Presentation to the Pittsburgh Association of Financial Professionals discussing Crypto-currencies and Blockchain. Emphasis on the importance of expanding familiarity with virtual currency and Blockchain technology. Exploring the potential for both utility and disruption for financial professionals.

1. Blockchain Technology
Bitcoin & Beyond
Pittsburgh Association of Financial Professionals
Judith Herron MBA, CPA
November 16, 2017

2. Why are We Even Talking About
Crypto?
• Significant funds are
moving into digital
currencies
– Coinmarketcap.com tracks
1,185 currencies
– Bitcoin remains dominant,
but alt-coin use is robust
https://coinmarketcap.com/

3. Bitcoin 101
• Bitcoin was designed as an electronic payment
system based on a mathematical proof.
– It’s created digitally using computing power in a
distributed network.
• The network processes transactions made with virtual
currency for a fee.
• Bitcoin stores details of every transaction in
the network in a general ledger called the
blockchain.

4. Bitcoin Utility
• Bitcoin trades capacity for security
– Significant computing power required for
transaction authentication limits transaction
processing speed
• Estimates are Bitcoin now is at a limit of about 7
transactions per second
• Visa runs about 20,000 transactions per second
– Once transaction capacity is full a free market is
created for processing time
• Average transaction fee in August $8.90

5. Crypto as an Asset Class?
• 110 hedge funds hold more than $2B to invest
in Crypto
– In December of 2016 there were 26
• CME Group says it will start offering Bitcoin
futures by year end
– Company says it will impose trading halts to limit
price volatility

6. FinCEN says it’s not money
• 2013 Guidance
– In contrast to real currency, “virtual” currency is a
medium of exchange…[that] does not have legal
tender status in any jurisdiction.
• More of a payment system than a currency

7. IRS see Crypto Currency as Property
• When you purchase crypto you establish your
basis.
– When you redeem those coins to purchase
something else, the difference between your basis
and the redemption value is income
• Most cases capital gains tax rates apply

8. FASB
• Businesses that utilize crypto have no specific
guidance.
– FASB has agreed to perform pre-agenda research
on accounting for digital currency
• Potential treatments include
– Inventory
– Intangible assets

9. From Virtual to Reality
• Get paid in bitcoin?
– You need a W2 in USD
• Mining Bitcoin?
– Recording the value as income on the date is
awarded on the blockchain. You can deduct costs
for tax purposes. Subject to SE Tax.

10. IRS Enforcement
• Paying with Bitcoin?
– Calculate your basis and sale price on each
transaction
• IRS Getting Engaged
– 802 Coinbase users reported capital gains on
2015 tax returns
• IRS is asking for account info for 14K customers
– Current action eliminates transactions below $20K

11. Crypto Taxable Event?
• The Hard Fork
– Bitcoin Cash broke away from Bitcoin in August
• Do you have to pay tax on that virtual change?

12. Blockchain

13. • Virtual currency transactions use Blockchain
technology to ensure each transaction is recorded
correctly.
– Participants create a secure digital signature with a public
and private key (Identity)
– The transaction is released to a network for authentication.
• The authentication process is difficult and requires significant
computing power.
Blockchain

14. Blockchain Utility
• Distributed database
– Records are verified directly. Each update flows to the
network.
• Peer-to-Peer
– No centralized location for information
– Each node has an identity
• Records are permanent
– Entered transactions cannot be altered, are chronologically
ordered, and available to all on the network
• Transactions can be programs
– Users can set up algorithms and rules that automatically
trigger transactions between nodes

15. Smart Contracts
• Ethereum is a virtual currency structured to
allow an embedded contract
– Mostly used now for ICOs
• Solution is still very power intensive. Relies on proof of
work consensus model for update. Proof of stake
model is next step.
– Other approaches to this are in the market. Differences in
processing time can be significant.

16. Initial Coin Offerings
• Coindesk says $2.3B has gone into ICOs in the
last six months
– Organization sells digital tokens for purpose of
obtaining funding
• Digital representation of a set of rights
– Right to access a network or software app
– Right to redeem for a unit of currency or goods
– Rights to receive a share of future earnings

17. What Is Legit?
• Regulatory scrutiny is
ongoing and escalating
– Are these securities?

18. Blockchain Implementation
• October 2017
– BNP Paribas & accounting firm EY develop pilot
program for bank’s treasury function
– MasterCard expands access to their blockchain
APIs to speed cross border transactions
– Deloitte 2017 customer survey
• 28% of companies have invested $5MM or more in
Blockchain
• 25% of respondents expect to invest more than $5MM
in Blockchain in the next calendar year

19. How Does this Work?
• AICPA 2016 survey
– 4% of financial professionals surveyed said they
were knowledgeable about Blockchain and what it
can do

20. How to Prepare
• Two-thirds of CEOs surveyed say Blockchain will play
a significant role in the company within 5 years

21. • HBR – “The Truth About Blockchain”
• https://hbr.org/2017/01/the-truth-about-blockchain
– Patterns of disruption regarding foundational
technology
• TCP/IP Technology – foundational to the Internet
• Key variables for business use
– Novelty
– Complexity
Evolution vs. Revolution

22. How Technology Emerges

23. SUMMARY – Virtual Currency
• Use of Virtual Currencies has expanded to the
point where it’s important to be aware how
they work.
– Tax implications
– Asset allocation
– Regulatory changes

24. SUMMARY - Blockchain
• Understanding the evolving Blockchain
ecosystem is an important tool in maintaining
an effective finance function.
• Developing decision tools
to evaluate the risks and
opportunities of new
Blockchain technologies
is a good first step.

25. Questions