Building a Blockchain: Part I: On the Handling of Digital Assets

Digital assets have radically reshaped the face of traditional accounting over the past few years. Additionally, given the recent boom in the global volume of digital assets, creating a systematic approach in the efficient storage, organisation, management and distribution of an organisation’s digital assets is unequivocally crucial. 

In fact, according to a July 21 report from Research and Markets, “the digital asset management market was valued at USD 2,962.2 million in 2020, and (is) expected to reach USD 8,158.6 million by 2026, registering a CAGR of 18.46% during the period of 2021-2026.”

The Accounting and Auditing of digital assets

According to officially accepted definitions, a digital asset received is regarded and accounted for as “an indefinite-lived intangible asset” – and can be categorised as anything that exists in a binary format. A prime example of digital assets today are cryptocurrencies like Bitcoin or Ethereum, a form of digital cash based on a large, distributed network of devices.

With an increasing number of businesses now having started to accept cryptocurrencies as a means of payment, the global accounting structure for digital assets now needs to evolve too. Accounting firm INAA Group, based out of Belgium, writes: 

“Increasingly, CPA firms are expected to properly account for digital cash transactions in financial statements in order to balance the books. But, since the Financial Accounting Standards Board (FASB) hasn’t yet outlined or classified specific-cryptocurrency Generally Accepted Accounting Principles (GAAP) this creates challenges for accounting professionals”

Digital assets like crypto are not yet regarded as cash or an equivalent on financial statements since they are not formally backed by a sovereign government. Furthermore, crypto cannot be classified as a financial instrument or asset either. Given their high volatility, financial actors believe crypto assets are more comparable to derivatives. 

The INAA Group concludes: “It’s clear that the accounting industry isn’t yet fully-baked when it comes to digital asset management. In the meantime, modern businesses must recognise the importance of protecting all of their digital assets until accountancy practices adapt to properly handle digital cash assets.”

The DAM Solution

When it comes to other digital assets by definition, the list includes, but is not limited to, documents, image, audio, video, animations, graphics, media files, presentations or any other digital media that requires the right to use.

According to IBM: “Digital Asset Management (DAM) can be used to refer to both a business process and a form of information management technology, or a digital asset management system. A DAM solution, in this regard, aims to create a centralised system that seamlessly streamlines the management of all these aforementioned assets, whilst optimising the production of any sort of rich media (especially within marketing/sales organisations). 

This allows for brand consistency, according to IBM, “through automatic asset updates and reinforcement of brand guidelines, providing a single source of truth within businesses and a more consistent user experience to external audiences.”

Steps to a DAM solution

There are several steps involved in the creation of a DAM solution:− Asset creation, encoding and indexing: Standardisation of templates and file formats prepares digital files for the encoding of metadata through different attributes. These attributes include asset type (e.g. research note), media type (e.g. document), technology used (e.g. Microsoft Word) and version (e.g. new). These identifiers are used to create an index to allow for grouping of similar assets.− Workflows and version control: The indexed files can be used to develop rule-driven workflows, enabling process and task automation. This is carried forward using version control, which ensures only the latest assets are being used, even as new workflows are being developed.− Governance through permissions:  This ensures only those with requisite permissions have access to the asset; thereby protecting against accidental corruption, erasure or theft.− Auditing: IBM opines, “an audit should be conducted internally to evaluate the effectiveness of DAM and identify areas of improvement. Likewise, regulatory bodies may audit a DAM solution to ensure an organization’s technology and processes comply with regulations.” Such audits usually occur regularly, especially in highly regulated industries such as finance and healthcare.

The Blockchain Solution

The blockchain for digital assets involves creating unique digital representations of assets defined beyond traditional financial instruments, thereby allowing for cheaper trade between any kind of digital assets with greater liquidity and speed. 

“Managing the full lifecycle of…digital assets on a secure, scalable platform” is crucial, according to IBM and should be carried out “with risk and compliance programs, to reduce the friction involved in the creation, buying and selling of securities.”

[Read more about Blockchain Management in Part II]

Image by Gerd Altmann from Pixabay