understanding the invoices where this money is flowing in and out of your business. You also want to keep pretty solid records as well, of ... not just your traditional bank accounts, but also the transactions going in and out of your Coinbase account. Jonathan Gass: So if you're collecting a lot of different types of payments it really just adds more work, more layers of complexity to manage? Levi Richards: Exactly. Jonathan Gass: I got it. Levi Richards: For every step that these system ... the currencies make our lives easier for giving us access or potentially ... more secure transactions, there is another layer of complexity somewhere else in your business. Jonathan Gass: So, it sounds like, if you are a ... entrepreneur or a business owner, or an executive, out of comedy, would you consider leveraging blockchain currencies as a method of payment? Called bitcoin? Levi Richards: Yeah. Jonathan Gass: That opened up in the market as only one consideration of whether you should do it or not? Levi Richards: Exactly. So you always need to consider the ... a good way to consider the ... holding crypto-currencies or accepting them as payments is to consider them ... potentially as a very risky foreign currency that you're holding. At one moment it could certainly balloon and be more valuable than the service you provided for it, it could fall over the next day. Jonathan Gass: Got it. As somebody who works with blockchain companies ... what do you do to help them better navigate the space? Particularly from a financial reporting perspective? Levi Richards: So, in a financial reporting perspective, the best thing that we can do for these companies is provide regular financial accounts. So ... again we want to be reconciling the segments, reconciling all the transactions coming through the business so we have a full understanding of the expenses flying in and out. We also want to ... on the ... again looping back to how we're understanding the currency held in bitcoin or any other crypto-currency, we want to be doing a monthly reconciliation on that, and balancing it back to the current market value; because we want to understand, what is the asset you're holding at the moment. Jonathan Gass: So before you go deeper on blockchain, and we let everybody's brain stop exploding for a second, I'm gonna give a shout out to CityRow. Levi's wearing here. It's the best workout in New York City, they're not a sponsor, we just love Helaine Knapp, their founder and the team there. It's pretty epic. It's like Soul Cycle ... they hate me for giving this comparison, but instead it's rowing, which has a better impact on your body and at least one of the two of us looks like a really healthy person up here. Maybe two, one and a half, I'll take a half. Also, want to give a quick shout out to Nam Le, who's behind the camera as always. Nam you're amazing, you bring the heat. We love having your support doing this. At some point we may drag you to the front of the camera as well. So with that ... let's jump back to blockchain. How do you feel about the future of the technology? What are some of the things ... I think the audience can tell, blockchain for you isn't just work, there's clearly a deeper lying interest for you. So, I'm super curious about where this question could go. Levi Richards: So, I, on a personal level, and of course everyone has different opinions on what's happening with the technology, cause there is a lot of debate in the market about it at the moment. I think the underlying technology that has been created from this system, is where the most value lies, so ... I certainly think that this information is around, or this technology is around to stay. We're going to see larger players in the market take up ... the technology and potentially role into their systems. There's certainly a lot of value in the bug banks and some very transactional heavy industries, where security of transactions is paramount. The biggest things in the news at the moment is certainly doubt of breeches. So personal information security is going to jump on the ability to lock down information securely and almost anonymously, within a regulated sort of system. So I certainly believe that while crypto-currencies themselves are going to go through spikes and dips, the underlying technology we're gonna see more and more sort of rolling out as bigger businesses and especially some start-ups come up with new and novel ways to use this. And it's gonna make our live easier, just because, once we've ironed out the back end of these systems, as far as the complexity of recording the currencies and sort of the tax implications there, the new technology is going to be that much better for us. Jonathan Gass: Yeah I mean, I think one of those interesting things about the blockchain space is their ability to self-fundraise. Right? I believe year to date you have less than a billion dollars has gone into blockchain start-ups from traditional investors and venture capitalist where I showed for a billion and a half dollars, right? So one and a half X of self-determined financing is pretty amazing. Levi Richards: Yeah, and again this speaks back to that new technology period, sort of. When ... computer and information technology first started out, it was nothing and nothing and nothing until it exploded. So I think we'll see a relatively same thing here. Where you're going to get a lot of people that truly believe in the space and certainly believe that they can do something with the technology taking those first steps and certainly risking everything they have themselves and they're gonna be the leaders in the market. Jonathan Gass: Some people will find success, a lot of people are gonna burn out. Levi Richards: Of course. Jonathan Gass: But it's that idea of building the core infrastructure like if you think about the internet, and then later came all the apps, later came Facebook, later it became the platforms that sat on top of it, and now the internet is ubiquitous. The investment cycles aren't quite the same. You know, businesses being built aren't quite the same. You think about Amazon is everywhere, right? But that ... literally is being built on top of how they existed before and a lot of the different types of risk takers. So it's interesting to see ... how fast the blockchain technology is building that core structure. I'm curious to see if they can beat those cycles and even cheat some of them along the way, which people hopefully can do. I'm always skeptical of cheating cycles, right? I mean ... business building and infrastructure building are all the same right? Levi Richards: Yeah. Jonathan Gass: It just requires certain steps before the others. Any last thoughts on bitcoin? Things that we haven't had a chance to touch on? Or blockchain that would be good for our audience? Levi Richards: I certainly think that there's a lot of information out there that you could read on. Certainly ... if you read CrunchBase or IO9 or any of those technology based forums, they certainly make it a lot more accessible for people that are interested in understanding the space and understanding what's happening with the technology beyond some of the hype information that's around mass evaluations and coins. It's certainly one of those space where, if your interested in getting the technology, it's a space where people who have the skills, or certainly at least the base interest to get involved in these business, are slowly becoming more and more in demand. So, if it's something you're interested in, there's a wealth of information out there. Jonathan Gass: And then one last topic I'd love to cover, we only have a few minutes left. As someone who works with entrepreneurs all the time, founding companies ... what advice would you provide them for someone who's always kind of working on the engine of the business you might say? Levi Richards: So ... On the back end of the business is ... the biggest thing, I can say, because a lot of businesses in the industry start out with people that aren't necessarily the most orderly. What you want to do to definitely put your business in the best space, is certainly having a good idea and a good basis of technology, but certainly putting in the effort to build out the end or certainly engage people that can help you building out back end of one of the most vital things you can do, because you do tend to find out that a lot of these businesses get to a crunch period without fully realizing it in advance and saving yourself in that last minute is a lot harder without any assistance. Jonathan Gass: And a lot more expensive, because everything is an emergency. Levi Richards: Yeah. Jonathan Gass: Right? Because you don't have much to negotiate around when you're a few weeks out from a fundraiser and you know ... I don't know if I can say this out loud but, shits a mess right? I guess cursing's allowed on Facebook. We'll find out soon enough. Nam: Benji did it. Jonathan Gass: Oh Benji did it. Otherwise Nam can like beep me out. Everyone's gonna see ... the blurry mouth right? Levi Richards: [crosstalk 00:17:41] everywhere. Jonathan Gass: We'll be watching like 1980s comedy's like Trading Places but on TBS, the cut out all the time and then you actually see the original version on Netflix and you're shocked by the jokes cause you haven't heard them in so long. You're like, "I can't believe somebody just said that on television." So, yeah. Not this moment now, I don't think anybody's gonna get offended by my choice of language, so. I think with that we've had a pretty good session here. Levi, thanks a lot for coming on sharing with our audience about the blockchain space. I know ideally, in the future, we'll chat some more about the tax implications of blockchain, cause I think that's another whole area where how you treat this entire asset base is gonna be different then just currencies in general. Along with the fact ... the iris isn't made a lot of wins on this. There's a lot of fuzzy areas, the development is so fast that there's gonna be some catch up and if your in this space with lots of money and the blockchain, you'll want definitely make sure you ... you're just gonna have to be on these things. Cause the tax man is always coming right? Levi Richards: No on escapes the tax man. Jonathan Gass: No one escapes the tax guy. Thanks everybody again and look forward to you seeing everybody next week.