Tax Hygiene Part 2: Additional Insights From Bitwave On Accounting For Crypto Companies (Podacst) – Fin Tech

Pricing is really, really tricky and we can talk about that in a
little bit, but if you think pricing for tokens is hard, pricing
for NFTs is 10 times harder than that. And then third, and this is
something I’m actually really proud of, the spam is really bad
and it’s getting kind of worse. So we deal with a lot of
customers that are well-known folks, that are known people in the
industry. One of them gets something like a thousand spam NFTs a
day.

And in an accounting system, no one has to deal with that.
QuickBooks has never had this issue where someone got so many spam
money sent to them. You’re not getting wires in, like,
“Oh, I got $3,001 wires in today. What do I do with it?”
This isn’t a problem anyone’s ever had to deal with before.
But on the blockchain it is because it’s so cheap to send these
transactions and it’s such a good way to advertise.

So we actually built what I think is the world’s first ever
NFT and token spam filters. We actually have a full spam filter.
Because, I mean, part of what’s cool about Bitwave is we
support any token we see, NFT, ERC-20, you name it, we support it
out of the box. We can support basically anything that we see on
the blockchain. You don’t have to wait for Bitwave to add
support for a token. We just pick it up. We might have to do some
work to get at pricing, but you’ll see it in your register.

And so we actually had to go and build a spam filter that
basically filtered out all these NFT spam that was coming in. We do
a score based on is it on OpenSea? Is it on Rarible? Is it in one
of the different platforms? How much transfer volume? How
centralized is it? Things like that. We turn that into a spam score
and then we’ll actually filter those transactions out. So we
have full ability to recognize NFT purchases. This gets back to
what I was talking about in terms of our gain/loss engine.

So because we can look at any number of assets on either side,
when you send a fee and you pay some ETH and you acquire an NFT, to
us that’s just a token to token transfer, just like any other
one. It’s just so happens the NFT might not have a cost basis
associated with it that’s fair market valuable. You might not
have the ability to fair market value the NFT when you buy it. But
in that case, we’ll just pick up a zero fair market value and
we’ll carry forward the cost basis from the disposed assets
automatically in that situation.

We have the ability to start adding pricing for those NFTs. I
imagine, this is kind of a funny world that it hasn’t quite
happened yet, but I do imagine a world where NFTs will eventually
kind of be more specifically priced. You’ll kind of be almost
in a way that you would do a yearly review of any real property,
like real estate property you’re holding. You would bring in
some sort of appraiser to sort of look at all your real estate
property and figure out fair market value. And that’s what you
would put in your books. I imagine a world where that happens with
NFTs, but instead of someone in a suit, it’s a 23-year-old with
a backwards trucker hat smoking a j, who throws his feet up on the
desk and just is like, “Bored Ape’s super hot. Mark that
up. CryptoPunks’ not hot. Mark that down.” It’s kind
of a world where I kind of imagine there’ll be this more
appraisal driven function at some point.

There are more scientific ways of getting into NFT pricing
because essentially the base things that they give you for NFT
prices, you have a floor price, which is what is the cheapest of
this NFT collection that was sold in the last 30 days. But no one
wants to use the floor price as pricing because it means everyone
will pick up an immediate impairment, right? Because the floor
price is necessarily the lowest cost and it’s also the lowest
cost. It’s not an offer to buy. It is a past sale. So you
can’t really use it for US gap pricing purposes anyways.

So we’ve developed a few different algorithms that use
ratios or averages or whatever it is that allow you to do kind of
pricing and we’re still building a lot of this stuff out, which
is a really fun part of the entire world here. But we do have very
good support for FMTs and the world’s first token spam engine,
I guess you would call it.

Eric Swartz: Yeah, I mean, the spam engine is
crucial because I know exactly what you’re talking about. I
mean, the amount of just random tokens that folks are receiving and
then obviously even worse is with the dusting with Tornado Cash.
And then I would imagine a world where almost you would want to run
through some sort of filter before it even could get to your wallet
because of that exact problem.

Pat White: That’s a cool idea. I like
that.

Eric Swartz: And almost have a way to have it
transferred to your wallet after the fact, but at least it never
touches your wallet initially. Because I think that that’s
super crucial after that dusting issue and literally these people
have reporting obligations for the rest of their lives because of
this. This is no joke, like a huge problem. So the solution that
you guys have built is amazing and I think it’s going to get a
lot of use after that.

Pat White: The dusting issue is one of my
favorite recent issues, to be quite honest. I actually really
enjoyed it. I am not a hardcore crypto libertarian or anything like
that. I’m like a deep pragmatist in this space. Businesses are
getting into crypto because of marginal efficiencies. Businesses
don’t take ideological stances. Michael Saylor and Elon Musk
are notable exceptions. But businesses like Walmart aren’t
getting into crypto because they want to burn down the Federal
Reserve. In fact, I think Walmart is quite fond of the Federal
Reserve.

They’re getting into crypto because someone like Walmart
looks at their supply chain and honestly asks the question,
“If we move to smart contract-based invoicing, could we shave
1% off of a trillion dollar supply chain?” If they shave 1%
off a trillion-dollar supply chain, that’s real money. I’m
no scientist, but that’s some real money that you’re
sitting on right there. Those are the questions that they’re
asking.

And so the way I tend to think about crypto regulation and what
I really like about crypto is you have companies like Bitwave that
are doing a best effort, good faith effort to comply with
everything that they can. So that’s the nature of building an
accounting product here is it’s not going to be perfect. The
world is imperfect and so you are doing the absolute best that you
possibly can as part of it.

Something like OFAC is not like that. OFAC is a very, very large
hammer to bring down. And it’s like the penalties for dealing
with sanctioned addresses in the US are incredibly severe. I
don’t love the Tornado Cash thing because I thought it was
incredibly poorly executed. And to the extent that OFAC, which
never releases FAQs, released an FAQ, whatever it was, a month
after it to clarify a lot of things like is it okay for you to mine
blocks, how are miners and things like that impacted by this?

But what I like about crypto, and the reason OFAC ultimately had
to do that, is that crypto, it has a release valve. If I get
sanctioned, all the US banks have to stop sending me money. The US
financial rail system does not have a release valve. OFAC has an
incredible amount and the Treasury Department and the Fed have an
incredible amount of control over the US banking system. Crypto, if
you do something like sanction Tornado Cash, you can dissuade a
certain number of people in America from using it, but Tornado Cash
still does a huge amount of volume every single day. You can’t
censor this stuff, you can’t stop this happening.

So regulation, realistically, there’s a relief valve on
really severe regulation where you can pass the law. Iran has a law
decision, you’re not allowed to use Bitcoin. There are still
Bitcoin miners in Iran. You can see it off their IP addresses. And
so you basically in the situation where laws are adhered to by
people who want to adhere to them, but if you pass a law that’s
overly strenuous, people just will leave the US, or they won’t
domicile here, or they’ll just ignore the rule because it’s
essentially unenforceable.

And I think that’s good. There’s a part of me that
really likes that. It likes the idea of regulation that is sensible
and followed by people who are genuinely trying to follow and do
the right thing without it being overly onerous. And I think
that’s why we haven’t seen crypto regulation come down with
a hammer in the US because the US does tend to be relatively
pragmatic. And it would just be like, “Okay, well, we’re
not going to follow this regulation, everyone move on with your
lives and now we’re just not going to report taxes at all in
the US because it becomes a bigger risk for us to report US taxes
because of really severe regulation than not. So we’ll just
domicile in the BVI and not report taxes.”

So it’s this really interesting kind of game theory game of
chicken that everyone’s playing right now. But I think it’s
gotten to a really nice equilibrium, in my kind of humble opinion,
between the regulation that we’re seeing and the actual act of
it. And part of that is just the pragmatic piece of it, which is
really cool to see.

Eric Swartz: Agreed. I think that we’ll see
a lot of sort of evolution as folks start to understand these
technologies more within the legislative branch. And I think at
some point we’ll have some solutions that make a bit more sense
than what currently exists. But I agree with you that there are a
lot of folks that sort of have decided to avoid the US and I think
that’s the exact wrong outcome and that’s not what the
regulators really want or the legislature really wants. So I agree.
I think there’s going to be a lot more acceptance of how these
technologies work and then also an attempt to work within the
confines of these technologies and the efficiencies that they
produce while also guaranteeing some of the safeguards that the
laws provide. So I mean, I couldn’t be in agreement more.

And honestly, the vast majority of our clients are very much so
like Bitwave in that they are very compliance-focused, and they are
within that first camp where they are trying their best to comply.
And so we sort of really encourage that type of behavior. And we
also understand though that the space is kind of ever changing and
evolving and there’s a lot of folks that can’t or just
don’t have a path to compliance. And so for them, we also
understand the need to have an offshore presence and set up
offshore where these activities are permissible and where
there’s less risk for the business.

Pat White: That’s just the thing, is
that’s why the US has been surprisingly non-knee-jerk reactive.
I don’t know how else to say it. Normally in these situations,
the US would be the first to knee jerk, but they recognized very
early on that there’s a world-level competitive advantage to
not ceding crypto to the Virgin Islands or to Mallorca, or wherever
it is in the world that this is happening. It’s one of those
things, when I talk about DeFi, the US, it’s something like 30%
of our GDP, maybe it’s not that high, 20% or whatever, is from
the financial services industry. I mean, we are a services-based
economy and one of the major contributors to that is Wall Street
moving ones and zeros around. And DeFi, fundamentally, is a threat
to essentially US financial hegemony, which we really have right
now. I mean, there’s no one else in the world that even is
close to how much money we move around the world.

And so there’s sort of two ways it could have gone. You
could have seen enormous rent seeking where all of the Wall Street
banks immediately pushed hard to outlaw all of this stuff and it
was completely illegal and you go to jail for touching it. Or you
could have seen this the other way is that we kind of embrace it
with the notion that if we want to maintain some sort of hegemonic
influence over this, we have to be the leaders and not the
followers on it. We again, surprisingly, picked that avenue. Now,
that doesn’t mean we’ll stay that way. Now that Wall
Street’s a little bit more waking up to it, maybe that changes.
But up to this point, that has been the situation, which is really
cool. Good for America on that side.

Eric Swartz: You heard it here, folks. Good for
America, good for tech. We love it. Thank you again, Pat, for
joining us today. We really appreciate the insights and think that
our listeners will love everything you had to say.

Pat White: It was absolutely my pleasure.
Anytime you guys want me, I’ll be back. This was really
fun.

Leah Satlin: Thanks again, Pat. And for our
listeners, before you go, if you enjoyed today’s episode,
please be sure to subscribe and hit the like button.

Kevin Iredell: Thank you for listening to
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