• A new Charles Sturt University study found that the treatment of cryptocurrencies and cryptocurrency exchanges presents challenges to traditional accounting and auditing practices
• The cryptocurrency market has experienced significant proliferation and growth over the past decade and led to increasing mainstream acceptance of cryptocurrency
• The study recommends that governments should develop infrastructure for digital currency transactions and work closely with regulatory bodies to address security and regulatory challenges, and encourage investment in digital currencies

A Charles Sturt University study offers a comprehensive analysis of the treatment of cryptocurrencies and cryptocurrency exchanges in accounting, including the need to bolster regulatory frameworks.

The study’s authors emphasise cryptocurrencies and cryptocurrency exchanges present challenges to traditional accounting and auditing practices within current regulatory frameworks.

The challenges are compounded by the lack of clear guidelines for the accounting treatment of cryptocurrency and the associated auditing difficulties underpinned by complex regulatory debates.

The article is by Dr Milind Tiwari (pictured top, inset), Senior Lecturer in Financial Crime Studies in the Charles Sturt Australian Graduate School of Policing and Security (AGSPS), and colleagues Dr Jamie Ferrill (AGSPS), Associate Professor Marcus Smith (Charles Sturt Centre for Law and Justice) and PhD candidate Mr You Zhou (Monash University). It was recently published in The British Accounting Review.

Dr Tiwari said the cryptocurrency sector has experienced multiple disruptions in recent years after the market experienced significant proliferation during the past decade.

“In 2013, the value of one bitcoin was around US$1,000. Since then, its value has experienced significant fluctuations, now valued at more than US $50,000 in August 2024,” Dr Tiwari said.

“This growth has led to an increasing mainstream acceptance of the cryptocurrency market, with its market valuation estimated to be around US$3 trillion in 2021.”

In order to extract crucial lessons to help avoid similar recurrences, Dr Tiwari and colleagues analysed two case studies representing market ‘crashes’ and disruptions – Binance and FTX.

By examining the operational and financial indicators that were overlooked in these instances, the study aimed to inform stakeholders ─ including investors, practitioners and regulators ─ on best practices for cryptocurrency exchanges.

“We found that both cases (Binance and FTX), while distinct from each other, present similar lessons that should be noted by practitioners, regulators and for the overall structure of blockchain platforms,” Dr Tiwari said.

“These include lessons on risk management and investment diversification, corporate governance and ethical practices, transparency and disclosure requirements, and robust compliance frameworks.

“We emphasise the importance of sound corporate governance, effective risk management and enhanced transparency to improve overall regulatory compliance and auditing effectiveness in the cryptocurrency sector.”

Dr Tiwari said the contribution of the current work is twofold; first, it educates stakeholders, including investors, practitioners and regulators about potential warning signs in digital currency exchanges.

Second, it proposes smart practices for these exchanges, focusing on corporate governance, risk management and transparency.

“The failures seen with FTX and Binance must not be repeated, and they underscore the urgent need for more developed and cohesive infrastructure and regulatory frameworks,” Dr Tiwari said.

“It is well established that if they can be appropriately regulated, cryptocurrency and other digital currencies can offer great benefits through improved access to the financial system, the reduction of errors, lower transaction costs and fraud mitigation, by ensuring accurate representations of information in financial reports.”

The study’s authors urge governments to develop infrastructure for digital currency transactions and work closely with regulatory bodies to ensure accounting standards align with platform design.

This will address security and regulatory challenges, encourage firms to invest in digital currencies, and contribute to greater financial stability.