Setting up the finance function for any company needs careful thought and preparation. This is critical for companies in the DeFi space due to the ever evolving nature of the industry. Fundamental to any set up is to ensure its scalable, compliant and can be relied upon to produce information when required.
There is no secret formula here for a one size fits all. From SAAS to ICOs, companies in the space can be dealing with many different types of products at the same time. We've listed the 5 common mistakes we've found when starting to work with clients,
1. Ignoring tax regulations:
The cryptocurrency space operates largely without strict regulations, but it's important to acknowledge that activities within this realm can carry significant regulatory consequences. For instance, mining, while not considered an economic activity by HMRC, many other pursuits undertaken by DeFi companies do fall within the purview of VAT and corporate tax regulations, and navigating these waters can be tricky.
Another example, is when accounting for revenue from certain activities , the tax rules for them (Vatable, non vatable, zero-rated) should be checked to ensure tax compliance. Crypto transactions may have tax implications that can be complex and vary by jurisdiction. Failing to report income, capital gains, or losses accurately can result in non compliance and therefor penalties and interest charged for non payment.
2. Ignoring internal controls
Internal controls serve a dual purpose: enhancing operational efficiency and mitigating risks. With the advent of DeFi and the expanding array of crypto and fiat assets, errors can occur more easily. The potential for fraud is notably higher compared to traditional setups. We all know that once funds leave a wallet, there is no getting it back if sent to the wrong address or person.
To address these challenges, internal controls should prioritize certain key elements - double-factor authentication, diversification of functions, and the application of common-sense controls above everything else. Such measures can significantly contribute to the establishment and maintenance of a well-balanced financial function in DeFi.
3. Lack of transparency for transactions
Let's face it! Transactions involving crypto currencies are hard to capture in real time at the right value. We've worked across clientele to establish good practices that capture them and make them visible and unde
rstandable for an investor or stake holder at a point in time.
You should look to establish the right combination of people + processes to be able to record them in order to provide a "true and fair view" regarding the value and the company's exposure.
4. Not having the right software
It's essential for companies in the space to implement software and solutions that align with the DLT-centric approach. We typically start with creating an eco-system that embeds software that's able to effectively capture,
- Accounting transactions (Xero, Quickbooks, Zoho)
- Planning and analysis (can range from google sheets to FathomHQ for forecasting and reporting)
- Tax reporting and valuation (Koinly, CoinTracker)
- Audit trails (blockchain backups)
- Payment processors (Direct via exchanges or he likes of Coinbase commerce, BitPay etc)
Crafting a finance function that harnesses DLT's capabilities is a multifaceted endeavor, and selecting the right tools for each function is crucial to create a finance function that'll sustain over the long term. We're working on a stand alone article to cover this aspect as it's such a vast topic, so stay tuned.
5. An ineffective treasury strategy
This is a hard one - but so important that our article will not be complete without mentioning this. f you keep a mix of crypto and fiat assets, you must have a robust treasury function embedded in your finance function. Without this, it's difficult to action transactions fast.
With the volatility in this market, not having a short term (1-3 months) and long-term (6 months to an year OR and overarching 3-4 year strategy) can be debilitating.
Simple example would be to have a strategy where you would convert 10% of all BTC assets every time it goes up in value by 10% or more. The mathematics behind it can be simple but if you have an idea that you will consistently liquidate your holdings that's a great cue for the finance team to alert management on variations.
We've just identified here the most common crypto company mistakess while setting up a finance function. While neglecting regulatory compliance, overlooking robust accounting practices, underestimating security protocols, inadequate risk management, and failing to maintain transparency—are pitfalls that can be easily avoided., it's not to say there aren't other things to consider too. Fundamental to all of these is to have a clear vision for what your financial function should deliver.
If you'd like to create a roadmap for your finance function, please feel free to reach out to us for a 30-minute obligation free chat. We create process maps clearly identifying existing processes as well as gaps in them. Companies can then consider best practices to plug them for the long term.
Notes and references
HMRC's Crypto assets manual - VAT treatment
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