In today’s newsletter, Ganna Vitko, president of the Toronto Chapter of Women in Crypto, takes us through the accounting rules in place for crypto and digital assets and some of the challenges of managing these new assets.
Then, in Ask an Expert, Aaron Brogan of Brogan Law answers questions about token issuance and its tax implications.
-Sarah Morton
The Accounting and Auditing Challenges of Crypto Funds: An Insight into the EU and US Markets
The crypto market poses significant challenges for accountants and auditors in all jurisdictions. These are some of them.
What to know:
- As digital assets do not fit neatly into existing generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), there is much uncertainty surrounding their classification, valuation and disclosure in both the EU and the US
- While the EU is slowly moving towards better standardization through new rules, the US continues to rely on interpretive approaches.
- All of this leaves auditors, accountants and fund managers to navigate higher inconsistency and risk.
The financial industry has undergone an extraordinary metamorphosis in the past decade. With digital assets becoming full-fledged parts of the financial ecosystem, every market participant has had to adapt to new circumstances.
No one has had it harder than accountants and auditors. Specifically, conventional auditing and accounting practices – based on the traditional financial instruments and reliable infrastructure – are not enough to contend with the ever-changing world of digital wallets and distributed ledgers.
Below we will discuss some of the most prevalent challenges facing accountants and auditors, both in the US and in the EU.
The core of the issues
At the heart of crypto accounting and auditing issues lies a fundamental mismatch: digital assets simply do not fit into long-established frameworks. Under US GAAP and IFRS, assets are grouped e.g. in clearly defined categories such as cash, securities, derivatives or intangible assets.
However, cryptocurrencies defy such straightforward classifications. Are they financial instruments? Intangible assets? Or should they be seen as fixtures? Despite recent attempts, not many jurisdictions have managed to fully define them.
This lack of clarity has several negative effects as it shapes how crypto holdings are validated, when impairments are recognized, and how gains and losses are actually recorded in financial statements.
Regulatory pressures and enforcement trends
We need to note that this uncertainty about accounting and custody is unfolding in an environment where regulatory scrutiny is at an all-time high. While not all SEC enforcement actions relate directly to crypto or audit failures, recent data on accounting and audit enforcement offers a useful window into the compliance conditions under which digital asset funds now operate.
The data in the table above reveal a remarkable shift in enforcement dynamics. Firstly, it is clear that the number of respondents in accounting and auditing cases fell in the financial year 2024. However, the average settlement amounts increased significantly, especially for the individual respondents. This pattern points to a shift away from broad enforcement and a move toward fewer cases with higher financial stakes. This, in turn, increases the personal and professional risk for everyone involved.
On the other hand, Europe is moving along a markedly different path. As Markets in Crypto-Assets (MiCA) moves into phased implementation and supervisory coordination is strengthened across all member states, the emphasis is slowly shifting to formalized compliance frameworks and standardized reporting obligations.
There is thus a contrast in the regulatory mechanics between these jurisdictions. In the United States, enforcement intensity ebbs and flows with policy direction and case selection. On the other hand, EU codification is progressing through structured legislative harmonisation. Both of these dynamics shape the governance environment in distinct but consistent ways for both crypto fund managers and their auditors.
Moving forward: best practice and innovation
Amid regulatory and technical uncertainty in the EU and US, market participants are doing their best to proactively adopt best practices. They include:
- Regular third-party attestation of reserves
- Independent valuation providers using pricing on multiple exchanges
- Improved internal controls over crypto operations
- Investing in audit technologies that leverage blockchain analytics.
Accountants and accountants themselves are expanding their skills and collaborating with specialists, which is a big step in the right direction.
Conclusion
Currently, accounting and auditing for crypto funds are at a crossroads. Issues such as fragmented regulation, volatile markets and new depository arrangements strain all previous financial frameworks. In the EU, new rules signal a move towards better harmonisation, while the US largely continues to rely on creativity and interpretive approaches.
For accountants and auditors alike, navigating these waters with all new guidance requires more technical knowledge and active engagement. Eventually, things will improve as more improved frameworks emerge. Only they can increase transparency, reduce risk and support sustainable growth in the crypto fund ecosystem.
– Ganna Vitko, President, Toronto Chapter of Women in Crypto
Ask an expert
Q. My client is considering launching a meme coin. What should they take into account?
The SEC has provided guidance that it does not consider certain “meme coins” to be securities. If a client wishes to sell these tokens, they should be aware that the tax treatment of meme coins is not equivalent to an exempt securities offering. IRC ยง 1032 says that proceeds from stocks are not taxable income, but this is a statutory creation with no crypto analogue. If your client sells meme coins, they may owe ordinary income tax.
Q. How might this change in the future?
There has been a push among crypto legal practitioners, such as Miles Jennings, to re-shore cryptocurrency projects. However, many projects prefer to offer offshore in part to try to avoid the tax burden of issuing in the US. Tax is a direct political issue among crypto lobbyists in Washington, DC, and a solution to the issuance conundrum may be the subject of future legislation.
– Aaron Brogan, Managing Attorney, Brogan Law
