It’s officially tax season, which means especially burdensome requirements for the adventurous who dared to invest in cryptocurrency last year.
Not surprisingly, the IRS was among the first government agencies to provide official clarity on what exactly bitcoin is, and what they decided was the cryptocurrency and its brethren are property. As with real estate or art, owners of bitcoin and other cryptocurrencies are expected to pay taxes based on how much its value changes.
For high frequency cryptocurrency traders that buy and sell cryptocurrency in fractions of a second and casual owners who choose to spend the cryptocurrency on a regular basis, keeping track of those changes in value can result in a tax nightmare.
This year however, things are different in the world of cryptocurrency. A few, elite startups that automated that process have been granted a status previously reserved for giant enterprises like Amazon Web Services, Oracle Cloud Infrastructure, and Intercontinental Exchange (ICE), the parent company to the New York Stock Exchange.
Designed to give customers of high-volume, large scale companies increased assurance that the software providers they work with comply with certain security and accounting principles, these Service Organization Control (SOC) reports, provide a detailed account of exactly what enterprises can expect from their software provided based on past performance.
The latest of these companies is Libra, a venture-backed startup that builds a wide range of accounting software for crypto, and is announcing its own SOC report today. As the price of bitcoin and other cryptocurrencies dropped 80% in 2018, the slow increase in the number of companies who adhere to these strict guidelines shows a clear path forward to companies looking to attract a new wave of bitcoin whales.
“We think that the auditability of this asset class is a really big hurdle to broader adoption,” says Jake Benson, founder and CEO of Libra. “And to have this certification is a milestone for the industry at large.”
SOC reports must comply with standards set up by the the American Institute of Certified Public Accountants (AICPA), and are conducted by third party auditors. In Libra’s case, the enterprise accounting software provider worked with accounting and advisory firm Friedman LLP over a six month period to tailor its policies, procedures and controls to the cryptocurrency space.
While this type of SOC is frequently described as a certification, it does not in fact make any promises about the quality of a service going forward, but rather is restricted to statements about a given period, in this case, from April 1, 2018 to September 30, 2018. Following in the tradition of the Intercontinental Exchange, Libra’s SOC report is only available to existing customers, and to potential customers who sign a non-disclosure agreement.
While Friedman declined to comment on any of its its customers, Libra provided an official summary of the report exclusively to Forbes that reads: “the controls of Libra that we tested, which together with the complementary user entity controls referred to in the scope paragraph of this report, if operating effectively, were those necessary to provide reasonable assurance that the control objectives stated in the description were achieved.”
Benson says that Libra’s 200 customers, including fund managers, hedge funds, and as of today, a number of new accounting firms, are now accounting for about $1 billion a month in cryptocurrency transactions using its software.
Libra chief commercial officer, and former PwC blockchain lead, Jeremy Drane, explained that “by achieving this certification, we now have the ability to sell to a lot of traditional financial institutions that heretofore would not buy our type of software.” To give an idea of how the cryptocurrency space is progressing as a result of this and other milestones, Libra today announced its first publicly traded customer, Galaxy Digital, which trades on the Canadian Securities Exchange.
Based in New York City, and supported by $23 million in venture capital, Libra is certainly among the best known companies to receive an SOC report. But it is not alone, with more competition to come. Already, the Digital Asset Custody Company (DACC) lists SOC 1 Type 2 and SOC 2 Type 2 reports available upon request, and cryptocurrency exchange Coinbase is now hiring a security compliance manager with the goal of implementing the same standards.
The need for such measures goes back to March 2014, the same month Libra was founded, when the IRS published its first official notification describing bitcoin as property. The following year, the U.S. tax agency released further guidance classifying it as a commodity, which importantly placed the asset under the purvey of the Commodity Futures Trading Commission (CFTC), not the Securities and Exchange Commission (SEC).
While the IRS has yet to publish national numbers on how successful it’s cryptocurrency tax campaign has been so far, in November 2017 the agency successfully petitioned Coinbase in Federal court to force the cryptocurrency giant to divulge information about 13,000 of its users over a two year period.
Then, in March 2018 the IRS issued a “reminder” to pay taxes on crypto earnings along with a not-so-subtle warning that “anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.”
While no software can make someone pay taxes, Benson believes SOC reports like the one his company received can attract new people and companies to crypto who are willing to pay in the first place. “We’re doing the same thing that we’ve always done from a technical standpoint,” says Benson. “But that certification allows us to serve a new realm of the industry.”