US East Coast 2018 Special Report - Theorem Fund Services
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US East Coast 2018 Special Report FEATURING FundCount // Opus Fund Services // Theorem Fund Services // U.S. Bank // Withum
FUND SERVICES
Crypto portfolio accounting:
data and reporting challenges
Pat Mulkern, of Theorem Fund Services, speaks with some of the industry’s
service providers about the importance of crypto specific portfolio accounting
systems and the challenges around reporting for the cryptocurrency asset class
I
f I were to pose the
question to a random
audience ‘What is an
Pat Mulkern
Theorem Fund Services A Yes, this is where things get
much more technical. There are
three main parts to this challenge:
Pat Mulkern is a director of business development at Theorem Fund Services. He has
ERC-20 token?’, the worked in sales in the financial industry for over 10 years. Prior to Theorem, Mulk- 1. Decimal precision: The deci-
ern was a vice president in sales at SS&C and Citco, in charge of generating new
large majority would fall into a blank business across the US. He holds a Bachelor’s degree from Penn State University mal precision for crypto can go
stare with no answer. This is an ele- with a Finance major and Economics minor. further than 18 digits. The rea-
mentary way to explain exactly how soning for this is because of the
traditional portfolio accounting sys- These are all new places where ability to purchase extremely
tems would react to the crypto-as- transactions take place com- small fractions of coins. While
set class. Throughout this article, I pared to historical equity ex- seemingly a simple problem, it
interviewed some industry experts changes. There are more than is very difficult to modify current
to shed light on the importance 120 exchanges where crypto software to accommodate.
of having crypto-specific portfolio trades can take place which 2. Fees: In traditional equities trad-
accounting systems compared to makes obtaining data even ing, an investor would pay their
traditional systems. We will take a more challenging. Also, these fees in a single fiat currency. Fees
journey through the complexities exchanges are far less mature for crypto can be charged in ei-
of dealing with crypto assets from a than equity exchanges that ther fiat or crypto. When fees
technical perspective. have been around for a very long are charged in crypto, they are
time. To add additional com- treated as a disposal creating
Q&A with Jake Benson, founder plexity, most funds also need to a realised gain/loss event. This
and CEO of Libra Tech track a complete set of transac- causes reporting challenges
tions that may also reside at OTC that can be laborious without
Q From your technological per-
spective, what are the main
desks and wallets.
• Lack of standard terminology:
the proper software.
3. Cost basis and lot tracking:
challenges our industry faces with The naming and symbology for When it comes to equities, tax
respect to the crypto-asset class? each coin can be different across lot IDs are applied, and the cost
A To make things easy, I would list
the challenges into three main
categories:
the exchanges, OTC and wallets.
This inconsistency leads to in-
efficiencies when normalising
basis goes right to the IRS. As for
crypto, there is not yet an official
lot ID system. The lot splits can
1. Ecosystem level challenges and comparing records from dis- get very complicated for a few
2. Crypto-specific challenges parate sources. One example of reasons:
3. Protocol-specific challenges this is not being able to report • Partially due in part to the
specific transactions that are or precision in the number of
Q To start, may I have you de-
scribe some of the ecosystem
are not done on margin. Anoth-
er example, even bitcoin itself
decimal points
• Fragmented purchases (par-
level challenges? can be referred to as BTC or XBT. tial coins)
A Yes, I would say there are two Without normalising the data, • No system for transferring the
main challenges when it comes you end up with several differ- cost basis information due to
to this: ent P&Ls on what is actually a the inability to track across
• Obtaining data: Recordkeeping single asset. the blockchain
software has never had to inter- • You can deposit coins into one
act with the venues that allow
the trading of cryptocurrencies. Q Now let’s dive into the cryp-
to-specific challenges.
exchange and transfer to an-
other. The cost basis will not
US EAST COAST 2018 HFM.GLOBAL 11
FUND SERVICES
move along with it due to the to the necessity to store for concerns that need to be considered,
lack of mechanisms. more information and accom- evaluated and addressed.
modate for new data structures.
Q Lastly, let’s talk through the
challenges around protocol.
3. Smart
portfolio
contracts:
accounting
Traditional
systems Q May I have you talk through
some of the ways you consult
A your clients to deal with some of
There are many types of pro- cannot process these new as-
tocols, which adds to the com- sets natively. Expecting current the challenges we have discussed?
A
plexity of this asset class and how software to be able to read the One of the biggest challenges
challenging it can be to handle values and terms of a smart con- that we find solutions to is un-
without the proper knowledge and tract would be like expecting a derstanding the underlying trade
technology. record player to read a USB drive. data and transactions to facilitate
1. Protocol and tokens: A proto- the process of originating financial
col is the platform crypto are Q&A with Christopher Mora, statements. Depending on the type
built on top of. There are many CPA at Centri Business Con- of organisation and crypto asset the
types of protocols, each with sulting, LLC organisation is trading, accounting
their own intricacies and tech- presentation and treatment can be
nical nuances, which adds to the
complexity of this asset class Q Being that you are a leader in
Centri’s Digital Currency Prac-
different. Each type of cryptocurren-
cy an entity holds has to be evaluat-
and how challenging it can be tice, could you sum up what you see ed to see if it meets the definition of
to handle without the proper as the main challenges with this as- an asset in accordance with gener-
knowledge and technology. One set class? ally accepted accounting principles
of the most well-known proto-
cols to the public is Ethereum.
Back to the beginning of this ar-
A Obtaining and understanding
the trade data is one of the most
challenging aspects of this asset
as well as fair value determination.
We are often helping companies de-
velop internal accounting policies
ticle, ERC-20 tokens are built on class. Every exchange has different and procedures so transactions are
top of the Ethereum protocol. ways of presenting its trade infor- accounted for systematically and
2. Accounts: Traditional bank ac- mation and new exchanges continue consistently.
counts have a single account to come online, shutter their doors
number applied to an account or evolve on a daily basis. Keeping up Conclusion
which is tied to an individual with the ever-changing landscape To wrap up this topic, it is no secret
or company. For example, any will remain a challenge for the fore- the crypto asset class is and will be
time you received or transferred seeable future. Unlike traditional evolving. As the asset class contin-
money, it would always come equity markets, crypto markets have ues to grow and mature, technol-
to and from that account num- to be monitored 24/7. Service pro- ogy will continue to improve with
ber. When it comes to crypto, viders, management and their advi- expanded capabilities. The use of
you may have different crypto sors have to plan accordingly. What Libra’s technology has played an in-
addresses (account numbers), happens when there are issues with tegral part in our success as a fund
sometimes a unique one for each data aggregation? What do you do administrator. It has allowed us to
transaction. Each protocol has if you lose trade exchange data or service some complex clients in this
its own convention for generat- there are connectivity issues? These asset class in an efficient manner
ing crypto addresses. This leads are just some of the questions and with a high level of confidence.
12 HFM.GLOBAL US EAST COAST 2018
We Are
The
Whole
Package
FUND ACCOUNTING MANAGEMENT COMPANY ACCOUNTING TAX SERVICES
INVESTOR/COMPLIANCE SERVICES
Chicago Board of Trade Building, Ste 4102 — sales@theoremfundservices.com — 312.588.6891
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