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How Centralized Crypto Can Improve Blockchain Reporting

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  • How Centralized Crypto Can Improve Blockchain Reporting

    Cryptocurrencies may have started off as an outgrowth of the cypherpunk movement, and that was reflected in how the cryptocurrency space initially developed. It is easy now to lose sight of the initial goal of cryptocurrencies; to develop an alternative financial system not beholden to any centralized or governmental agency. No matter what side of this conversation you find yourself on, centralized versus decentralized, the sheer ambition of such an idea was something to admire.

    Reality, as is often the case, is more complicated and nuanced than just a big idea.
    Decentralized cryptocurrencies may have initially been designed to be used as a medium to pay for goods and services, but the issues with that have been well documented over the past several years. Technical complexity, a lingering feeling by some that cryptocurrencies are associated with criminal activities, tax treatment that does not encourage usage as a fiat alternative, and a murky regulatory picture have proven substantial headwinds to broader adoption. Cryptocurrencies with more oversight, or even those issued by a government, are emerging as a potential next step for crypto and blockchain.

    The promise of cryptocurrency was to break free of the incumbent financial institutions and regulatory structure, but those incumbents and regulatory structures are in place for a reason. Without regulators and oversight bodies, the metrics and types of information reported lack the consistency and regularity that businesspeople rely on. How much information should be reported? What types of data should be disclosed? And, what happens if there is a blockchain-specific event, like a hard fork?
    Cryptocurrencies of all kinds run on, and are dependent on, underlying blockchains; investors, regulators, and merchants need greater transparency and consistency to accelerate the move of blockchain from a crypto-only tool to a business tool in general. As blockchain adoption continues to accelerate and move far beyond just cryptocurrencies, the need for increased clarity and standardization around how to report blockchain data will only increase.

    Semi-centralized or centralized cryptocurrencies may not represent the ideal version of crypto that some proponents desire, but let’s look at a few of the ways that these versions of cryptocurrencies can help improve blockchain reporting.

    First, having more centralized cryptocurrency options, especially if these are issued by a central government, will give many increased confidence in the validity and integrity of these cryptocurrencies. Personal opinion aside, having an implicit government backstop or approval will probably help spur wider usage and adoption, due to the lower implied risk of using these cryptocurrencies.

    Second, the increased confidence in, and more widespread usage of, these centralized cryptocurrencies will, in turn, help push regulators and accounting organizations like the Financial Accounting Standards Board (FASB) to codify reporting practices and standards. Reporting crypto and blockchain information may not be the most exciting part of the conversation (for some), but getting these processes standardized for blockchain information is critically important.

    Lastly, and a trend that is illustrated in the form of recent announcements related to Service Organization Control (SOC) engagements, is the clear expectation that blockchain data will be examined with the same rigor as non-blockchain information. Imperfect as they are, financial and control audits play an important role in the functioning of the financial reporting system. If more merchants and individuals are using cryptocurrencies, as a result of them being semi-centralized, the rigor and testing of this information will inevitably have to increase.

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