Enterprise Digital Asset Finance: The 4-Step Maturity Model
* Read levels 1 & 2 below
Bitcoin. Blockchain. Digital wallet.
Despite being the most dramatic shift the financial industry has seen since banks started using computers, cryptocurrency has felt like a distant future possibility for you and most other finance leaders. Until now.
Maybe your CRO agreed to accept payment from a new customer in Ethereum. Or perhaps your CEO asked you to research and develop a digital asset strategy by your next board meeting. Either way, it’s now up to you to make enterprise digital asset finance a reality for your business. It’s a big challenge with even bigger benefits and potential, from asset diversification to market leadership.
It’s a big challenge with even bigger benefits and potential, from asset diversification to market leadership. But your existing general ledger and finance systems weren’t built to support this change. It also requires a fundamental shift within your finance group to a more specialized and self-empowered approach.
The path to success is a journey — one that must be taken a single step at a time but with a long-term vision and goal in mind.
That’s why Bitwave developed a step-by-step maturity model to help guide you through the exciting yet daunting process of embracing enterprise digital asset finance.
Bitwave’s 4-Step Framework for Success
Our 4-step framework is derived from the work we’ve done with our customers, other leading companies, and financial leaders, and is designed to help you judge your current cryptocurrency adeptness, streamline your adoption of these new assets, and ultimately unlock the business value of this revolutionary technology.
Level 1: Enable Digital Asset Adoption: Lay the foundation for digital asset finance in your organization by assembling the right team, adopting the right technology, and building basic tax and accounting processes.
Level 2: Expand Digital Assets Across Your Business: Establish the processes, training, and automation necessary to efficiently scale the use of digital assets outside of the finance and executive teams to the rest of the organization.
Level 3: Unlock New Digital Asset Opportunities: Go beyond the basics and begin exploring new blockchains, tokens, revenue streams, and other exciting and innovative opportunities that digital asset finance has to offer.
Level 4: Amplify Digital Asset Value with DeFi: Fully embrace bankless or decentralized finance (DeFi) as you take full financial control of your business and begin to experience unprecedented cost savings and investment yields.
Let's dive in.
Level 1: Enable Digital Asset Adoption
You’re Ready for Level 1 if…
- Your business recently transitioned from having no cryptocurrency on its balance sheet to owning a small amount.
- You have one or two digital wallets managing just a few currencies.
- The number of employees who are allowed to tran
Key Roadblocks and Opportunities
Roadblocks
- You don’t know what you don’t know. There’s an overwhelming unfamiliarity with cryptocurrency lingo, processes, requirements, etc.
- Finance lacks understanding around how to treat cryptocurrency transactions from a tax and accounting perspective.
- Your existing general ledger doesn’t support digital asset transactions.
- There’s little to no institutional discipline around securely storing or consistently bookkeeping cryptocurrency.
Opportunities
- Appoint finance team members with the most interest in or pre-existing knowledge of crypto to become your company’s resident digital asset experts.
- Identify and implement the technology you’ll need to streamline and scale digital asset management over time.
- Develop a workflow that breaks managing digital assets into achievable and clearly defined daily, weekly, monthly, quarterly, and yearly tasks.
How to Reach Level 1 Maturity
- Assemble and train a digital asset tiger team. Digital asset finance has a steep learning curve, so not everyone on your team will be interested in figuring it out — and that’s okay. Identify which people have personally dabbled in crypto and who is the most eager to learn, and ask them to be responsible for understanding the technical and accounting aspects of digital assets, defining the organization’s initial crypto processes, and eventually training the rest of the company.
- Adopt foundational and scalable digital asset FinTech. Managing crypto requires finance teams to bridge the gap from the blockchain to your accounting system. For example, you’ll need to generate the equivalent of a bank statement for your crypto holdings (your general ledger won’t be able to help you), and you’ll eventually need to secure consistent, audit-defensible pricing for digital assets.
A simple application that shows your balances and can export transactions to CSV may suffice for your most immediate needs — but it won’t help for long. Fortunately, new and more sophisticated digital asset finance platforms offer more robust functionality, like full two-way integrations with your general ledger and tax processes and one-click mark-to-market calculations.
- Design your general ledger to take on crypto. Deciding how to structure your general ledger as you bring on digital assets can have profound implications for your business down the line. Many companies wrongly consider setting up general ledger accounts by token (e.g. bitcoin) or per digital wallet. However, as you’ll see, tokens and wallets quickly multiply into the thousands or even tens of thousands, which causes both of these general ledger approaches to quickly become unruly and burdensome. That’s why we recommend creating a primary ledger account called “Digital Assets” and tracking your cryptocurrency in a sub-ledger.
- Define step-by-step accounting and tax processes. At this maturity stage with just one or two wallets across your organization, focus on establishing workflows that allow you to handle day-to-day crypto bookkeeping and close your books at the end of the month.
With the right digital asset finance software connected to your wallets and accounting system, the process of establishing the processes outlined above are straightforward.
- Step 1: Code any new transactions that have been detected by the platform. For instance, this 1 BTC outgoing was payment to contracts, or that incoming 10 ETH is sales revenue.
- Step 2: Sync these transactions with your general ledger at the end of each day, either individually or rolled up.
- Step 3: At the end of the month, run an automated gain/loss report, which will give you realized and unrealized gains and losses. Then book these numbers as adjustments to your account system (this step depends on your tax tracking and reporting requirements).
- Step 4: At the end of the month, run a balance report to see the full fairmarket balance for your holdings.
- Step 5: Compare this balance with your adjusted general ledger balance. They should match to the penny!
If you decide to tackle these items manually, this process will involve additional steps like downloading the transactions (for instance, from Etherscan), pricing the transactions (going to CryptoCompare to get end of day pricing), and finally importing those transactions into your ledger. You’ll also need to track the coin cost basis, either in a spreadsheet or some sort of asset management / inventory management system, to calculate gains and losses.
"Bitwave was an amazing tool for our business. Not only did it give us the ability to track all things needed for our accounting, but it helped our auditing process hit the ground running and gave us the ability to move forward with our Series A funding."
–Justin Podhola, CEO, Elite Mining
Level 2: Expand Digital Assets Across Your Business
You’re Ready for Level 2 if…
- You have dozens of wallets and your company’s volume and variety of digital assets are consistently growing.
- The number of employees who are allowed to transact in crypto is expanding beyond the executive team to include senior decision makers across sales, marketing, etc.
- Digital asset transactions are becoming more commonplace across your business as you begin accepting customer payments and paying contractors in crypto.
- You’ve invested in core digital asset finance technologies to bridge the gap from the blockchain to your accounting system.
Key Roadblocks and Opportunities
Roadblocks
- There’s a lack of awareness outside of the finance team that all cryptocurrency transactions must be accounted for from a tax and bookkeeping perspective.
- The volume of transactions has increased to the point where manually gathering details for each individual transaction is becoming extremely time-consuming and difficult to manage.
- The number of wallets and types of tokens held by your organization are rapidly multiplying, making it increasingly difficult to stay on top of new wallets, owners, unapproved transactions, and compliance.
- More invoices and bills paid with digital assets must be handled correctly from an accounting and tax perspective, as well as seamlessly integrated into your existing accounts receivable/payable processes.
Opportunities
- Get ahead of potential loss, shrinkage, or compliance issues by establishing regular organization-wide training and clearly documented protocols for using crypto.
- Standardize and enforce specific rules, naming conventions, and taxonomies for wallets and transactions to help organize bookkeeping, reporting, and governance.
- Build a dashboard that can help you more easily monitor crypto holdings across your organization.
- Begin integrating your various FinTech applications and services to automate the most time-consuming manual processes and ensure tax and accounting accuracy.