Virtual currency: a primer on why Bitcoin matters to CPAs.

• Author: Morris, Daniel D.
• Position: Emerging economies

When my clients first began discussing Bitcoin, I had a quizzical look on my face. I wasn't sure what they were talking about and I had never heard of digital or cryptocurrency. Fast forward a few years and the conversations have moved mainstream. However, many remain unfamiliar with bitcoin and its various cousins.

Bitcoin Basics

For ease of discussion, I'll use Bitcoin to include all similar cryptocurrenices. Most versions of these competing currencies, often called "altcoins," are derived from the Bitcoin open source code project and share many common attributes. A worldwide network of enthusiast's run Bitcoin mining software to validate transactions and monitor and update the public ledger known as the "block chain." The easiest way to think about this is a cloud-based spreadsheet or ledger showing the balance of each Bitcoin wallet.

The technical aspects of block chain are beyond this article; however, as a CPA, I look at the block chain as an immutable record or complete history of every Bitcoin transaction conducted. That is, the history can never be changed. Plainly speaking, this means that before Bitcoin can be used in a transaction, there is an audit confirmation that that the bitcoins exists (meaning they are real and authorized back to their creation), that the bitcoins are in the custody of the user that holds the private key to the wallet and that the receiver of the bitcoin has provided his public address into which the currency is tranfered.

In traditional cash-based currency-transactions, the currency is assumed to be authentic, yet occasionally is found to be counterfeit. The assumption is that the user of the cash in facts owns it; however, sometimes it's stolen or ill gotten. The receiver is assumed authorized to receive the funds, but on rare occasions there is fraud by way of a false intermediary. And finally, there is not normally an audit trail as to where the funds move in a currency transaction. Bitcoin solves for these traditional currency-based structural weaknesses. Auditors, regulators and governments should seek to embrace the values and virtues of Bitcoin rather than fear and attempt to restrict its use.

What is Money?

My exploration about Bitcoin transpired into a learning journey. One that includes a better understanding of what money is--and is not. And how money, banking and commerce are impacted by the flow of money, and how digital currencies, like Bitcoin, provide opportunities that traditional...