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[00:00:20] Preview

Blake Oliver: Where do you see this going? I mean, it's a tiny sliver of businesses right now that are accepting cryptocurrency. Do you see it going mainstream? Do you see business using cryptocurrency? Are you a crypto maximalist? Do you think that it's going to replace fiat currency and the US dollar? What's your view of this?

Hello, and welcome to another episode of the Earmark Accounting Podcast. I'm your host, Blake Oliver, CPA. And I'm joined today by Ben Taylor. Ben is the CEO and co-founder of SoftLedger, a cloud native accounting platform and APIs that empower your growing company to operate more efficiently and make smarter decisions.

Ben is also a CPA who got his start at EY as an auditor and spent over a decade in the profession before starting his own software company. Very happy to have you on the show. Thanks for joining me.

Ben Taylor: Thanks for having me on. I appreciate it.

[00:01:25] Why did Ben go from accounting to starting a software company?

Blake Oliver: So what the heck made you take the leap from accounting into starting your own software company?

Ben Taylor: Sure. Yeah. Not a common path to spend a decade in accounting and then start your own software company. And the reason for that was it took too long to get financial data at the company I was working at at the time. Really what that means is it took too long to close the books.

I like to say that you didn't know how you did on January 2nd until February 25th, let's say, because you need to get to the end of January, you then close the books, and that takes weeks. And all of a sudden, you're looking two months behind. And that just seemed kind of crazy to me.

And so I called up my long-time friend, Geoff Ostrega, who's a CTO and co-founder. And he's been building applications since he was in high school, so he knows how to actually build software. I thought maybe this is a problem that could be solved with software. And so that's what led us down the road to ultimately building a mid-market general ledger, which is kind of at the core of this problem to ultimately get financial data into the hands of everyone who needs it at an organization as fast as possible.

[00:02:39] What is SoftLedger and where is it in the market with competitors

Blake Oliver: Yeah. I was really excited to hear about SoftLedger when we first got in touch. I didn't know about this as an option. I mean, I think we're all familiar with QuickBooks and Xero, and some of us, NetSuite, Sage Intacct in the mid-market. So you are building, or you have built a cloud-based GL for mid-market companies that do compete with NetSuite, Intacct in that realm? Or where do you sit?

Ben Taylor: Yeah. Yeah. I mean, kind of in between, to be honest. You might come off of a bookkeeping software platform like QuickBooks or Xero earlier than you would have otherwise because it's... There's a big jump from that to NetSuite or Intacct, and sometimes you are never going to need that level of complexity.

We took a very much of a product focus to building the application. We say a lot of the same things that everyone does. It's easy to learn. It's fast to implement. It's easy to connect to other systems. But in our case, it's just very true on every front.

And a lot of that comes from just using a product focus and doing it in the past few years versus... If there's not a lot you can change if you started 20 years ago, it makes it a lot more difficult to change your system. And just would fundamentally build a mid-market accounting system differently you started when we did.

Blake Oliver: And you were on another podcast, CFO Weekly, I think was it, and you were talking about how your GL is built with APIs from the beginning. I mean, it's in the description.

[00:04:17] App is built with API's - why is that important?

Blake Oliver: Why do you highlight API in your website at the very top? Because most people probably... I mean, I think a lot of our listeners know what an API is. Maybe you could just explain why that's important. What's different?

Ben Taylor: Sure. Yeah. Yeah, absolutely. And that's something that I've learned a lot more since actually building the system. And I was, I guess, in the exact same boat when I was using accounting system in my day-to-day job. But essentially, you could say legacy cloud accounting software providers built their application and then they added on an API as a way to communicate with other systems.

The way we constructed our platform, we thought about APIs from the very beginning. And I would love to take credit for this connote to tell Geoff that the architecture behind this really taking the end user requirements and realizing, oh, okay, this is how you should do this. And today, how you'd build a, it's called cloud native is the architecture decision that we made.

And that means our application actually talks to our API to work inherently. That's just how the system works. In the same way as if you're using another system like HubSpot or some internal system that you use for billing, whatever the case is, it could do the same exact things as we do via our application, but via another application.

So you could send over a journal entry, you could send over invoice and create that and send it out all just via code because that's the same way that our end users are really using the API.

Blake Oliver: So then, is it accurate to say that the user interface is really just accessing the API to do things in the app the same way another third-party app that's connected would access it?

Ben Taylor: Exactly. Yep. That's a great way of putting. So you could kind of think it as the user interface and the API has these two kinds of things that... If you think of the hub and spoke model, like the user interface or our user base is one, and then another application could be another and then another, and then you... It's all feeding from the same exact source.

Blake Oliver: So you guys don't need to... I guess if somebody uses SoftLedger, RPA is not necessary because you have an API for everything already built in.

Ben Taylor: Yeah, exactly. And we've looked at this before, too. Yeah. We've realized that when we've assessed RPA in a number of areas and a lot of times it doesn't seem like it makes sense because you now have this ability to directly connect transactions in a way that's just tougher.

If you have an application and then an API, and the API can kind of talk to some things in the application, but not others, it creates more friction in that connection. And by removing just a little bit of friction the way that we have, it starts to create new possibilities for connecting systems.

Blake Oliver: I want to make sure I'm visualizing this right. So we have database, then we have API, and then we have the user interface on top of that.

Ben Taylor: Yeah.

Blake Oliver: Okay.

Ben Taylor: Yeah. Yeah, that's kind of right. Using my very dumbed down version of... Yeah. There's one database that the API, that's communicating with, which the same place where the UI is pulling information from. And it keeps it all consistent. You start to eliminate a lot of data replication, which I think helps a lot.

[00:07:53] What does a general ledger have to do with blockchain?

Blake Oliver: So we're here to talk about blockchain today. This episode is Blockchain for Accountants. So you've you started your own general ledger application. What does that have to do with blockchain? How'd you get interested in blockchain tech for accountants?

Ben Taylor: Geoff and I got interested in 2017. And crypto assets, blockchain networks, related technologies, all these things that were coming in, there were a lot of projects building on them. It became pretty active and mainstream. We all remember the ICOs that boomed in 2017.

We got interested in it, and then we realized, okay, so these ICO's initial coin offerings, you don't remember the term, to me, coming from a SEC reporting background, I basically look at that and think, okay, well, the SEC is going to view this as an IPO, basically. This is a little IPO, except these companies don't have accounting departments and financial groups and all the things that you have traditionally before IPO.

And that's going to be a big problem because this is really complicated to track. A lot of the same tracking requirements exists, but there were no systems for it. And so we decided, okay, this is something that we should build out specific functionality for. Because at first, we tried to use inventory to model it out, and it kind of worked, but it fell down in a few ways.

And so we decided, okay, we're going to build out a specific module for crypto assets. And then we released that in August of 2018 essentially to help these companies get all these complex transactions into their financials in a controlled auditable way.

[00:09:39] Why should accountants care about crypto and blockchain - why did they build this app?

Blake Oliver: And why should we, as accountants, care about crypto, about blockchain? Why do we need a special module to handle it in our accounting system? Why did you build it?

Ben Taylor: You need to track it a bit differently. Some of the same issues exist with this as with traditional foreign currencies. Especially for our target customer not being a large multinational corporation, they're traditionally not using a bunch of different currencies for reporting purposes and transacting in them and having to mark things to market in a way where you have all this complexity early in your lifecycle. But if you're using crypto, you've run into a lot of those problems, the same ones.

Except, normal currencies have benefits for accounting where they're homogenous. You can treat them all as the same thing, you don't need to have these individual costs layers each time you go into the different assets just like stocks. And so now with crypto, you can trade one of these assets for another one. So you're like trading a stock for another stock, for instance, to use a simple example.

Or even if you're paying your vendors, you need to record the market value at that time and any gains or losses when you pay your vendor. And so it just starts to get really complicated to track all that if you want to do business with crypto. So to start with, it's just, if you're using this, you need a system to account for it. That's, at its most basic level, why we built this.

[00:11:16] Why did inventory tracker not work?

Blake Oliver: And you were saying that you tried using inventory to track crypto holdings, cryptocurrency holdings, and that fell apart or didn't work. So the reason it doesn't work is because why?

Ben Taylor: Because you don't pay for a vendor payable with a physical inventory. And that's the flow that doesn't quite exist. And so it's like you're kind of trying to fit it into something that doesn't really work. And sometimes it can work for certain situations, but for others, it can't. And that's a good example is when you're using these things like cash, you need to build it in a certain way that is open to doing that.

Blake Oliver: Yeah. Most inventory modules don't have a way for me to trade my inventory for other-

Ben Taylor: Right. Yeah. It's like a barter transaction.

Blake Oliver: There's not really a barter system. And then with the currency modules, well, there's lots of reasons why we can't track cryptocurrency as a currency, even though we call it a currency. Well, that's because SEC US GAAP doesn't recognize cryptocurrency as an actual currency yet. Or it does it? What's the current situation?

Ben Taylor: The official SEC guidance is all the stuff falls in tangibles, generally. Unless it's just a digital representation of a concept that would clearly be a security or something else, it's going to be treated as an intangible asset.

And I think that's still the case for Bitcoin and Ethereum. Although those two kind of they've said some things that point to them being potentially handled differently. But yeah, as it stands, they're still all intangible assets.

Blake Oliver: So you've built a module inside of SoftLedger then that basically allows me to track my crypto holdings or my company's crypto holdings as intangible assets and then also use them like a currency when I pay for things.

Ben Taylor: Well, it's configurable. So if it's an intangible asset, great. If it's ends up being cash, then you just reclassify where that asset sits. And so we've built it. Like they say, it's purpose-built for uncertainty. Whatever happens, you can code it how you want to, configure it into different groupings. You can always change those classifications later.

And that was really important for us because we have customers all over the world. And so there's various regulatory jurisdictions that we cross over. And we just want to make sure that we give all of our customers the tools to categorize them however they need to.

[00:13:59] What percentage of their users use crypto?

Blake Oliver: How widespread is crypto the business community? Do you have an idea, among your users, like what percentage are using the cryptocurrency module? And then what about more broadly?

Ben Taylor: So over half of our customers are using crypto in some way in their operations.

Blake Oliver: That's a lot compared to the general.

Ben Taylor: Yeah. And a big part of that is because we have a module for it. So we've carved out a niche here for companies that are using crypto. Broadly for real economic activity outside of trading and other outside speculation, other financial services like lending. Some of these things are pretty big now. Outside of that, we haven't seen a ton of normal nuts and bolts crypto activity.

For payments is one thing, but if it's just payments, if you're just accepting or paying with Bitcoin, for instance, that's not the complexity that really lends itself to needing a whole system for tracking this. You could easily use something like BitPay that converts crypto to US dollars or euros or whatever is your currency. And then you can kind of avoid the complications there.

So when it comes to really game-changing new economic models and there being a significant amount of business happening on those, that hasn't quite happened yet that we've seen. But there's some really interesting cases that have started to trickle in. And yeah, I think over the next few years, we're going to start to see some of those pick up and become material.

[00:15:42] Where do you see this going? The future of cryptocurrency

Blake Oliver: Where do you see this going? I mean, it's a tiny of sliver businesses right now that are accepting cryptocurrency, which is the main use case for blockchain at the moment, it seems like. Do you see it going mainstream? Do you see business using cryptocurrency? Are you a crypto maximalist? Do you think that it's going to replace fiat currency and the US dollar? What's your view of this?

Ben Taylor: Sure. So it's a complicated question, I guess. We sit somewhere in the middle. I think the biggest things that this will do haven't happened yet, and we probably don't know what they are yet. In the same way as when you initially hooked to GPS up to a mobile phone, you didn't realize Uber was going to happen.

It's one of those things where there's these really interesting building blocks for new businesses that will emerge from this. We have to start a lot of it now. And yeah, I do think that blockchain and related technologies, crypto assets and some other things are going to be really big for the next... We kind of view it as it's just the next iteration of internet-based technologies.

You're right. So for crypto assets, right now, that's the main use case. And Bitcoin's really the biggest thing where it's like you can now pay someone on the other side of the globe, wherever. You could transact some value without having to go through any intermediary other than just this global monitoring network that's just processing transactions and doesn't care, they're just-

Blake Oliver: They don't care where you are.

Ben Taylor: Block after block are being processed. Yeah. And it's just going to keep on going. And so that was really revolutionary and interesting and a lot stem from that. And I think that that is going to continue to be a really, really huge innovation.

The most interesting stuff starts happening once we start talking about these Nebulous concepts with really buzzwordy things like blockchains and Web 3 and consensus mechanisms and all this stuff. We're trying to talk about solving actual problems, and that's when it'll happen. I think this will unlock a lot of that. Everything takes longer than you hope it will.

[00:18:09] A message from our sponsor

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Blake Oliver: What about this idea that was being tossed around a few years ago for a while when blockchain was hot and new in the accounting world? You had these people out saying it's going to automate because we're going to have a distributed general ledger or triple entry accounting and we're no longer going to need to validate transactions in the audit and it's going to eliminate a lot of work. It seems so ridiculous that companies would want to put their GL on a blockchain for the public to view.

[00:19:48] Will audit be impacted by blockchain technology?

Blake Oliver: Do you think that could happen? Is audit going to be impacted by blockchain tech?

Ben Taylor: Yes. I think audit will be impacted by blockchain tech to the extent that there's what's called on-chain transactions. So transactions actually happening on blockchains that's programmatic, you can search it and do analytics on it via computers as opposed to doing this manual checking.

I think that's great. And that kind of ties into where audit is headed, taking more of an analytics view versus a substantive view on audits. When it comes to triple-entry accounting, it's a buzzwordy thing that I think that anyone that actually understands and has books and reviewed journal entries, the concept of triple-entry accounting is... the two entries are debit and credit. So unless there's some third entry-

Blake Oliver: I guess that would be to the blockchain.

Ben Taylor: Well, it's debit and credit on a centralized database today. So you could say that that's the third entry now, and now there's a distributed database. You still have this concept of a debit and credit to an organization that's going to be booked in a general ledger.

And if there's some other relationship with a third-party, that's still just captured in that debit and credit. And now we're just talking about, well, is it going to be reported in a general ledger and is that from a blockchain based sub-ledger?

Okay. Well, that could make sense. If there's a lot of economic activity on a blockchain that you want to capture automatically to flow on your GL, that's great. But I don't think it's as simple as just saying, okay, you stamped to a blockchain and then all of a sudden, you get some additional automation there.

The context is very important for what the transaction is. And if you use blockchain, they're very unforgiving. You can't make changes. The rules are set. You can't provide a lot of context. That's what a general ledger is for. And a centralized database makes sense for that. And I don't see that changing anytime soon.

Blake Oliver: Yeah. I suppose the one thing that would be easier to audit would be when it comes to confirmations. Because if you can see a transaction on a blockchain... I think that's what you were talking about, right?

Ben Taylor: Yeah. If a business could choose which transactions it shows, or it gives temporary access to auditors to view their... But in that case too, I mean, if you're doing audit confirmations on transactions that should all be used to be private and the auditors gets to see it for a certain amount of time, how different is that than providing access to their bank account or bank statements.

It's more automated. It could be. You could have this feed that of transactions that's more easily shareable with auditors, but you could always shut off access as needed. Maybe that's where that ends up. But it really depends. I mean, for certain types of transactions, if they're occurring in this publicly accessible database, that could be really helpful in a lot of cases. Yeah. In a lot of cases, I don't know if businesses would go for it. In some cases, maybe it makes sense, but that starts to get pretty tricky.

[00:23:12] What are their customers using cryptocurrency for?

Blake Oliver: So you said that half of your customers are using cryptocurrency or tracking cryptocurrency. What are the applications that they are using it for? What are they doing with it?

Ben Taylor: It's mostly financial services, so crypto exchanges, other payments-related companies, we have ATM providers, there's miners too. There's other blockchain-related companies like a company that does staking for certain networks. I don't know if you're familiar with that concept.

Blake Oliver: No, no.

Ben Taylor: So proof of stake networks is what they're called. There's certain economics around holding coins to participate in the network. So you have a certain ownership stake in the network. And based on that, you can lend out your coins and vote on certain updates for the protocols. And you get some amount of interest usually for that.

But it depends. There's different models depending on the different networks. And so there's a company that helps organizations and people stake their coins and earn a return on the network. So as this emerges, there's a bunch of different infrastructure services providers that are necessary to build the tech stack that supports web through your crypto or whatever we're going to call it.

[00:24:47] What are the most important thing's for accountants to know about blockchain?

Blake Oliver: As an accountant, what do you think are the most important things that I need to know about blockchain in order to serve my clients in the future? Maybe I have a few that are holding a little bit of crypto as investments. They're hobbling or whatever you call it. They are doing some investment.

But you obviously think this is going to grow. More and more companies are going to be transacting using blockchain in some way. What should I be learning about in order to be ready?

Ben Taylor: I think just poking around with the different concepts and familiarizing yourself with some of the terms. There's a lot of like anything new, these daunting-looking terms that you don't know what they mean, but there's parallels to a lot of it. And I'd say just signing up for a Coinbase account, buying some crypto, doing a couple of transactions, I think that helps to get it a little bit better.

Just to kind of connect the dots on what's going on, that was helpful for me early was just sending some money with Bitcoin or other networks and seeing how that process works I thought was pretty interesting and help connect it. A lot of this, when it comes down to it, is just...

If you're just talking about using crypto and accounting for that and figuring out the out tax implications for it, there's assets that have a certain value when you got them and different value when you get out of the asset or trade it to another one. And you just need to make sure you're tracking everything properly and making sure you have all the costs layers recorded and know that if you keep on changing states of things, those might all be taxable events.

You start to build up complexity really, really quickly. It doesn't take that many transactions. So that's just something to make sure you're tracking them very well.

Blake Oliver: Yeah. Let's dig into that. Because I think that's kind of the core thing that we need to understand right now, which is, cryptocurrency is tracked as an intangible asset.

[00:26:55] When do you record gain or loss for cryptocurrency?

Blake Oliver: And so we record it when we purchase it at our cost. And then when do we recognize gain and loss, gain or loss?

Ben Taylor: So you mark it down, not up, for what you're still holding. So if you have reporting requirements that require you to impair your assets, then you'd mark it down, but generally it's not going to go up at least in the US.

Blake Oliver: So that's a big risk to companies that are buying and transacting and are holding crypto is that there's only downside to that at least from a financial standpoint.

Ben Taylor: Yeah. Yeah, that's a big topic that's been coming up for a while now, but maybe is that the point of being material enough to be considered by the FASBI, looking into, is could you mark this up now that there's more and more public companies holding these assets.

Because yeah, you buy a bunch of Bitcoin and then all of a sudden, it goes down for a few months and then you can never bring it back up, even though it goes way up, and it's traded enough that you think that there really is a market here that's providing a good price. So that is a big consideration. And I think a lot of people view that as an impediment to more widespread adoption by companies.

Blake Oliver: And where did that come from? Because we don't have a lot of guidance on crypto from the regulatory authorities.

Ben Taylor: Yeah. Well, that just came from treatment as intangibles.

Blake Oliver: Okay. So in general, intangibles are marked down, not marked up, so that's why we do it with crypto.

Ben Taylor: Exactly.

Blake Oliver: Okay. Now then, if I sell my cryptocurrency for cash, I simply recognize a gain or a loss at that time, that's easy.

Ben Taylor: Yeah. Yeah. Well, easy. You need to know all the cost layers and then-

[00:28:45] Cost layers for crypto

Blake Oliver: Let's get into layers. Okay. So if I don't buy all of this crypto that I'm holding on my balance sheet all at once, I have cost layers. Explain that.

Ben Taylor: Sure. Yeah. Actually, even if you buy a bunch of Bitcoin or Ethereum at once and you placed an order and it got executed in eight different trades, now you have eight different cost layers.

Blake Oliver: Just like inventory, I have to track all of the quantity and the cost associated with each one?

Ben Taylor: Exactly. Yeah. Yeah. And the exact same way as inventory. Another thing that hasn't definitively been ruled on, but based on everything we've seen... It seems pretty clear that first and first out is how a lot of this is going to be treated. And so that's generally what's worked. And so taking that very granular approach of...

In our system, for instance, we specifically identify each layer sitting in the database. It's like on June 17th at 10:20 PM, you purchased 2.6 Bitcoin at 36,000 a coin or whatever it is. And then that's just stacking up, and it could be thousands and thousands of layers. And then you say, okay, you're going to sell it all, then you have to pull a thousand plus layers to figure out what your cost basis was.

And then that's what drives what your gain or loss was on it. So tracking that constantly, especially if you're not just doing it for tax purposes. But you want to actually see how your gains and losses are looking month to month or week to week, day to day. You need to be tracking all that and be able to go back and edit things and investigate. It gets complicated, really.

Blake Oliver: I feel like doing it in a spreadsheet would get very difficult if I had a lot of layers.

Ben Taylor: At some point, it gets impossible. That's what we found is we've seen some spreadsheets I never could have put together that attempt to do it and get close in some cases. But if you have to set cost layers, then pick them, and then and transferring, you're trading, you're doing all, you can't do it. It's just not possible in Excel at some point.

Blake Oliver: And you said people are doing FIFO. Are most people doing first in, first out, are some people doing another method? Can I do average costs? Can I potentially do LIFO? What's the rule about that?

Ben Taylor: Some people, they do LIFO for tax purposes. They make an election to do it. I don't know enough about that to say whether that's acceptable or not. Some people-

Blake Oliver: Some people do it.

Ben Taylor: ... have expressed interest in doing that. Average cost in some countries is what's used. So that comes up sometimes. You can specifically identify in certain cases, like with a brokered transaction, if you are taking a certain amount of Bitcoin to buy some Bitcoin or to buy some Ethereum, let's say, and those transactions are associated with one another, you wouldn't want to get this new Bitcoin and then pull from cost bases five years ago when it's not really attributed to that transaction. I think you can do that in certain cases, but FIFO is the one we see most commonly used.

Blake Oliver: Got it. So now I've got my cost layers. That is familiar from an inventory standpoint. But what is less familiar is this idea that if I exchange cryptocurrency for a different cryptocurrency or for cash,

[00:32:18] Calculating gain/loss

Blake Oliver: I have to calculate gain and a loss on every transaction. Is that right?

Ben Taylor: Well, kind of. The gain or loss, we just view it at the asset level. We're using that Bitcoin for Ethereum example again. You're getting out of Bitcoin and you're buying Ethereum. And Bitcoin went up during the course of time that you held it enough so that you have a gain, your Bitcoin is going to come out.

We'll use some of those costs layers to say, okay, this is the total cost of that coming off. And then the Ethereum is now worth more than the Bitcoin that you have on your books, so you record a gain at the account level. So there's a gain or loss account, and it's the gain and loss account for Bitcoin, that just total amount goes there. So the calculation is performed when we just give an amount for this is what-

Blake Oliver: Got an amount for that transaction.

Ben Taylor: For that transaction.

Blake Oliver: Okay. And that is taxable?

Ben Taylor: Yeah. Yeah. I mean, that's taxable.

Blake Oliver: Okay. So that's kind of the fundamentals of how I track it in my accounting system. I could use a spreadsheet to do this. Some people do. You've built a module that handles all of this automatically.

Ben Taylor: Exactly. Yeah. Yeah. And it's just about volume and the number of different things you're doing. If you're just doing deposits and withdrawals, it may be simpler. If you're starting to do trades, it gets less simple really quickly. And even with deposits and withdrawals, if you're transferring around, if you're paying vendors with crypto, it can get complicated really quickly, too.

[00:33:56] When will the IRS & SEC treat crypto like an actual currency?

Blake Oliver: So do you see the accounting treatment of this changing? I know there's been talk from the SEC about.... Or maybe the IRS or maybe... Who's going to decide whether or not we actually get to treat crypto as a currency, which it feels like it really should be for the major ones because they're acting like currencies. I mean, what is your view on this?

Ben Taylor: It's tough to say. I'd say that yeah, they're behaving like currencies in so many ways, but generally, currencies don't fluctuate as much. And I think that's going to be a problem that regulators have in figuring out how to categorize them. So let's start with Bitcoin.

It's pretty clear that MicroStrategy is a big holder of Bitcoin. The CEO has been a big proponent of buying Bitcoin because they had a loss in their balance sheet. They should be able to mark that up. You could use the same concept as anything fair value wise.

There's an active market for it. You can clearly liquidate it. They should be able to mark that up. And so starting there, I think that's definitely the case. Next level, yeah, as you get into other assets, maybe that's true for Ethereum as well, but then you start to get further, like when does that stop being the case?

I don't know. And like, what are the thresholds? And then maybe it's vague and it starts as vague like some of the fair value, you have to figure out whether it is an actively traded market and do the whole analysis. And is it a tier one, two, or three?

Blake Oliver: Yeah. Rather than simplifying things for us accountants, that could end up making it more complicated because now we've got to decide for our clients or with our clients, how do we treat it? Do we treat it as a currency or an asset?

Ben Taylor: Right. More judgment, more estimates, more documentation on one versus the other, and yeah.

Blake Oliver: And like you've just said, there's this whole scale of fungibility on these where you have Bitcoin and Ethereum where there are actively traded markets, it's easy to get a price. And then on the other side of it, you have these coins that nobody trades. They're very infrequently traded. And then you have NFTs, which are, by definition, not fungible.

Ben Taylor: There's certain ones that I think are going to be more complicated, but... Okay. So now we're [crosstalk].

Blake Oliver: It's okay, we can go all over the place with this. Because the topic's blockchain, and we've actually dove really deep into crypto, but we can't forget that there's more to blockchain than cryptocurrency.

[00:36:39] Other uses of the blockchain technology

Blake Oliver: Well, so we've dug in pretty deep into the number one application for blockchain at the moment, the one that is in the news, the one that we hear about, the one that people are speculating ridiculously on and either making lots of money or losing a lot of money.

Let's talk in the time we have left about other uses of blockchain because crypto gets all the attention, but I get really excited about other areas. And I'm curious to know what excites you about blockchain that doesn't have anything to do with currency.

Ben Taylor: That's a great point. And there's one that's happening right now

[00:37:12] Bitcoin mining

Ben Taylor: that is pretty interesting that ran mining Bitcoin. In order for the Bitcoin network to operate, there's miners all over the world. Miners are essentially, think of it as solving a really complex math problem.

Whichever miner or group of miners gets that first, it gets that problem solved first, they are awarded with, it's called a block reward. So they get some Bitcoin for doing that.

Blake Oliver: And these are the guys that basically facilitate all the transactions that are happening on the chain.

Ben Taylor: Exactly. Yeah. Yeah. Basically, all these full nodes of the Bitcoin blockchain store an entire copy of the blockchain. And basically, they're all kind of doing the same exercise and agreeing, even when it updates, what the next state of it is. And so as part of that, they're processing the transactions. And it's a very energy-intensive process. So it means that if you're a Bitcoin miner, you want to go to a place with cheap energy. If you have cheap energy and a reliable internet connection, that's everything.

So the easy thing to say is, okay, so you're using real-world energy, you're consuming real-world resources to create this thing that doesn't actually exist, this digital whatever. And so it's easy to say that that's bad for the environment. But what it ends up doing is there's this incentive to search out cheap energy.

And I would expect that through regulation, things will start to move more and more in this direction where if it is really bad... If you're burning coal to mine Bitcoin, I imagine that's not going to... I don't know what percentage of miners are doing that, but that's a pretty easy one to think.

Okay, regulators are probably going to be all over that and say, no, you got to use renewables or something. And so it starts to push all this development toward, okay, how do we make renewables more efficient? And then all this investment will go into them because people are going to be making money off of this. And even for just existing, like natural gas, powered electricity plants that have excess capacity can mine bit point with the excess capacity.

And so it's weird because it's like as long as you have an energy source and connection to the internet, you can turn that energy into something that has value at the bat spot. And so it's kind of this... This is really happening right now. Energy companies are investing in mining Bitcoin.

Blake Oliver: With their spare capacity?

Ben Taylor: Yeah.

Blake Oliver: Interesting.

Ben Taylor: Yeah.

[00:40:12] Energy use and crypto mining

Blake Oliver: This is interesting you brought this up because this is one of the main criticisms of cryptocurrency and blockchain is that it is so energy-intensive, and there's always a headline every time mining grows that it is now eclipsed the total energy usage of this country here or this country here.

And so the criticism is that it uses all this energy, it's totally inefficient and it's bad for the environment. But you're saying that it could actually lead to innovation when it comes to clean energy?

Ben Taylor: Yeah. Yeah, absolutely. I think it will. I mean, it's this interesting dynamic that is kind of counterintuitive at a glance. You think that that line of thing could be right. So that's one thing. But then also, if you think about the total energy that's used to process transactions generally, what is the total amount of energy used for other monetary networks. It's not like it's nothing.

And so I don't know. This isn't something I know a ton about to be able to make direct comparisons between all of them. There's some interesting arguments that you can make when you get into this. And it's not exactly as it seems. A lot of those article headlines I view as a little bit sensationalist. And if you start to go through it, there are some other considerations there.

Blake Oliver: I guess I could see how demand for really cheap energy would then stimulate people to supply more really cheap energy. And that if we figure out how to generate more cheap energy than the blockchain demands, that benefits all of us. So we're going to see if that ends up happening.

Ben Taylor: Yeah. Yeah, exactly. It's kind of an experiment. We don't know really yet. That's one of the reasons why I like to point out that one first because actually, this experiment is happening right now.

[00:42:12] Blockchain and supply chain

Ben Taylor: But then another is around supply chains. And so this is another one where it's unclear how it will work or how this all come together. There's not a lot of visibility along the supply chain from manufacturer to distributor, to wholesaler, through these multiple steps in the process of something coming from point A to point Z or whatever.

I can see specific use blockchains for certain industries or consortiums of organizations within an industry using the same blockchain to decide to have agreed upon state of this network between companies that don't trust each other or don't have to trust each other anyway. And then it could be this mechanism for governing this this process.

So those are being explored. I think a lot of what we've seen so far, I don't know how much headway it's made at least in companies actually using them for their supply chains. But a couple of years ago, there were a bunch of headlines on them, and I haven't seen much recently.

[00:43:31] Can supply chain issues be solved with blockchain?

Blake Oliver: Well, I wonder, like how much of the supply chain problems that we've experienced during the pandemic could have been averted if, for instance, auto manufacturers had all the parts on a blockchain database or ledger so they could actually see that, oh, we're not making enough computer chips.

Isn't that the reason that we don't have enough right now? It's mainly because they cut their orders of computer chips. And then when demand surged, they didn't have enough.

Ben Taylor: I don't know that it's like, the answer is okay, if you put it on blockchain, it's going to help that whole process. Maybe there's multiple blockchains in the mix. And in the entire life of that chip that ultimately gets into your car, there's the raw materials suppliers that have to get the raw materials that also had their own disruptions.

And then that leads to that leads stage in the production process, and the next one, and the next. So you might be talking about like five different industry blockchains that have to then get handoff to handoff. And so if that's the case, then a decade, maybe it makes more sense for a timeline for how long they'll actually take to get together.

But knowing that this is available and having some use cases helps the people who are in the details to know the problem really well to now apply that. And I think there'll have to be multiple iterations of that happening before you get to a really complex solution like that. But yeah, I mean, I guess in summary, yes, it could really help because it's all machine-readable, then you can go right back to the beginning and say, oh, this is where it started.

[00:45:14] International transactions with crypto

Blake Oliver: International transactions. I think you mentioned that being a big application of crypto. Let's talk a bit more about that and how that is impacting accountants today.

Ben Taylor: Yeah, absolutely.

Blake Oliver: So historically, what, I've done wire transfers to get money out of the country. How does a blockchain and cryptocurrency change the equation for me?

Ben Taylor: Sure. So that was actually my first question. Have you done an international wire transfer? So you have these instructions that you put into this form, and then maybe there's a corresponding bank or some other bank that has to be involved that's not yours or the ultimate payee's bank.

But in order to process this transaction, they need to be in the mix. And then you submit this wire, and if it's during a certain window of time, it will be processed hopefully the same day. Unclear some amount of time, it'll be in the payee's account. And so during that, you have to trust all these organizations in the way, there's all these networks involved to get it ultimately there.

And this system works. It ultimately makes sure you can pay people, there's some mechanisms for reversals. There's all these things that have been built up over time to make that work. But it's slow and it's kind of janky and you could miss-key an account number and lose your money. There's all these problems with that.

And so the reason why you go through that is that you have to trust that it's going to get from your bank to the other bank, and you're not going to get your money stolen in the middle there. So if you could replace that with computers, that'd be great.

And that's kind of what Bitcoin is doing. There's certain mechanisms that don't currently exist. There's no check to say is this something that we need to check and make sure that it's going to the right account? Like if you miss-key, maybe there's a check and you can catch that. That's not going to be the case with Bitcoin.

But I mentioned just trying a transaction to learn how this stuff works. I think this is a great example of it is if you go into Coinbase and you say, I want to buy some Bitcoin and say, I'm going to send it to it to this other Bitcoin address, all you do is you put in this long string of characters and say send and authenticate and put in your two factor authentication or whatever need. And then it just it just goes.

And then the network that's just building block after block and the blockchain concept just processes your transaction and the other part or the other wallet gets it. And so that that's kind of, at a high level, what's happening is you're just automating that whole piece of getting value from one party to another without having these trusted centralized intermediaries.

Blake Oliver: The Bitcoin network has cut out that middleman. We're not paying wire transfer fees anymore; we're paying a fee though to move the Bitcoin around. And that goes up and down. It's not cheap though. What is it?

[00:48:36] Fee to move the bitcoin around

Ben Taylor: It really depends, but it's currently pretty cheap to do Bitcoin transfers. And this varies a lot based on different networks too. So there are other networks that are faster and charge very low fees. Bitcoin is the, in a lot of ways, the safest one because it's so big, it's so widely transacted, it's very secure. So you could pay via that. Specifically for payments, there's going to be other networks that might help out there. But it's the same concept is you're removing that middleman.

Blake Oliver: Yeah, I just did a Google search because I was curious, and I found Wall Street Journal said, the highlighted snippets, so we can trust it, that average daily transaction fees this year were as low as $1.78 and as high as $62. So I guess it really does depend when you do it how much it's going to cost. Interesting.

Ben Taylor: It does. Yeah. Mostly though, anytime... And I haven't done a ton of these. But over the past year, anytime I've checked, it has been pretty low, like dollars.

Blake Oliver: Few dollars. Which is a big difference compared to the 20, 30, 40 dollars you might pay for a wire.

Ben Taylor: Always less than the wire fee.

Blake Oliver: Interesting.

Ben Taylor: Years ago, it was really expensive for a while. Ethereum is running into some of this now where it's a lot of congestion that can be very expensive at certain times. There's some that are like cents and they're instant. It's really cool. You do a transfer and it's there immediately. Everything happened immediately.

Blake Oliver: It seems like this is sort of the no-brainer way to get started. If I'm an accountant at a company and I'm doing a bunch of wire transfers to vendors abroad, suppliers abroad, if I can get some of them on Coinbase with me or some sort of way of sending them crypto, if I can get them to accept crypto, then I can save a lot of money for my company on fees.

Ben Taylor: Yeah. Yeah, absolutely. And what this ultimately could turn into is there's a lot of middlemen making entire businesses, entire industries in this stack of paying third parties. If you start chipping away at this, then all of a sudden, maybe those 2% fees go away in certain cases. It really could be a paradigm shift.

Especially for certain industries, like if you're constantly paying and receiving goods from the same suppliers and certain things like that, it was just going to be a no brainer that the amount of money you're paying is so much that you would just go saving a few percentage points or even a few bets could be really impactful. So yeah.

[00:51:47] How Coinbase and other services like it makes money

Blake Oliver: And the way services like Coinbase make money is they charge a fee to turn that crypto back into US dollars or for me to buy it too. That's when they're making their cut.

Ben Taylor: Or trade it too.

Blake Oliver: And trading. They make a cut on the trading. But it still can be a lot less than a wire transfer fee if you got to do the math, but it ends up being a good deal. Interesting.

Ben Taylor: Yeah. And certainly if you're holding it and if you're doing this at scale, Coinbase has broker... They'll broker transactions. A lot of the other exchanges will do it too. And so you could get better fees on that. There's enough competition that you definitely could get those down. And once you have it, yeah, I mean, I think you can really, really cut down on transaction fees.

Blake Oliver: One of the risks of cryptocurrency is I send the money to the wrong wallet. These are irreversible transactions. So that brings me to the fraud question. How do we handle fraud? How do we ensure custody of these assets? All it takes is knowing the key, which is just a string of numbers and letters in order to move money from a wallet. So it's not like a traditional banking system where there may be ID verification or whatever, and I know those have their challenges, but yeah, how do companies use cryptocurrency while also guarding against fraud, and how do we, as accountants, stay on top of that?

Ben Taylor: So I think for companies, almost in the vast majority of cases, they're going to have somebody help them with the custody of those assets. And that's just the answer is there's somebody charged with custody, and they go through all the checks to make sure that their funds don't get stolen. And there's different checks you need to do. It's a lot more extreme because, like you said, it's not reversible. And so that's what we've seen is just there's benefits to holding yourself, obviously to having the crypto yourself and owning your keys and managing those, but yeah, you have to be willing to take on that risk and build in those practices internally to make sure that that doesn't happen.

Blake Oliver: So a service like Coinbase, they act as a custodian for my crypto assets. Is that accurate?

Ben Taylor: Yeah, that's right.

Blake Oliver: And there's lots of them, Coinbase is just really well known.

Ben Taylor: Yeah, there's lots of them. Yeah. And some that are specifically focused on institution as well.

Blake Oliver: So they basically perform that function that my bank currently provides, which is ensuring, or at least providing me with the tools to ensure security.

Ben Taylor: Exactly. Yeah. Yeah. And they'll make sure that if you have... I think Coinbase is the only one, or might be others, but the only one that comes to mind that has any insurance for your holdings. I think there are some, some others that have insurance, but it's not the same way currently as a bank where you're definitely not going to lose your money. And so as that gets to be more prevalent, then I think it basically becomes a bank for you.

[00:55:18] More about crypto exchanges - any business specific ones

Blake Oliver: Are all the crypto exchanges both for consumers and businesses? Are there any that specialize in just businesses? Like if I to get set up, do you recommend Coinbase as a tool for businesses? What do you recommend?

Ben Taylor: Most of them have a consumer side to them, but some are specifically focused on businesses. Yeah. Mostly those, they would give you more of a white glove service and proper transact. You say, I want to buy 50 Bitcoin, they go out and they get the 50 Bitcoin and custody them for you.

And you can get this little dashboard to see, I have 50 Bitcoin, and incorporate that into your own processes, but you've kind of offloaded that whole side of things.

Blake Oliver: Do you have any recommendations for where to look?

Ben Taylor: So Coinbase is the easiest to use to get started. It's just really focused on keeping everything very simple to onboard and quickly get started. There's some other ones that have been around for a while, like Kraken, and Bitstamp is another one. And then there's a number of other exchanges that are newer. There's a lot of good ones out there. There's some not so good ones too.

So I think stick with the ones that have been around for a while and the ones that have a really high volume of transactions. That, more than anything, probably, should give you some comfort. If they have a high volume of transactions, they do not want a security incident that will really impact them.

And if they've been around for a few years, they've invested enough in security that generally helps out a lot. But I think if you're going to start with one, Coinbase is a good place to dip in.

Blake Oliver: And I imagine that you want to ensure that you use something that's been around a while because they'll know how to get you the information you need to do your accounting and to do your taxes as well.

Ben Taylor: Yeah.

[00:57:10] Does SoftLedger integrate with these crypto marketplaces?

Blake Oliver: Because they've got to be able to provide the data. Does the SoftLedger integrate into Coinbase, does Coinbase integrate to SoftLedger? How do you get that data into your system?

Ben Taylor: So the tax tools are coming for the bigger ones. They're not a hundred percent there yet. You have a starting point mostly with these exchanges to start doing your taxes. But we sell to businesses. And so our starting point is we have a module to help you categorize your crypto transactions, get them into your financials and make sure that right. Everything's locked down, everything's auditable, everything's categorized properly.

Blake Oliver: How do I get that information, and do I connect my wallet SoftLedger? Or do I import it as a CSV file? What is the method?

Ben Taylor: So there are a few integrations that we have to that data in from exchanges. And we're adding more kind of eminently via a data aggregator. The trouble with doing it all ourselves is it's a lot to keep up all these integrations, and so we've chosen to partner on that front.

Blake Oliver: Yeah, it would be like trying to integrate with all the banks. It's just too many.

Ben Taylor: Exactly. Yeah, Yeah. But regardless, we made sure that our Excel upload and CSV upload was really good. And so that's generally how all of our customers at least get some of their data in is via that upload. Or some of them have built integrations with our API to send in data as well.

But yeah, it's tough because for a consumer, you want everything to be kind of like very easy, one click. everything imports. And so if you're just doing it using this for your taxes, we're probably not a great fit unless you're a really heavy trader. So there's a bunch of tools out there to help with taxes.

Blake Oliver: Got it. So you're focusing more on the, I want to actually have useful management financial information about my crypto transactions and holdings and all that.

Ben Taylor: Exactly. Yeah. Yeah.

Blake Oliver: Yep. Interesting.

Ben Taylor: It's more.

Blake Oliver: Ben, thank you so much for your time today. This has been very educational for me, and I hope for our listeners as well. Is there anything you'd like to share with our listeners, for instance, where they can get in touch with you or learn more about SoftLedger?

Ben Taylor: Sure. Thanks. Yeah. Thanks for having me on this. This was a great conversation. Yeah, if you want to check us out at softledger.com, that's where most of what we do is pretty clearly laid out. And feel free to drop us a line, and I'm always happy to help if I can.

Blake Oliver: I am Blake Oliver, your host of this Earmark Accounting Podcast. I have been speaking today with Ben Taylor, CEO, and co-founder of SoftLedger. Ben, hope to see you around sometime.

Ben Taylor: Thanks. Yeah, me too.

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