Suzanne Morsfield from Lukka on Valuation of Crypto Assets

[00:00:00] Umar: Welcome to The Accountant Quits brought to you by Auditchain, the world’s first decentralized, continuous audit, and real-time reporting protocol. On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.

[00:00:17] My name’s Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need, that will be relevant for the accounting industry as a whole.

[00:00:30] Welcome to Episode 22. Crypto assets are challenging the accounting bodies and standard-setters around the world, since they vary greatly to the traditional assets like equities, bonds, commodities, and therefore estimating their fair value is no straightforward task. Since they’re mostly unregulated, the markets never close and many can be turned into fiat currency. One company who wants to solve the complex post-trade blockchain data is Lukka.

[00:00:58] And as a crypto focused tech company has developed a proprietary valuation methodology for crypto assets. Today, I have the pleasure to have Suzanne Morsfield, the Global Head of Accounting Solutions from Lukka. Suzanne brings more than 15 years of data driven international corporate reporting experience and has worked for JP Morgan, Morgan Stanley, Ernst and Young, Thompson Reuters.

[00:01:22] Suzanne also worked for the IFRS foundation where she led projects on improving financial reporting standards and has spent many years being a lecturer at New York university, the London School of Economics and other US universities. Today, Suzanne is contributing to bring more clarity to crypto assets and is co-chair of the Global Digital Asset and Cryptocurrency Association for the accounting and tax working group.

[00:01:47] In this episode, you will learn; the challenges valuing crypto, why the classification method of crypto assets under intangibles is being criticized, the relevance of identifying a principle market for valuation, the valuation methodology developed by Lukka and much more.

[00:02:05] Suzanne, welcome to the show. I’m glad we finally found the time to speak.

[00:02:11] Suzanne: Thank you so much. Really enjoy being around and the opportunity to speak with you. I’m an admirer of your thinking and your podcast. And I really look forward to sharing whatever conversation we have today.

[00:02:24] Umar: Thanks a lot. To begin, could you share your personal background? I want to ask you maybe the first encounter you had with blockchain and crypto and what your work today at Lukka consists of, as being the Head of Accounting Solutions.

[00:02:44] Suzanne: So my first encounter interestingly enough was back in, I want to say probably 2008, and someone’s an early investor in it and recommended, if you don’t do an investment in anything else, invest in Bitcoin.

[00:03:01] And my partner, and I didn’t do anything about that. And of course we all know that if we had, you know, how life would have played out. And then secondly, my nephew was taking an accounting course at the University of Georgia and they, and part of it, you know, they talked about, Bitcoin and cryptocurrencies and he started talking to me about it.

[00:03:21] So, it really came not as a direct part of my accounting and financial reporting career, but from other people in my life who were interested in it. And that’s probably true for a lot of people I would imagine. I joined Lukka in June of 2021. So, I’m relatively new to Lukka, but I was very much drawn there by the leadership team that’s there.

[00:03:45] And this thing called Lukka Prime that you and I will talk about later was so striking to me and such an interesting. I’d spent a lot of time in financial reporting accounting standards, as you just described in my bio, and when you think about the crypto and crypto accounting, coming up with valuation of fair value is one of the first challenges that people often talk about.

[00:04:08] And so I was really drawn to the methodology, the rigor in it, the thoughts behind it, how it does link as we’ll talk later very much with the other evaluation standards in both IFRS and in US GAAP, but it’s also institutional grade. So with something we’re also always focused on is the quality of it. We meet AICPA SOC TypeI Type II, you know, standards.

[00:04:34] We’re very, very, very devoted to rigor and really high quality sort of checks and balances around it and high quality thinking around it. So and my role is really to help keep the accounting solutions piece of our software and our data because we are a software and data company. We don’t give accounting advice.

[00:04:56] We don’t give tax advice. But we’re here to help meet whatever the regulators standards and requirements are and help customers meet those goals. And so I’m always keeping an eye on that as well as helping as, as we’ll talk about later, sort of in the thought leadership kind of education sort of in communication, sort of that’s needed in this area of financial reporting.

[00:05:21] Umar: If we’re speaking about valuation, we have to touch on classification first. So at the moment crypto assets are being recognized as intangible assets, or more specifically indefinite lived intangible assets, both on US GAAP and IFRS. And to give a quick recap to the listeners on, what happens when intangibles are recorded on the cost model.

[00:05:47] When the price of the crypto fluctuates, these crypto have to be tested for impairment annually. So if the price of the crypto goes down and the carrying value of your crypto exceeds the fair value in your books, you will have to record an impairment loss in your books. And if subsequently the price of the crypto now rises, the carrying value is not adjusted.

[00:06:12] You will only recognize these gains at the time of sale when these are realized. So having mentioned this, why is the classification method of crypto under intangible, I mean, it’s quite obvious, but why is it being criticized and what issues does it give rise to?

[00:06:34] Suzanne: Yeah, that’s a great summary, really great summary on the topic and the issue with this classification.

[00:06:42] I’ll step back for one second and then I’ll jump full into answering that question. One of the things in my career has been, I have ended up and if you think about all the places I’ve been, I’ve ended up in accounting, financial reporting, looking at what people talk about accountants as being counters.

[00:07:04] And we put the beans in these different areas and we classify in this way. But from an early part of my career has been, what can I learn from the beans? What are they communicating? And communication for me is a huge, huge part of accounting and financial reporting. And so I’ve looked at it from the investment community side.

[00:07:23] I’ve looked at it from the preparer side. I’ve looked at it from being at the IASB and being on the staff and looking at the standard setting side. I’ve looked at it from an audit side at EY. And so communication around financial reporting is so, so, so important. Well, how, what is it telling users of financial statements?

[00:07:43] So I think this is where I linked to the problematic issue of the current classification. All of us in this area, get how we ended up there you go through a list of the available assets. You know, whether it’s in the IFRS world or the US GAAP world, what are the available assets to choose from?

[00:08:04] You go is it cash? Well, but it doesn’t meet technically that definition. Is it a financial instrument? Well, it doesn’t technically meet that. And so you go through that list and you end up with intangible assets and then you end up with indefinite lived intangible assets, especially under US GAAP. We have that very clear call out there.

[00:08:22] And so we understand how we got there, but the question comes back to is that classification going to communicate effectively to users of financial statements what is happening when a company is either holding crypto assets or using them in transactions? Is the communication effective? And most of us in that community, most holders or users of crypto would say, it’s not communicating.

[00:08:54] It’s not telling the story accurately about what’s happening. And the one other thing, and we will talk about this more I’m sure. One other really piece that I just touched on briefly is, well, there’s actually two pieces. You brought up the impairment issue and that if you hold them right now, under current accounting rules, if you’re classified as an indefinite lived intangible asset, you have to impair.

[00:09:17] And under US GAAP, that impairment is quite brutal right now. It is, you can only write it down. You can never write it back up, even if it recovers in value the very next day. You’re just stuck under. Under IFRS, as I know we can touch on later, you can recover some of that value as it moves up.

[00:09:38] So impairment is one of the issues, because again, it’s hindering the communication value of what is being recorded in financial statements, with respect to crypto. The other really big part of this story, Umar is that once, it’s one thing when you’re, if you are only just holding crypto, sitting on your balance sheet and you have to impair, you do have opportunities to communicate to the financial community, the user community, Hey, we had to impair it, but guess what?

[00:10:08] At the end of the period, it was actually really worth this. So here’s the actual value at the end of the period. That’s just, if you hold it near, but what happens when you go to use the crypto in a transaction? So I moved from just holding it to now using it. And that’s where you know, sometimes I say it a little harshly, like that’s where the wheels start to fall off the wagon.

[00:10:32] So as you pointed out indefinite life intangible asset examples often are trademarks brands, license, some licenses, some franchises. And so what is the accounting meaning and the economic meaning of taking a piece of my brand and buying a car with it? What does that mean? What does it mean? If I take a piece of my trademark and loan it to someone, what does that actually mean accounting wise?

[00:11:01] What does that mean economics wise? And again, I’ll circle back to the communication really starts to be hampered and that’s part of the controversy , are those two things is what’s. And I like to always come back to it’s about, are we communicating effectively to users of financial statements?

[00:11:21] And I think that, you know, that’s where I try to break it into those examples and, and encourage people to think about we’ve sort of lost our way a little bit in terms of how effectively we can communicate.

[00:11:34] Umar: One of the differences I noted between US GAAPand IFRS is that IFRS allows for crypto to be measured under the revaluation model, if there’s an active market, which is, often the case with crypto it’s possible to not to subsequently measure it at cost, but, measure it at its fair value. So now your financial statements reflect that market value. What I want to ask you is does this approach solve the limitation of the cost model and in practice, what, are clients doing? Are they using this revaluation model rather than the cost model under IFRS?

[00:12:11] Suzanne: That’s another really great question and I’ll circle back to it.

[00:12:16] And I feel bad that I keep circling back to this, but I’ll circle back to this notion of communication because you’re hitting a really key point about the difference between IFRS and US GAAP. And I would say that again, valuation is only a piece of the communication problem we have with crypto, but this capability to do the revaluation under IFRS can help with part of that problem.

[00:12:43] So then I can revalue up if the value goes up, however, under IFRS there can be a cap on how high you can revalue. You can’t necessarily revalue to completely, to the current fair value, the current market price. So you get into the weeds of that opportunity to revalue. It gets you part way there, and it helps for part of the valuation issue and part of the communication issue.

[00:13:12] And yes, customers definitely are attracted to that opportunity. And so you pointed out it’s a choice under IFRS. Not that it’s an accounting method choice. And so some people can choose it. Other, other entities might not, but it is a very attractive choice. And we are seeing people take advantage of that opportunity.

[00:13:33] Umar: Coming to valuation broadly speaking, what are the challenges with valuing in crypto? I’ve mentioned in the introduction,these vary greatly from the traditional assets like equities, bonds, commodities, and also when determining the fair value then for crypto assets, what is the meaning of a principal market?

[00:13:54] Suzanne: That’s a great, great point and agree. And it is where Lukka, Lukka Prime really comes in and tries to really help bring a solution to customers. So, you know, recap some of my, you know, my standard list of the kind of challenges in the crypto ecosystem, there’s challenges in general, because of the things you mentioned that markets never close, you know, they’re often fragmented.

[00:14:25] They’re often unregulated. I’ll go down and add a couple of more things that, that contribute to the principal market question that, that I’ll definitely zoom right into there’s different prices for the same assets on different exchanges. There’s decimal price, precision things where don’t round you can’t round up, don’t round to two decimal places, which is more traditional in traditional markets, because you’ll lose value potentially.

[00:14:53] So some go out to eight decimal places, some go out to, you know, many more decimal places. And so we need capabilities that can handle that level of precision And then the data aren’t necessarily normalized across exchanges, so to speak. So, you know, we’re used to ticker symbols in traditional equities, and there are different sort of symbols and ways of identifying across the different exchanges, the same asset.

[00:15:22] And so someone needs to come in and bring order to the data first. And this leads to, into this is leading into your principle market question, because step one really can be, we’ve got to bring order to the underlying data. So, so one of the many things that Lukka does that’s before you hit our Lukka prime, valuation software product is bringing order to the data. We’re normalizing, standardizing.

[00:15:52] We have our own sort of set of tickers so that we’re mapping what’s going on and all the chains and all the exchanges to our standardized methods. So when you come into the world of Lukka’s data, you’re meeting a world that has order to it and , and then allows you to understand and use the data however, you’d like.

[00:16:11] One use of our data then once we’ve gotten to that point is in helping come up with valuation. And the first step in that is identifying a principal market if you’re reporting under IFRS or US GAAP. So principal market is an idea notion that comes right out of accounting standards internationally.

[00:16:35] And this standard was designed at a time when the IFRS Foundation and the FASB, were doing some completely joint standards. And so it was jointly determined. It’s why, you know, if you, if you meet the valuation requirements of US GAAP, chances are you’re going to really be meeting them under IFRS, and vice-versa. You know things evolve over time.

[00:16:58] But the foundation was very much in common. So principal market, let me jump into that.

[00:17:05] One of the key things, you know, again, going back to this point of fragmented and unregulated market, markets that never close data not normalized, different prices for the same asset on different exchanges. So in all of that noise, if you will, or variety or fun, you know, depending on how you can look at it at a given day, we need to identify a principal market and US GAAP and IFRS are very similar in how they think about that. And one of the things that’s interesting about fair value under ASC 820 and IFRS13 just to throw those codes around, is that there’s lots of times in that guidance in the requirement where it says, you must do this, but it doesn’t say a precise recipe, if you will, for how you have to do.

[00:17:58] FAS+B is very principles based. So it says you must identify a principle market and it gives you some guidelines around that, but it doesn’t say it absolutely has to follow a specific recipe. Some of the guidelines are crucial. You know, you have to take an approach that where you’re looking for, you know, initially, you know, for what we would call level one sort of level two assets, it is an active, where’s the active market, you know, can we observe prices actually on the market, on an exchange or a market?

[00:18:33] What’s the market with the highest volume. What’s this, you know, and what Lukka brings to bear is we take those guiding principles and we have what we call our five step sort of process for, for identifying a principal market, given those principles and giving these challenges. And I help customers identify a principal market and where. I can go into those five steps here or wait until you you’d like to talk about that further

[00:19:07] Umar: So we can go into it right now. So you’ve already mentioned that Lukka has developed this methodology, a five step methodology called Lukka Prime. Could you guide us through the approach, the five steps, maybe also, if possible, give us an example of maybe if the company is holding Bitcoin and now how would this, be measured under this approach?

[00:19:31] Suzanne: Yep, that’s great. So, so what we do is and you hit the nail on the head there with it. It is our approaches, both what we call dynamic. And it is in each case that we run the methodology, it is based on a specific asset or asset pair, a trade. And that again is because of the IFRS and the US GAAP standards that says, you need to identify an exit price for the thing you’re trying to value at a specific time, though it doesn’t prescribe the time. And I know that’s something you want to talk about, but you have to have those components.

[00:20:09] So they identify the asset. You have to identify the time and you have to find an actual exit price that as part of this principal market determination.

[00:20:21] So what we do is we have done, we have if you will sort of thought about all the exchanges out there, we’ve looked at and narrowed down to ones that meet our standards for governance quality. So we develop what’s called a base score based exchange score. And it involves looking at the qualitative side of the exchanges, what is the regulatory environment in the country that they’re in?

[00:20:53] What is the anti-money laundering sort of approaches in this exchange? What are the know-your-customer type of approaches within this exchange? So we’re looking at that to narrow it down to a set of exchanges that are. Right now, we have 15 that we start with that meet our governance requirements, and each of those will have a score.

[00:21:18] So you’ve got your Bitcoin that you trade that you want to look at, and we bring that into, and you tell us the time of day. So you’ve told us the asset, you’ve told us the time of day that you want to value it at. And we start to run the process. So we go into the 15 exchanges that need our governance requirements.

[00:21:40] And for that given asset, we go, we take the base score. That is the governance sort of driven score. And then we start to look in at the specific trades at that time of day. And we identify for that asset. We start with identifying which exchange has the highest volume that day. Because when you go to US GAAP, when you go to IFRS, it’s saying for principal market, look at volume, look at what’s happening.

[00:22:10] And then once we’ve identified that we then look at something that helps us figure out how stale is that trade or is it stale. So we’ve got a volume sort of indicator and we’re adjusting the base score for. Then we look at the time of the last trade. And part of that to sort of get a sense of, was there high volume, you know, six months ago, or was there high volume six milliseconds ago, you know, and we can identify that at that level of detail.

[00:22:45] And then we adjust the score of all 15 exchanges. Remember that all 15 exchanges are being looked at and in this process we’re ranking them. So there’s a ranking going on of the 15 exchanges. So volume for this particular asset time of the last trade, we get to what we call a DK and value adjusted score for the exchange or the markets.

[00:23:10] So remember we started with 15, we’ve got your Bitcoin, asset, you know, and the time of day you’ve given us and we get this score, then we sort the scores in order and the highest scoring exchange for that asset at that time of day is the principal market. So we went through all of that.

[00:23:32] There’s obviously massive sort of data being processed in the background. We pull the actual trade off of that primary market for the time of day you told us. So again, exit price, actual trade, all ties back to guidance and principles in the FASB guidance and in the IASB guidance and take the trade, take the price times quantity that you need valued, and we get the fair value that way.

[00:24:04] So that’s kind of, that’s our steps one through five. I like to say there’s a bonus step and a bonus step is we have incredible oversight that is going on over all the data that we’re processing and all the data that factors into these calculations. We have an oversight board, we have a pricing, you know, sort of the ability to submit a pricing challenge.

[00:24:26] If you’d like to, we are running analytics constantly. This is not a sampling sort of approach to audit of what’s happened of the data that we’re using. It is constant running of constant analytics over all the data. We’re making sure that if there’s an outlier, we’re analyzing it. If there’s something that looks like a, you know, one of those wash trades, that’s like not perhaps a real trade, you know, around sort of tripping going on.

[00:24:58] We’re looking for all of those kinds of signals because if the underlying data that we’re using, isn’t analyzed and isn’t properly overseen, then we lose some value in our approach, but let me show you this bonus step is an incredibly important part of our approach to the rigor of what we do.

[00:25:21] Umar: The former auditor just thought of a question. It’s completely right that different exchanges will have different prices of the same asset, maybe at the same time of the day. So there are fluctuations. And so I want to ask you what if a client is not doing this or not a client, someone listening. They’re not doing this work of aggregating, the different prices from different exchanges. Should they then stick to one exchange? And the time is also quite tricky. I mean, with crypto, you can have a price jump in one hour of 10%, it can happen. It’s quite tricky.

[00:26:03] Because one of my questions was that given that crypto assets markets never close, how should they determine the fair value? Should there be a cut off time that they always use? And they cannot, they have to remain consistent somehow.

[00:26:18] Suzanne: Oh, and you know, another really great insight and approach. One of the things that we have seen is, among our customer base and we have a really broad and very interesting customer base but one of, let me, let me just interject here with part of our customer base, are audit firms and auditors, and they are using our Lukka Prime as a way to test and look at what their clients from an audit perspective are using as a price and timing.

[00:26:50] And so we play this very, I think, important role, even from the audit, from the audit side. So even if, as you mentioned, someone’s not doing this sort of broad scale approach, their auditor might come in and say, well let’s look at your number. And then let’s look at a number that is at the exact same time of day as you chose.

[00:27:10] And it does factor in what’s happening across the, you know, sort of this, you know, a smaller set of key exchanges and see how things look and see if there’s a big Delta, you know. And one of the things I neglected to mention Umar about our method is that once you get that 15 sorted and we choose the principal market, we have a report.

[00:27:32] We call the transparency report that shows the 15 exchanges, and the results. So you can see the volume on that time of day. You can see the, when the last trade occurred across all 15 and then which exchange was at the top. And then all the ones that go down, it’s very transparent. And it’s also one of the really wonderful things about our method is, if you use our method, your auditors can see very clearly and they can then test it themselves and they can go look at the exchanges of that time of day.

[00:28:03] If you’re not using our method, your auditor might be using our report to then sort of see, ah, you chose this exchange at this time of day. You know what, that’s way down the bottom of the Lukka Prime list. So let you know, we might need to talk. So we say, you know, your listeners a key thing and you really hit on it as an auditor is, you know, and again, I’m not giving advice, you know, actual accounting advice here.

[00:28:35] I’m not sitting at all trying to override whatever their account advisor or auditor would tell them, but a sound approach that one could take really truly is documenting your approach to principal market choice. And as you said, making it consistent. Probably one of the last things you want your auditors to see is that you’re opportunistically choosing a time of day and an exchange to put the value at the highest that is not consistent, where I always go to this exchange for this reason, I always use this time of day and for this reason, and I think your documentation will be key as well as consistency is, as you rightly point out.

[00:29:20] Umar: The IFRS has a fair value hierarchy being level one, level two, level three. For the listeners, so level one would be for something like Bitcoin. So it has a quoted price in an active market and level three would be where you don’t have those observable inputs. Maybe it’s for an unlisted token. I want to ask you then what would be the valuation approach for a crypto under these level two, three categories where you don’t have an active market?

[00:29:51] Suzanne: It’s, you know, it’s another really great question and I think an answer to that is there’s an answer for the here and now, and there’s an answer that sort of, it’s evolving, right? So for the here and now, one of the things that we see our customers doing is even if it’s not technically a level one assets, or is that they’re using Lukka Prime, because one of the things you can do in leveling and coming to your valuation is you know, and probably many listeners know is that you can devise your own model.

[00:30:27] And you can have a piece of your model, be the observable inputs. As, as you get below level one observable, it could be a mixture of observable and unobservable inputs. And so some of our customers are using Lukka Prime as an observable input, but then they have to bring their own. Some of them have, fine with the asset that’s on their balance sheet that they’re looking at. They have to bring in some unobservable inputs and thoughts. And once you hit as, you know, an unobservable input, even if you’re using an observable, one is piece of this story. You have to go to an unobservable that brings you to level three.

[00:31:04] And the lowest level that is in the model is the one you have to level your asset at. So what we’re seeing is customers using Lukka Prime as a level one, and in their level two, to sort of give them some, you know, level one is obvious, level two is, becomes a benchmark, becomes a similar, you know, it’s a similar assets, you know, enough that they can use Lukka Prime to get them to level two.

[00:31:31] And then others are using it as an input to their model for getting reaching level three, because they had to bring in some unobservable inputs into their model. And, oh, you know, I should add, sorry ,this is the thing with the evolving piece of the story. So for, from Lukka’s perspective, we have a methodology that we’ve got done and we’re getting ready to roll out in 2022 for thinly traded or more illiquid assets.

[00:32:01] And so we’ve got it developed, tested, another, what I think is a very groundbreaking method that will help our customers get to a really sound valuation for those kinds of assets. That’s the evolving part of the story.

[00:32:18] Umar: Before we continue. We’ll take a quick commercial break from our sponsor.

[00:32:22] This episode is brought to you by Auditchain, the world’s first decentralized, continuous audit and real time reporting protocol. Some of you listening might be aware that I previously used to be an external auditor. Now traditional audit methodology focuses on materiality and not accuracy. We’re constrained by time and cannot audit a 100% of the transactions.

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[00:33:27] Now in September, 2021, you wrote a letter to the FASB recommending that the board adds certain projects to their short-term agenda that would improve the accounting of crypto. Could you summarize what were some of the suggested proposals?

[00:33:47] Suzanne: Absolutely. And, you know, it was a wonderful opportunity for both the FASB and the IASB did reach out to their constituents and said, please talk to us about what we should add to our agenda for the next three to five years, depending on which kind of standards you’re talking about.

[00:34:04] And so we also submitted a letter to the IASB’s agenda consultation with, you know, some slightly different input because it’s a slightly different setting. But overall, I’ll say having been in a standard setter, I always start off this way because of having been in one, I have so much respect and Lukka so much respect for what they do and the challenges that are in front of them.

[00:34:30] And while many of us in the industry would love a quick answer, a quick fix to quick responses, one of the things is there is a due process that is embedded in both boards. That is there to make, to kind of in a way, protect all of us and protect the capital markets everywhere because they do take their time.

[00:34:53] They do carefully analyze and, and educate themselves on new issues and new topics. And there’s a lot of what is in the presses is the feedback loop where they’re reaching out to all the constituents they’re reading, reaching out to investors on the credit side, on the equity side, on the buy side, on the sell side, they’re reaching out to preparers, they’re reaching out to credit agencies, rating agencies.

[00:35:18] So there’s a huge part of the process that seems slow to all of us, but it’s also a little bit invisible to all of us where they’re doing this detailed outreach to make sure that they’re meeting the needs of all the stakeholders. And so, the other piece of it is the deliberations, you know, there’s public deliberations, there’s public opportunities for us to comment and write our letters and speak to them in a public way.

[00:35:47] And I’m a huge fan of the transparency around the public deliberations and the public opportunities. And, and I’m a huge fan of that, whether it’s the authoritative guidance or not authoritative guidance that comes out that the more transparent it all can be, the more the public sort of deliberations can occur.

[00:36:06] I think the better for all of us. So that was a long-winded answer to set up to what a part of what we thought. And I thought was, something that would be useful is, to expand the definition of pervasiveness. Pervasiveness is often is, is something that those of us who are writing to the boards don’t often think about it’s an important issue for them, but they have limited resources, limited time, and they need to choose projects where the issue is pervasive, is the most pervasive. And we in the crypto community often like to talk about pervasiveness as, oh, it’s a $3 trillion market. How could it not be pervasive? You know? And, and we throw around these big numbers and wonder why the boards, regulators aren’t jumping on it.

[00:36:56] Suzanne: But the reality is when it, when it comes to tax, that affects every individual out there on the planet almost, and corporate entities and non-for-profits and partnerships, when it comes to accounting standards, those really are just at the entities level. And it is their accounting standards.

[00:37:16] Their definition of pervasiveness is about those folks. The corporate entities, the partnership, anyone that’s using US GAAP to report is where the pervasiveness question comes in. So as a community, we have to be, we have a responsibility to be more careful in how we are helping them understand pervasiveness.

[00:37:37] And it was something where, you know, in my letter, I tried to suggest some other ways of looking at pervasiveness that it focuses on the right sort of constituents and stakeholders and market place that uses US GAAP or IFRS because I’ve tried to look at pervasiveness. I’ve been on their side of the desk where to measure pervasiveness often, you know, the tool set that that staff person has, is to go look at how many times crypto or digital asset shows up in a 10-K, in a 10-Q, in an IFRS public filing.

[00:38:15] And we count how many times, how many companies reported that. And that is the definition of pervasiveness that is reachable sometimes. And, you know, I would qualify that with saying all of the things that are they’re looking at behind the scenes are usually much, are usually quite comprehensive, but it’s an area where the community, the industry could help them understand.

[00:38:38] And there might be data and information that we have around pervasiveness that we could help communicate. And we should, because a lot of crypto is happening in the non publicly traded entity space. And we might be able to see that in an anonymous, sort of anonymized way, in ways that the standard setters and staffs can’t necessarily see that.

[00:39:02] So the pervasiveness definition, thinking about the economic uses of crypto, so that it’s not just one type of asset and this, we touched on. If I’m using it to buy things. If I’m using it to sell things, if I’m holding it as an investment, if I’m an active trader in it, all these different sort of use cases need to be looked at.

[00:39:24] And the chief accountant of the SEC said that quite recently, in a financial executives institute interview that I thought reported on it. He said, listen, there is a very good basis in US GAAP, a very strong model of accounting that could be used. You know, what he was essentially saying is the building blocks for improving finished reporting for crypto are there.

[00:39:53] And it includes looking at how the crypto asset is being used. So is it being used similar to, is it being used similar to a currency? Is it being used for, you know, similar to financial instruments, then go to those parts of US GAAP or IFRS standards and it’s something I talked about in my letter is let’s analogize to a crypto transaction and a traditional transaction and see if it’s the exact, essentially doing the exact same thing from an economic meaning point of view, from an accounting meaning point of view. And then let’s just see if it’s wrapped in different technology.

[00:40:35] It’s executed in a different way. And if that’s the main difference. And there’s just things we can sort of tweak in existing GAAP to help that accounting that exists already, the strong accounting model of the chief accountant brought up, then let’s use that. And then let’s sort of adjust the existing GAAP to just help this crypto version of a traditional transaction.

[00:41:03] And then if we do that from our world, we might get to some transactions where there’s not a clean mapping. And so there, we need some new GAAP. We need maybe to start with a clean sheet of paper, but on average, I don’t think that we need to, this is really my personal view here. I don’t think the standard setters need to start with a clean sheet of paper for most of what is happening with crypto transactions.

[00:41:32] There will be some that they do. And again, the industry could really be useful to them and understanding all of these transactions and mapping them to analogues. I do think the industry really needs to be involved with them. They need to be engaged really directly. If either board could set up an official industry working group with industry representatives, not composed solely of auditors, let’s say, but you see the folks that are in the trenches up to their elbows in these transactions in accounting for them in finance and doing the financial reporting for them as well. I think that would be really useful for both boards. And so that was one thing I recommended and then the small targeted sort of projects, rather than let’s have a big crypto accounting project that could potentially. Be careful what you asked for when you asked for that, because those projects can last a decade.

[00:42:26] Let’s just be honest about that. So sort of taking a smaller targeted approach was the other thing that I recommended.

[00:42:35] Umar: All right. This is a great point that you mentioned. Now, we know the accounting industry is kind of a slow moving industry, but I’m not saying it’s a bad thing, right?

[00:42:45] It’s quite a monumental task to come up with these new standards for crypto. But I want to just throw some ideas there on maybe some different approaches, how to deal with this. Blockchain is open source. Can accounting bodies be more open for collaboration in these changing times? I think of sometimes coders have hackathons.

[00:43:09] So you have all coders who come together who collectively try to come together and find a solution. Can the accounting industry adopt such an approach? And so even if the IFRS or the FASB sets up a working group and they’ve done so. I’m sure a lot of the eligible candidates there would be technical partners from public practice accounting firms, which of course makes total sense.

[00:43:38] They have the experience and knowledge to set these standards. But sometimes I feel maybe with the open source nature and the non-hierarchical ethos of blockchain and DAOs would then anyone, who wants to collaborate maybe should be able to do so in an open environment, what do you think about this?

[00:44:04] Suzanne: I know, and in my view, I love that idea. One of the things I saw, for example, over here is that the FRC at one point, the Financial Reporting Council maybe did this innovation that came from a former colleague of mine, called the Financial Reporting Lab and in it, and the idea was let’s get in and it’s not necessarily replicable in every country in the world because of various kind of legal sort of issues.

[00:44:40] But the idea was to really try to be innovative, to get all the participants in the room, who are trying to communicate with financial reporting, right? So those who are trying to tell their story, those are trying to understand the story and then turn it into a valuation, a buy sell, or hold call.

[00:45:00] Those who are trying to trade. You know, sort of investments and get them all in a room and talk about financial reporting and what’s working and what’s not. And what happened. And the reason I bring this example up is,A it was very innovative. B, to make that happen, the UK government, you know, sort of body seconded my former colleague for part time, and I just wonder out loud Umar, if it’s, and to your listeners, if you know some models where they’re seconding of people, truly in the crypto industry into standard setters into government regulators, I mean, the SEC always has a program of having professionals academics and all of those kind of come in and actually do real kind of work, help them understand what’s going on out there.

[00:45:54] Suzanne: You’re right that the technical partners from the audit firms are an important part of the story, but, you know, I’m keen to see those of us who are up to our elbow. You know, Lukka is a prime, is a prime example, no pun intended of, we are seeing what a whole variety of types of crypto community sort of organizations are dealing with.

[00:46:18] You know, we have miners, we have auditors. We have, in our client base, we have hedge funds. We have fund administrators, we have actual companies, you know, publicly traded companies. So, we see this whole ecosystem and you know, we could help, you know, help standard-setters regulators certainly understand.

[00:46:39] And others out there in the crypto industry could as well. And I think, as you said, it’s open source and there’s I think there’s those of us out there wanting to find ways to really actively engage and help them. And I think, you know, I just wouldn’t, you know, I would hope that something could work, work out where we see more of that kind of coming for this particular thing that is so innovative and so pervasive, no matter how you measure it is pervasive, that it just would be really great to see the standard setters and regulators take advantage of the community that I think is really willing and able to help, you know, to do the equivalent of secondments or hackathons or whatever.

[00:47:26] I think there’s a lot of willingness and I hope the standard setters and regulators take advantage of that.

[00:47:32] Umar: Suzanne for the last part of the podcast I’d want to keep things a bit light and speak about the different career opportunities and how people should keep educating themselves in crypto and blockchain.

[00:47:48] If I look at yourself, your career has been a testament of someone who has an innate desire to keep learning and evolving. You’ve always been on the academic end either as a professor or researcher. Wer’e now in what’s being referred to the exponential age where all these emerging technologies, not just blockchain, but AI, virtual reality, the internet of things, these will exponentially disrupt the way we work.

[00:48:16] And a lot of us will have to reinvent ourselves. What word of advice do you have for people listening to navigate through this time? This quite unique time?

[00:48:27] Suzanne: Yeah, it is a wonderful, wonderful sort of point of view. And it’s part of what I so much love about the work that you’re doing, the conversations that you’re having, what you’re sharing about your own experiences, this sort of journey, this quest approach to life of constantly learning, constantly evolving, being willing to take risks and do something new in your career in your personal life is just such I think a wonderful message that you convey and then to bring it into an accounting setting, which we often have the reputation of being sort of stuck and rigid and, you know, sort of ones with the green eyes shades and sort of something out of, you know, a Charles Dickens novel, you know.

[00:49:14] So, I love that. I love that you asked that and that’s how you want to end it. I I’ll share a little something, a little personal note that I don’t often share, but I think it’s really appropriate for this conversation is that how I ended up in accounting as a career started with a really big challenge in my life and a really big difficulty.

[00:49:36] And I ended up with a post viral syndrome and this was, gosh, I can’t remember how long ago, it was a long time ago and, you know, probably be similar to, you know, some people would call long-term COVID where you get a virus in it. And it turns into a syndrome that can be quite debilitating. And I was, I was actually bedridden for almost two years, including if I wanted to leave the house.

[00:50:00] And so I didn’t know at the time, wasn’t sure if I’d ever get back to full health, to full sort of mobility and I did get stronger and strong enough for me and how I ended up telling was my sister, Kathy, decided to take an accounting course for her job at a local community college, which is, you know, these smaller sort of colleges in the United States.

[00:50:22] And I dragged myself along with our, you know, to every course and it clicked, there was something so fun to me about it. It was a mental jigsaw puzzle. I grew up loving to do jigsaw puzzles from a young age and it just clicked. And it, you know, I think my point of sharing that is this sense of whatever’s going on in our lives and in our careers being willing to try something new if we want to take having, if there’s a challenge that comes up looking outside of the challenge too, is there something, and I don’t mean to minimize challenges and people’s lives at all because they are real.

[00:51:06] And sometimes they’re very, very, very powerful. You know, in a very hard, but how I ended up in accounting is because of some very difficult thing. And so I went from that accounting course all the way through a PhD, as I got stronger and stronger, and I worked hard on getting stronger and, went on to train for a triathlon and again, many years ago, but all that to say for me, accounting, too then turned into an, and you, you hit the nail on the head for me accounting has been a source of feeding my endless curiosity about the world and my desire to constantly learn.

[00:51:51] Suzanne: And I, you know, I was just volunteering my age because I don’t mind getting older. In fact, I love it. That’s love that comes with that. I’m 61 and I’m choosing to go into crypto and crypto financial reporting and I’m choosing it on purpose because it’s interesting. It’s exciting. It’s new. It’s disruptive.

[00:52:11] All the rules aren’t set yet. Maybe something from all my years of experience in financial reporting will be useful and helpful, you know, to regulators, to standard setters, to others that are grappling with this. And so bringing your life experience to bear on decisions about what to do next, or even what you’re doing right now is something that behind the scenes is always happening for me.

[00:52:39] If you’re not happy and fulfilled with what you’re doing, you know, then look for something else to follow the principles that you talk about, both on your website Umar and that you illustrate in your podcasts, you know, do the small steps that you can right now, while you’re thinking about doing something different.

[00:52:57] Suzanne: But if you are in financial reporting and accounting, and I am telling you the opportunities and the variety of things you can do, if you, if you look for that and you’re open to that are almost endless. And so if you’re at all attracted to accounting, financial reporting, you’re not happy with what you’re doing right now.

[00:53:19] Look for this new thing. And I have to say crypto and blockchain is a really, really, really great place to be because you’re around people who are excited about this new world, this new frontier that is probably going to change everything we do. And so the financial reporting around it will need to evolve.

[00:53:39] We’ll need to change, and you can be a part of that.

[00:53:43] Umar: Thanks for sharing your story its very inspiring. I’m sure it will inspire a lot more people. Like you said, age does not matter. I will say this to my mom. She’s two years younger than you. maybe, that can get her to look, I don’t know, more into blockchain and stuff.

[00:54:01] I I’m always speaking to her about blockchain and crypto and trying to explain it in a simple, simple language. As closing thoughts, Suzanne, would you have anything else you’d like to share with the listeners? You’ve already shared a lot of wisdom, knowledge here, but is there anything else that you wanted to share?

[00:54:23] Suzanne: You know, I do think there is a lot to that principle. I guess my final point of, you know, work should be fun and it won’t always be fun, but your overall experience should be fun.

[00:54:39] Enjoyment. The challenge is interesting and exciting and fun and so I would just keep encouraging listeners to find that if they don’t have it now, to look for that and to not settle, you know, it doesn’t mean every part of your day job will be fun and there will be challenges and there will be difficulties, but your overall experience should be that this is fun.

[00:55:06] I enjoy coming to work and enjoying what I do with my colleagues. And I have been very fortunate that very, very, very much of my career has encapsulated that. And when it hasn’t, I have looked to move on, you know, it’s really quite simple. So that would be my closing.

[00:55:25] Umar: Alright. Alright. Thanks a lot for today. I’ve really enjoyed this conversation and learning from you. Before we go, where can people, if people want to reach out to you and also keep learning about Lukka, or just reach out to you, where do you, where are you hanging out? Maybe on social media channels.

[00:55:44] Suzanne: Yeah. So LinkedIn is a great place and I tend to, I tend to accept all invitations, you know,

[00:55:51] So LinkedIn is a great place to reach me. I think it’s probably the best place to reach me. I’m still working on the rest of my social media. That’s where I look a little old still working on the rest of my social media presence. So, but LinkedIn is a really, really good, reliable place to get in touch and I, you know, invite your listeners to feel free.

[00:56:10] Umar: Perfect. And if they want to keep learning about Lukka, I’ll include the website of Lukka and the links to this. I’ll include the links to the articles you wrote about the valuation of crypto as well, which actually was the article where I found out about Lukka.

[00:56:28] Suzanne: That’s a great idea. You know, one other thing I mentioned that maybe as a useful link is that I have heard so I mentioned before the former chair of the FASB, and I did a joint presentation on fair value and the challenges of fair value and Lukka Prime solution for a conference. And I’m in the virtual conference that Rutgers University in the States held back in November. And so I, that is posted up on their website.

[00:56:53] So, you know, people are interested in a little bit more detail around what we do and Bob’s thoughts around what we do that could be really interesting as well.

[00:57:03] Umar: Sure I will include that as well. I listened to it before the episode today. Thanks for your time. And we’ll be in touch. We’ll speak soon.

[00:57:13] Suzanne: It sounds great. Have a wonderful day. We’ll see you again.

[00:57:17] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes and transcripts on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only, and is not a substitute for consultation with professional advisors.

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