Author: flowie, ChainCatcher
2022 is a year of frequent negative events, and it is also a crucial year for crypto regulation to force the industry to make coordinated plans. Crypto financial transparency, compliance, auditability and crypto taxation are also important regulatory directions.
In an interview with Bloomberg after FTX's bankruptcy, SEC Chairman Gensler hinted that regulators will still focus on the financial records of crypto companies. "Crypto companies should do this by complying with time-tested custody, customer funds segregation rules, and accounting rules."
In 2022, some important policies have been implemented in the field of crypto accounting. One is the new regulations of the Financial Accounting Standards Board (FASB) on fair value accounting. In June 2022, FASB issued a ruling requiring companies to use fair value accounting when reporting crypto assets in financial statements. That is to say, companies need to accurately report the value of their cryptocurrency assets on their balance sheets, which places higher demands on the financial management of crypto companies. In addition, FASB recently revealed in an interview with the Wall Street Journal that it is working on developing clear accounting and disclosure rules for companies holding Bitcoin and other crypto assets, and hopes to release a proposal in the first half of 2023.
Second, the Organization for Economic Cooperation and Development (OECD) released its new global tax transparency framework, the Crypto-Asset Reporting Framework (CARF), which was developed by 38 member countries. Many governments have confirmed that they will implement these standards in 2023, including EU member states. The CARF draft contains some relevant content related to potential tax reporting rules related to DeFi protocols, stablecoins and NFTs, which may cause companies or individuals to pay more taxes after the OECD requires crypto companies and platforms to provide additional data.
The supervision of crypto financial compliance is bound to become stricter, which will force companies and individuals in the crypto field to invest more in financial management and compliance. Crypto accounting-related projects and innovations are emerging.
According to RootData data, in 2022, there were frequent financings for crypto projects related to crypto finance, accounting, taxation and on-chain financial solutions, with more than 20 financing events in this field, including participation from well-known funds such as Sequoia Capital, Paradigm, Tiger Global, CoinbaseVentures, and Distributed Capital. However, most projects are currently concentrated in early financing stages such as seed rounds, and most protocols are headquartered in the United States, where policies are relatively strict and regulatory frameworks are relatively clear. Among them, Coninbase invested heavily in crypto accounting and taxation in 2022, with Coninbase participating in more than half of the projects financed, and Coninbase also participated in most of the projects' clients or partners.
Despite the bear market, many crypto accounting protocols have achieved considerable growth. For example, the sales of crypto accounting & tax platform ZenLedger increased fivefold in 2022; ZebecProtocol, an on-chain salary payment protocol with tax functions on Solana, achieved $20 million in revenue in 2022 alone, bringing $2 million to $6 million in net profit to the ecosystem.
This article takes stock of projects with financing amounts of more than 10 million US dollars and briefly analyzes their main business directions and some future development trends.
Data source: Rootdata 1, TaxBit
TaxBit was founded in 2018 and is headquartered in the United States. It has disclosed four rounds of financing so far. After receiving $130 million in Series B financing in August 2021, it became a unicorn with a valuation of $1.3 billion. Well-known investors include Paradigm, Coinbase Ventures, Galaxy Digital, and PayPal Ventures.
TaxBit was founded by certified public accountants, tax lawyers and software developers to serve ordinary individuals, businesses and governments. For ordinary crypto users, TaxBit can quickly integrate cryptocurrency asset data, obtain standardized data and tax calculations, and complete crypto tax form declarations. For businesses, there are also enterprise-level asset management and bonded solutions. On the government side, TaxBit works with some of the world's largest regulatory agencies to provide them with services such as data analysis, tax calculations and inspection support.
Government business is one of TaxBit's more competitive aspects. In May 2021, TaxBit obtained an exclusive cooperation with the Internal Revenue Service. Haun Ventures, the latest strategic investor in 2022, is a venture capital firm founded in March this year by Katie Haun, a former federal prosecutor and former general partner of a16z. TaxBit's CEO said that investor Haun's experience in working with the government has helped it.
It is worth mentioning that after FTX went bankrupt, Mazars, Armanino and several other accounting firms withdrew from crypto audits, and the Big Four accounting firms also announced that they would not conduct proof of reserve audits for private crypto companies. But soon after, Ernst & Young LLP (EY), one of the Big Four accounting firms, chose to form a strategic alliance with TaxBit (EY–TaxBit). The purpose of the alliance is to help companies with digital asset transactions provide better tax solutions, avoid expensive fines or audits, and increase industry transparency. EY–TaxBit mentioned that innovative tax reporting solutions can help taxpayers and regulators solve the estimated $50 billion tax gap.
As of now, TaxBit has submitted more than 30 million tax returns in 2022, has more than 5 million taxpayer users, and supports more than 500 protocols in vertical fields such as exchanges, wallets, DeFi, NFT, etc. Its current major crypto corporate customers include Binance US, Uniswap, Coinbase, Okcoin, etc.
2、CoinTracker
Founded in 2018 and headquartered in the United States, CoinTracker has disclosed two rounds of financing so far, with well-known investors including Coinbase Ventures, Kraken Ventures, and Y Combinator. After receiving Series B financing in January 2022, its valuation rose to US$1.3 billion, making it a new unicorn in the field of crypto taxation.
The founding team of CoinTracker is composed of engineers from Google. From the perspective of product business, on the one hand, CoinTracker can help crypto investors track and manage data from almost all mainstream exchanges, NFTs, and DeFi. On the other hand, it provides professional tax accounting and bonded solutions for individual cryptocurrency holders or corporate customers. Corporate-level customers can be certified public accountants, funds, or other companies that are interested in crypto financial accounting and bonded.
Representative corporate clients include Coinbase, TurboTax, and OpenSea. CoinTracker's advantage lies in the expansion of corporate clients. After integrating with platforms with huge traffic such as Coinbase and TurboTax, it has gained a lot of traffic. Currently, the platform has more than 1.2 million users, supporting the United States, India, the United Kingdom, Canada, and Australia, and partially supporting several other countries.
3、Zenledger
Zenledger was founded in 2017 and is headquartered in the United States. It has received a total of four rounds of financing. Its main investors include Vestigo Ventures, Castle Island, Coingecko Ventures, etc.
Compared to Taxbit and CoinTracker, ZenLedger mainly serves investors and tax professionals who trade frequently, helping them simplify the DeFi, NFT and crypto tax accounting process. In addition to bonded tools, it can also provide more professional crypto accounting & tax consulting. ZenLedger is planning to launch new products customized for potential customers of registered investment advisors (RIAs) and certified public accountants (CPAs).
ZenLedger supports more than 400 cryptocurrency wallets and exchanges, more than 30 DeFi protocols, and 10+ NFT platforms. Compared with other competitors, ZenLedger has access to more comprehensive crypto platforms. ZenLedger currently has more than 50,000 users. In its financing statement in May 2022, ZenLedger revealed that its sales in 2022 increased by 500%.
4、Ledgible
Ledgible was founded in 2017 and is headquartered in the United States. It has disclosed one round of financing. The main investors include Distributed Capital, TTV Capital, Commerce Ventures, Nathan McCauley, and JAM FINTOP.
Ledgible's core team is led by crypto, tax and accounting experts from all walks of life. Similar to ZenLedger, Ledgible focuses on tax professionals, corporate and institutional clients, helping clients simplify corporate cryptocurrency and digital asset accounting operations and track cryptocurrency assets according to institutional and business needs; on the other hand, it provides clients with crypto bonded software integration to help clients serve bonded users on their platform.
Currently, Ledgible’s corporate clients include ACUITY, Agorand, Aprio, Blackchain, etc.
5、Bitwave
Bitwave was founded in 2018 and is headquartered in the United States. It has disclosed two rounds of financing. Its main investors include Hack VC, Blockchain Capital, Nascent, Nima Capital, and Arca.
Bitwave mainly serves enterprise-level customers and has a wider business scope. In addition to crypto accounting and taxation, it also provides compliance solutions for enterprises. Bitwave Institutional, a product that was focused on after last year's financing, is aimed at custodians, exchanges, financial institutions, wealth management institutions and other organizations facing huge risks, supervision and control complexity in holding, managing and investing users. Digital assets can provide enterprises with digital asset accounting, taxation, bookkeeping, invoicing and other services, but also have other functions, such as separate balance sheet tracking, internal and external system reconciliation, debt proof and reserve release.
Bitwave's main customers include Near, BlockDaemon, Cimpound, OpenSea, Messari, Fifment, Bankless, etc.
6、Zebec Protocol
Zebec Protocol was founded in 2021 and is headquartered in the United States. It has disclosed a total of four rounds of financing, including three consecutive rounds of financing in 2022. Its main investors include more than 20 global first-line investment institutions including Coinbase, Solana Ventures, Distributed Global, OKX Blockdream Ventures, Circle Venture, etc.
Zebec Protocol is a streaming payment protocol for the Solana ecosystem that supports sending funds in real-time and continuous payments, and can be used for scenarios such as payroll and investment. During the entire streaming payment process, the payer uses the Solana ecosystem wallet to connect to Zebec, enters the recipient's wallet address, sets the time interval, token type (any SPL token), amount, and then starts streaming payment funds. The recipient can receive the funds instantly in their wallet and withdraw them at any time. The entire process is handled entirely on-chain.
Zebec has also launched a solution based on Zk-Rollup, the Zebec Chain public payment chain, to further improve privacy protection and compliance, and has basically completed the migration to BNB Chain and issued the BEP 20 standard $ZBC token.
The founder of Zebec said in a recent interview that about one-third of Solana projects use the Zebec system to pay wages, and more than 250 projects have been built on Zebec. The early user scale of Zebec Protocol has reached 30,000+, and without any staking mining, the TVL has exceeded US$300 million.
In terms of revenue, Zebec will achieve $20 million in revenue in 2022, bringing $2 million to $6 million in net profit to the ecosystem, and is expected to achieve $40 million to $50 million in revenue within a year (until August 2023). In addition, Zebec Protocol plans to launch its own stablecoin when revenue reaches $1 trillion.
Currently, Zebec Protocol's Web3 partners include ARB, Synchrony, Francium, Mirror World, HalkSight, Drippies, Rewards Bunny, Aver Exchange, Moonlana, etc. Through cooperation with Rewards Bunny, Zebec Protocol indirectly cooperates with more than 1,000 Web2 companies including ebay, alibaba, travel, booking.com, etc.
In addition, Zebec Protocol acquired five Web2 payment companies with more than 10,000 users.
7、Coinshift
Coinshift was founded in 2021 and is headquartered in India. It has disclosed two rounds of financing. Its main investors include Tiger Global, Spartan Group, Ethereal Ventures, Polygon Studios, Sequoia India, HashKey Capital, ConsenSys Mesh, and Alliance DAO.
Coinshift mainly builds multi-chain financial management and large-scale streaming payments for Web3 enterprises and DAO organizations using the multi-signature wallet GnosisSafe. Coinshift allows users to integrate Gnosis Safe safes on multiple chains and manage fund balances using multi-signature functions. A dashboard is created to facilitate viewing operations. Users can access contacts, tags, budgets, reports, and advanced access level controls for vaults, signers, and non-signers.
In addition to financial management, in September 2022, Coinshift integrated the streaming payment protocol Superfluid, which allows users to create, view, manage and edit real-time fund flows directly from the Coinshift dashboard, and automatically pay salaries in batches, such as transferring funds from Gnosis Safe to 100 people at the same time in a single transaction. This batch payment method can save 90% of gas fees. Coinshift is also expected to launch asset allocation, risk assessment and insurance functions to help users make asset allocation strategies more efficiently and mitigate the risks of various DeFi protocols.
Coinshift’s current clients include Consensys, Messari, UNI Grants Program, Balancer Grants, etc.
8、Tactic
Tactic was founded in 2021 and has disclosed one round of financing, with major investors including FTX Ventures, Coinbase Ventures, and Lux Capital.
Tactic's business is mainly to aggregate crypto asset data from different sources, allowing companies to "have a complete financial view of their balances and activities" and help companies automatically classify transactions and apply accounting logic, such as calculating US dollar gains and losses and taxable items. Accountants can then reconcile the company's crypto sub-ledger with traditional Web2 accounting software such as QuickBooks.
The founder of Tactic once said in an interview that "DeFi" transactions or other decentralized finance have the highest financial complexity. An interaction with a smart contract can generate hundreds of "nested transactions", all of which need to be broken down for accounting purposes. Therefore, Tactic has worked with accounting firms to help explain the accounting standards for DeFi-specific activities such as staking, NFT minting, and airdrops.
Tactic currently has dozens of clients in the NFT and DeFi fields, ranging from early-stage startups to multi-billion-dollar companies across industries.
The development of crypto-accounting still faces many problems
Although funds have begun to flow into the crypto accounting track frequently, the development of related projects still faces many difficulties and uncertainties.
After FTX went bankrupt, the related auditing firms Armanino and PragerMetis may face scrutiny. After learning from the previous experience, Mazars and Armanino withdrew from crypto audits one after another due to concerns about their reputations. The Big Four accounting firms also announced that they would not conduct proof of reserve audits for private crypto companies.
The "hot" crypto audit is due to the constant changes in crypto policies and crypto project innovations, which makes it difficult to form effective audit standards. On the other hand, it also exposes the poor processes and infrastructure of most crypto companies in handling finances.
The core reason is that on-chain transactions are incompatible with many traditional financial infrastructures. Crypto companies usually manually input and check financial issues such as tax reporting and transaction tracking, wages, and invoices through Excel spreadsheets. As the scale and complexity of enterprises grow, these solutions are inefficient, error-prone, and unsustainable.
Crypto companies have special systems in terms of organizational structure and financial transactions, which are very different from traditional companies. Due to the innovation and diversity of cryptocurrencies, it is difficult to adopt unified and standardized accounting rules. Although cryptocurrencies meet certain characteristics of intangible assets and inventories, the existing accounting standards do not have clear accounting standards for intangible assets and inventories held for investment purposes.
In addition, due to the natural international nature of Web3 companies, the accounting industry, which relies heavily on regulatory policies and laws, urgently needs to unify crypto accounting standards across countries, rather than relying solely on U.S. policies. Therefore, crypto accounting protocols will face the pain of unclear and inconsistent policies for a long time.
Of course, the driving force behind the rise of crypto tax solutions is the gradual clarification of crypto tax-related policies. As more relevant policies are implemented in 2023, this field will maintain a certain financing enthusiasm; and flow payment, as a new payment paradigm based on blockchain technology, has a lot of application space besides crypto finance.
I believe that in 2023, driven by the external factors of stricter supervision and the internal factors of improving the companies' own operational efficiency and "saving" operating costs, more solutions worthy of attention will emerge in the field of crypto accounting.
