What We Discuss With Jakub Sawczuk
The adoption of cryptocurrencies as a store of value and medium of exchange lies in the ability of that data to be easily extracted into any accounting software from the different crypto wallets & exchanges.
As of today, the legacy accounting softwares do not integrate with cryptocurrencies for pricing, and accounting for crypto involves some workaround.
One company which has for mission to simplify financial reporting of crypto is AEM Algorithm, with their product AEM Journaler.
AEM Journaler is a Xero certified accounting platform for tracking and managing cryptocurrency transactions and exporting data into accounting systems for financial and tax reporting.
And in Episode 32, I speak to its founder Jakub Sawczuk. As a certified accountant, Jakub is working to facilitate the adoption of digital assets by building a bridge between crypto and traditional accounting systems, like Xero.
In this episode today, we will learn;
- What’s different with crypto accounting
- What is AEM Journaler and does it facilitate the reporting of crypto into Xero
- A walkthrough of accounting for crypto for investment & trading
- Challenges & good practices with accounting for crypto in Xero
- The new mobile wallet under development by AEM, and much more.
- Why Jakub founded AEM Algorithm (2:27)
- What’s different with crypto accounting (4:33)
- The challenge for bookkeeping is getting from block explorer to accounting software (7:25)
- How AEM Journaler work? (9:38)
- Crypto exchange gains/losses with every transactions and how to report (11:46)
- Walkthrough of holding Ethereum as investment, and importing that data from exchange to Xero (14:37)
- Creating bank accounts in Xero that represent wallet addresses (18:39)
- Good practices for crypto accounting in Xero (20:51)
- Merge multiple wallet addresses into 1 single account in Xero (22:57)
- Challenges for crypto accounting in Xero (24:51)
- Request Finance commercial break (28:23)
- Reporting of DeFi transactions into Journaler (30:18)
- What’s different with AEM+, the mobile crypto wallet (33:56)
- Why build an invoicing module in AEM+ (36:55)
- Barriers for crypto adoption (38:48)
- Closing thoughts on how to simply crypto accounting for individuals/corporates (41:31)
[00:00:00] Umar: Welcome to The Accountant Quits, brought to you by Request Finance, an all in one platform for crypto organizations and freelancers to easily manage and track their invoices, salaries, and expenses in a compliant way.
[00:00:15] Umar: On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.
[00:00:23] Umar: 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.
[00:00:37] Umar: Welcome to episode 32. The adoption of cryptocurrencies as store value and medium of exchange also lies in the ability of that data to be easily extracted into any accounting software from the different crypto wallets and exchanges. As of today, the legacy accounting softwares do not integrate with cryptocurrencies for pricing, and accounting for crypto involves some workaround.
[00:01:02] Umar: One company which has for mission to simplify financial reporting of crypto is AEM Algorithm with their product AEM Journaler. AEM Journaler is a Xero certified accounting platform for tracking and managing cryptocurrency transactions and exporting that data into accounting systems for financial and tax reporting. And today I have the pleasure to be speaking to its founder Jakub Sawczuk.
[00:01:30] Umar: As a certified accountant, Jakub is working to facilitate the adoption of digital assets by building a bridge between crypto and traditional accounting systems like Xero.
[00:01:42] Umar: On this episode today, we will learn what’s different with crypto accounting, what is AEM Journaler and how does it facilitate the reporting of crypto to Xero, a walkthrough of accounting for crypto for investment and trading, the challenges and good practices with accounting for crypto in Xero and much more.
[00:02:02] Umar: Jakub, welcome to the show and thanks for making the time to be here.
[00:02:07] Jakub: Thank you for having me. It’s a pleasure.
[00:02:10] Umar: I always like to start with asking my guests, could you share a little bit about your personal background, how you first became interested with blockchain and the story that led to founding AEM?
[00:02:22] Jakub: Yes. So, as you’ve mentioned, I’m a certified accountant based in Australia.
[00:02:27] Jakub: I got involved in this space in 2017. Started to look at what’s been happening with Bitcoin back then, you know, the price was increasing quite a lot. I got interested in the asset and then quickly from there, I realized that there’s a big value to what crypto currencies and blockchain is on us. So the whole idea of having a digital ledger tied to a underlying currency, you know, you have transactions as well as transfer of value in one place.
[00:02:53] Jakub: And what I’ve done since then, trying to keep it short. In 2018, we got accepted into a startup program. It was called Block Engine by a place called Blockchain Centre. They actually had offices in different cities around the world. It was a program to actually write a white paper. Most of the projects back then, we’re actually looking at doing an ICO.
[00:03:12] Jakub: We came in from a slightly different angle. We actually pitched the idea of this big system that will become a standalone accounting system. And effectively would mean that you can have a system disconnected from banks. That’s what I kind of saw in it. We narrowed down from there, as we build our prototype and we found the challenges around reconciliation process.
[00:03:34] Jakub: So as you’ve highlighted, we’ve really found those gaps existing back then and to this day where if you’re using traditional accounting systems and you are on the blockchain, the process is followed by accountants were very manual. They are still highly manual to this day. And we’ve endeavored on getting that improved.
[00:03:55] Jakub: It’s been a long journey because we’ve actually kind of did it by ourselves, bootstrapping and doing other work in the background. Some people involved. And we significantly scaled in 2020 when we partnered with RMIT Blockchain Innovation Hub, starting to build better prototypes more of them and exploring things.
[00:04:12] Jakub: Thanks to the resources from the universities has been quite exciting and fast forward to now. Last year we finally launched into Xero, but we actually got certified even in the year before that. So we were actually the first people that pitch something to Xero, they said, yep. That actually looks good. Can go into marketplace.
[00:04:30] Jakub: And from there, we’ve released it. And we’ve been building since then.
[00:04:33] Umar: Perfect, I want to start our conversation with what’s different with crypto accounting. Accounting is accounting at the end of the day, the universal equation of assets is equal to equity plus liabilities must hold true. But with crypto, the way to get there is a bit different.
[00:04:50] Umar: We don’t have bank statements, but rather the transactions are onchain. They’re held either in wallets, exchanges or some other form of custody. For people who are not familiar with crypto accounting, how do you explain how crypto accounting is different and the new challenges that we now face for bookkeeping?
[00:05:10] Jakub: Yes, exactly. So again, having those discussions almost every day or every week, the key challenge really sits in the fact that the exchange rate is quite unpredictable.
[00:05:24] Jakub: And the second challenge sits in the accounting system. Cryptocurrencies are not recognized. So if you are trading as an example in US Dollars, Pounds, Euro, or Yen, you have those exchange rates in them because you don’t have that within the accounting system, you are then forced to do your reconciliation process and your conversion in another package.
[00:05:47] Jakub: So I could actually, again, draw a good example here. You know, people use things like Koinly or other products that actually done for, kind of the side of calculating your tax liability on your activity. But what is accounting or what is accounting for a business? A business wants to be able to send every transaction into the system to report it every single one of them.
[00:06:10] Jakub: And because there is no automated feeds such as those that will exist with a bank account, that’s really the pain point. The accountant is then forced to use the own manual methods. To collect those exchange rates and then report it. And from there, it gets even more difficult, once you start taking on different categories of transactions and understanding the interpretation of each nature of each transaction there.
[00:06:35] Jakub: So to try and take it at high level, it’s a new area. People may not understand what cryptocurrency products or there could be different words used are, and they actually don’t really know how to really report it. And that goes all the way through to understanding what, what is the liability in terms of reporting what they have to report to the government or as a business to put on the financial statements.
[00:06:59] Jakub: I may have given you a long answer, but let me know if you want me to clarify anything else.
[00:07:03] Umar: Maybe one thing I want you to clarify is regarding transactions on block explorers. So traditionally we have those movements appearing in my bank statement, and you said it can be easily feeded or uploaded to my accounting software.
[00:07:19] Umar: Now the main challenge here is how to get from block explorer to accounting software.
[00:07:25] Jakub: Well exactly. So that already gets difficult. Going from block explorer into accounting software. And what needs to be understood, any given blockchain, let’s say Ethereum has its underlying currency, being Ethereum, then can have a range of tokens on those.
[00:07:40] Jakub: So to just extract the transaction and a fee, if you knew nothing about blockchain, you would just assume your fee and your transaction are in the same currency, but that already may not be the truth. There may be a different currency used for the fee. There may be a different currency used for your extra settlement.
[00:07:59] Jakub: In addition to that, the transactions carry different fees at different points of network activity as well. So there is no standard type of situation. That’s your fee was 0.5% of a transaction, always a fixed fee. They actually vary. So there’s a lot of those uncertainties about what happens. So this is one, and then another challenge.
[00:08:20] Jakub: Finally, what you probably asking actually and I should’ve got to it directly, there may be a lot of transactions. There may be. There could be into hundreds of thousands of transactions even in a day. So again, we’re looking at micro transactions a lot of times or large volumes of transactions. Something that we wouldn’t traditionally see in standard kind of bank accounts where that would supposedly carry less transactions.
[00:08:45] Jakub: So that challenges around actually getting that amount of data through the APIs, without it getting stuck. And actually one of our biggest challenges these days. And what we often try and explain to the clients is this is something that we constantly optimizing when people say transactions are not coming through.
[00:09:04] Jakub: We’re not seeing some transactions appear. We constantly optimizing of how we actually get that data in an instantly and better, and again, more accurate with the exchange rates. So just the technical technicality of getting data from a blockchain explorer through based on volume, different currencies traded on that blockchain explorer, it already is quite complex.
[00:09:27] Jakub: And you have to know how to set up your file in Xero as well, to feed the transactions into different bank accounts and bank accounts would really represent different wallets for different currencies.
[00:09:37] Umar: Okay, perfect. So we’ve spoken of the challenges. Now, could you tell us a bit about AEM Journaler and how does it facilitate converting these crypto transactions from the block explorer or from the exchanges into like the traditional accounting software?
[00:09:55] Jakub: Yeah. So I like to always fall back on our story to kind of provide more of an understanding of our logic and philosophy. So what we’ve really focused on is a state of the transfer of the transaction data from the blockchain, really forgetting about blockchain, like what is a block explorer or other thing, we take it from the blockchain right through to the system.
[00:10:17] Jakub: The way we do it is actually 2 ways. We tag actual wallet addresses on the blockchain. So if you know your wallet that you’re transacting with, you can tag it in our system and you start tracking it through the dashboard. And then from there you can set up your automatic feed or manually choose where you want to send those transactions.
[00:10:36] Jakub: What I mean by where they may have different categories. So let’s say you’ve done a bunch of settlements representing a sale of assets, or you’ve done a set of transactions that were your rewards. That could be basically your income from rewards. Again some simple examples, then second type of integration we offer, again to fall back on our personal story, we really are driven by the process done by the accountants.
[00:11:02] Jakub: So we have what’s called exchange wallets, where you can actually input data for close to 10,000 currencies. And for those exchange wallets, we’ve built it really heavily around how accountants operates. They often would get data from the clients. They have it already. They may not have access to every single exchange that is out there.
[00:11:21] Jakub: There’s actually a large number of exchange being called the exchanges, being there in the markets, you know, dozens of hundreds. So, because we want to make this a global solution. We’ve really just focused on the common aspect where you can import a data file. And then through those wallets, you can export the information into Xero.
[00:11:39] Jakub: And again, if, as this is being more of a manual process, it’s, it’s not a live feed, is actually a manual feed at any given time. There’s a couple of other things to mention as well that we have. And that’s actually the layer of complexity that I didn’t mention, mention earlier. One aspect of reporting is obviously carrying the value of each transaction.
[00:11:59] Jakub: But if you’re an accountant, you clearly know, or someone familiar in that space that there is a gain and a loss associated with every transaction that is carried. So we also have secondary features such as journals. And what journals are they let you actually report tax gain or loss on any given wallet.
[00:12:17] Jakub: And we also have general features that let you report your balance position on any wallet. And again, to explain what I mean by this is that your position of that wallet may be changing month to month. You may be holding $10,000 today next month, because the market went up or down, you might be holding $8,000 or $20,000.
[00:12:36] Jakub: It was an amazing month, but again, there’s a range of things you need to do to correct the report. So trying to paint a picture of the things we do. But back to the transaction, this is really where we have pretty much everyone working with us. And those general features like actually our next big, currently being improved and developed and made available, because we can see there’s a lot of institutions put it this way that are starting to be involved in, a crypto world, and, you know, they invest and want to report a bit better.
[00:13:04] Umar: When you’re saying these journal features. Is it for example, the crypto gains or losses that’s happening month to month, right? So my position from 10,000 to 8,000, so you would provide an automatic, journal entry with that decrease in holding amount.
[00:13:22] Jakub: Yeah. And I’m smiling because I’ve actually talked to our, call it competitor recently. I even put this suggestion out there with someone who specializes in that space and where we really want to sit is getting that data into Xero. So we’re getting quite a strong pull into providing sophisticated tax reporting, but because we’ve really specialized for so long in reporting data into Xero, there’s different things we may be doing in the coming months. So we, for example, are exploring options of, can we actually cross, cross integrate with another platform doing good tax solution for crypto and put that data into Xero already, but yeah, back to your question. Yes, it is that the position, but what we don’t have or what is relatively simple, we currently have your standard, general feature creating a journal within Xero for a tax gain on a particular wallet.
[00:14:15] Jakub: And that’s where it ends, and so we kind of have this open road ahead of us going, do we go more sophisticated or do we perhaps crossing the line? It’s actually very interesting time for our business and sorry to go on, on a personal story, but everything we do now is driven by feedback from clients and even discussions with other businesses that do similar things.
[00:14:36] Umar: Yeah. I want to go through a simple walk through and maybe a very practical example for people transacting in crypto, right now. And go through like two types of bookkeeping events first, related to investment. And secondly, to trading and payments. We won’t be touching on the accounting treatment though.
[00:14:55] Umar: Let’s say a company holds Ethereum for investment and wants to make payments in USDC. Everything is currently held in their crypto wallet. In the case of Ethereum, let’s say held as investment, could you provide us with a walkthrough from the time it’s purchased until the time the import is made into Xero.
[00:15:17] Jakub: Yes. So that’s a good one to look at. So you’ve bought Ethereum on, let’s say Binance, I’m saying you as that business, and then you sold that Ethereum two years later at a very good profit and decided to exchange it into USDC and let’s say pay for some services. So let’s say you had, you know, developer working for you to optimize your website.
[00:15:40] Jakub: So where we sit nowadays again, very common with our clients is that part when you’ve actually paid your developer, for example, to pay for his services, because this is a straightforward type scenario where you’ve settled the bill, you want it to put that bill into Xero. And if it was a one bill, would be simple. But if there was more and more of them, you obviously now need a better integration.
[00:16:04] Jakub: So that’s the part that AEM Journaler does very well. The part of actually the gain and loss, if it was just simple, like stated, again, we can cover that pretty easily because it’s a simple scenario. We’ve just traded, bought one asset, the same asset it got sold later on, you’ve made a gain.
[00:16:23] Jakub: We can actually do a estimate of your tax liability, but the way we do it is straightforward because we let the users set the settings, the tax setting, and just is more an indicator type to our CGT calculator, than a lodgement feature. So a lot of other software packages might be focused on providing you with a lodgement reports.
[00:16:45] Jakub: So we do not do lodgement reports. We literally just add the accountants kind of choice of products to provide the report on that transaction. And that’s basically where we stand with the features and back to the general feature that is coming out very soon, that can be done journaled in Xero and added to the total tax liability for the business.
[00:17:05] Jakub: If the accountant has the certainty that he’s calculated, the tax rate correctly, he’s captured the correct transactions that have actually been the trading transaction. They can actually push that into Xero.
[00:17:17] Umar: So this question is from my accounting background, Xero does not support crypto. Like I said earlier, there’s no like price feed available to directly value my crypto in real time.
[00:17:30] Umar: So for an accountant, that’s not a big problem. What we could do is, I mean, we would just obtain the price from a reliable source and depending on the accounting treatment, I mean, either we’d have to perform an impairment test or revalue the crypto, we would just perform a journal entry at month end or at year end. Is that what’s currently being done in practice?
[00:17:53] Umar: So people would get the price outside outside of Xero, of course and then just perform a manual journal entry to revalue or to perform the impairment test of the crypto.
[00:18:04] Jakub: Yeah, they do. I mean, the, the process I described to you and actually what we do is, is based exactly on having worked with accountants to understand what they do.
[00:18:14] Jakub: But again, back to you saying this is simple, what I would say, it’s not, as soon as you start doing more of those conversions. So as soon as you have multiple clients doing multiple transactions, it becomes quite a job. Also because there’s a possibility of getting an error somewhere. So of course you’re going to be checking, and this is where the problem sit.
[00:18:39] Umar: Now let’s take the case of stable coins. Let’s say a company wants to pay salaries in stablecoins. My question regarding this is in Xero right now, there is the chart of accounts in Xero. So when using AEM would I have to create the account first in Xero, and then it’s automatically synchronized into AEM. And what’s like the good practice for creating an account in Xero right now.
[00:19:09] Jakub: Yes so rolling back to our history with Xero. When we actually started working with Xero, we already came with a existing solution that they certified. And the underlying thing was exactly that we knew that the accountants already following that process, they were creating accounts in Xero bank accounts that were actually just representing wallets.
[00:19:29] Jakub: So this is the thing you always need to be able to do. And from there you can set up your feed. So let’s say your payroll came out of that account. Following that example you just did. It’s a good one. So let’s say you recorded payroll. You could then just marry it up. Cause you could say I paid out of my Ethereum account and once I paid out of my Ethereum account, I can do the feed into that account and make sure I close that transaction.
[00:19:54] Jakub: And of course, this is also your accounting one-on-one at this point, cause you’ll be checking. Okay. So I’ve paid somebody thousand dollars. It looks like I’ve paid them $950 because you know, my calculation perhaps was off. This is where actually the accounting process comes in because that lets you actually check that you’ve corrected in paying on the correct day, according to the correct exchange date.
[00:20:18] Jakub: I can give you numerous examples of why this is important. Let’s say your accountant, they need to do the payroll today. They do it tomorrow. Maybe the exchange rate has changed. So there’s lots of little things and little elements that why you need the actual life tracking to correctly check that the settlements were done properly to not underpay someone, for example.
[00:20:37] Jakub: So again, this is a, one of the processes I just described here.
[00:20:42] Umar: And from the conversations that you’ve been having with your clients, what are some of the good practices when it comes to accounting crypto in Xero?
[00:20:51] Jakub: Well, I would not call it a good practice. I would call it a standard practice. So standard practice is the account itself.
[00:20:59] Jakub: Then making sure you get the data out of the blockchain Explorer, for example, and you can fall back on those transactions, but from there, there’s lots of other examples of what you need to do. But I guess part of the good practices, the two elements that I described earlier, so one is carrying through the transaction at the correct exchange rate, but second is to not lose your capital gain calculation.
[00:21:24] Jakub: Which I referred to earlier around the journals that are created. So very often accountants do that by hand creating a manual journal within Xero to then correct the capture that there was, let’s say 10% gain on those assets or so on. The tax cannot be forgotten on top of the transactions. So that’s the one and two and another good practice, which is something we’re working with is the accuracy of your exchange rate.
[00:21:50] Jakub: This is something that is actually rather complex. And even now we do a lot of work on seeing how fine we should take it. We can’t just work around our local taxation’s office requirements. There’s a daily average type requirement, but as you know, a lot about crypto. In my opinion, that’s very problematic because there’s big changes across even the day in some exchange rates.
[00:22:12] Jakub: So good practices actually, to fall back on your transaction that occurred and check that the transaction actually conversion rate is okay. And again, back to an example of what we do on our system with manual feed of transaction data, we’re getting more and more sophisticated with how you can optimize those transactions and the exchange rates to make them accurate.
[00:22:33] Jakub: So, from a system provider, we have lots of work ahead of us still to make sure the accuracy is there. And for someone the size of an exchange who has lots of clients, you know, lots of revenue to do this work, accounting systems are, we are the people who are still catching up in that space. We, some of us, you know, we haven’t been getting so much funding, but the funding, you know, goes into to making those best practices even better.
[00:22:57] Umar: One of the other thing that comes to mind is the fact that I can have many wallet addresses So for whatever reason, maybe I’m paying a supplier and I don’t want them to know, let’s say my total treasury. So I’d be using a specific wallet address just for them. But when I import those transactions to Xero, I don’t want to have like a hundred different wallet addresses.
[00:23:20] Umar: I want everything to be grouped under a single bank account. For example, how does AEM Journaler accommodate for that?
[00:23:27] Jakub: Look, so I can get quite technical on this, but I’ll actually try and get directly to the point. So what we let you do is obviously set up a transaction feed. You can choose, even if you have 10, 20, or a 100 wallets, it doesn’t matter.
[00:23:43] You could feed all that data into one account. So we don’t block you from feeding that into one account. Basically, if you want to have everything meshed. And to speak like an accountant that could act as a same as when you have a cash account, you could have a crypto account where all your crypto transactions are matched.
[00:24:03] Jakub: So that is not a problem whatsoever. But what I wanted to say as an anecdote, that there’s other interesting things happening in blockchain, where you have wallets that are mixed wallets, and they actually let you create individual address every time you create a transaction. So we’ve actually been doing some simple integrations with those.
[00:24:22] Jakub: I mean, at the moment we only have xpub integration, ypub zpub is the type of thing on Bitcoin that actually has those wallets, but that’s where, you know, I’m getting technical. What we try and do is actually keep up with the developments on the blockchain. So you may have some more sophisticated tools for transacting.
[00:24:39] Jakub: That in fact, create multiple wallets. And we closely following that because you’re right. Like you’re someone doesn’t really want to operate out of one account if they don’t have to, but that’s how we covered both angles.
[00:24:51] Umar: I want to touch on some of the challenges we have today for accounting in Xero. You said in the beginning, a lot of the work today is still manual, but so some of the challenges that I can think of right now is so because cryptocurrencies are not recognized currencies in Xero, and there’s no price feed available, essentially I would account for them like just accounting for equity, for example, in an accounting software.
[00:25:17] Umar: The other one I can think of is that Xero have like a limit to round you to like two decimal places if I’m not mistaken. Can you go through some of these challenges that clients are facing today bookkeeping in crypto?
[00:25:32] Jakub: It’s easy to get confused with this, but the underlying thing is that Xero will only take data in Fiat currency.
[00:25:40] Jakub: So at that point, the rounding, it becomes irrelevant. The rounding is actually 4 decimal points, but because you are forced to report in local currency, you only interested in your closest 2 decimal points anyway. So you are never trying to make something that will be the Bitcoin in there, it will actually be, it’s just physical representation.
[00:26:04] Jakub: Like let’s say hundred dollars worth of Bitcoin is recorded as your equity, but that’s why, what it actually becomes important is those other features where you actually actively updating the value of your equity for features like journals that let you then update that position each time and change it according to today’s rate and so on.
[00:26:25] Jakub: But again, everything really comes down to what you’re reporting and how, that’s when it becomes complicated, because really if you’re just reporting settlements and if the currency is just used for payouts, so other things are, in some ways you can know don’t take it as financial advice because it depends on every country, but you might just be interested in those actual hard values of each settlement that happen.
[00:26:48] Jakub: If you are a business and you are investing and your major activities is investment, then obviously you’re interested in reporting your equity correctly every time. The part about equity in Xero is reporting of your actual holdings in local currency.
[00:27:04] Jakub: Therefore you are just really worrying about the accuracy relevant to your local currency. So US dollars, American dollars, just saying, it could be Euro, it could be anything else. Xero will not let you report a holding of X amount of Bitcoin or X amount of Ethereum. You will just convert it and call it a number $10,000 or $20,000. So your, all your reporting is done in that way.
[00:27:29] Jakub: But again, looking into the future, perhaps something will be done better by accounting systems in the future because they were built in the time when cryptocurrencies weren’t as mainstream as they are now. But what I was trying to say as well is to actually provide relevance of the services we provide and companies such as ours or solution providers are relevant.
[00:27:50] Jakub: We focus on getting the data from the blockchain correctly and pushing it through. And that’s where I feel accounting systems will always have the struggle for a long time. To reliably take the data from the blockchain. They may do it better from a centralized source. If a bank account in Bitcoin will be something that is a normal thing in 10 years time, they may already start providing feeds.
[00:28:13] Jakub: But at the moment, yeah, each system is rather limited, they all built around this regular currency and that is quite a range of limitations.
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[00:30:16] Umar: I want to touch on DeFi a bit. Does AEM facilitate the export of data from DeFi protocols? Let’s say a company has provided liquidity and at year end wants to report that closing position and wants to report those interests that has been earned.
[00:30:33] Umar: Is there a way to automatically do it? How manual is this process at the moment?
[00:30:38] Jakub: Yeah, so we have a range of DeFi clients actually using us. And it’s interesting because obviously we only know so much what someone’s reporting. We just provide a solution. So I can tell you that the way this is provided, I imagine a lot of users would use our exchange wallets feature that focuses on thousands of currencies that we recognize in there and you can actually import your, for example, your payout information to it.
[00:31:05] Jakub: So you could record all the transactions from the blockchain Explorer, where you had collected numerous rewards. So that’s one example of DeFi use case for us. And then those rewards payments could be reported at the out to Xero, which is a pretty standard scenario.
[00:31:21] Jakub: In terms of providing liquidity, this takes a bit of a closer analysis or better understanding of DeFi, because the way DeFi works, you provide liquidity into a liquidity pools. You will take two different currencies, deposit them into creating a liquidity token, and then that position is fixed. But then once you come out of it, as those two have changed, the exchange rates for example, asset one, let’s say, Ethereum versus stablecoin again, I’m using simple examples every time, but I could have used anything like Solana or whatever you wanted to use there. You let’s say a year down the track decided to exit that liquidity pool. So therefore, after depositing, let’s say initial hundred Solana, you may be taken out, 50 Solana because the exchange rate has changed.
[00:32:10] Jakub: And on the other side, your stable currency may have changed as well. You could have deposit against that Solana. Well, again, let’s just use very plain examples. Let’s say it was worth $1 at that time. So you deposited a hundred dollars, but as you took it out, the value of what you’ve taken out from the liquidity pool, when it was decided to exit it would have changed.
[00:32:29] Jakub: So again, reporting that change in the value in the coins that you own, you can in fact report it through our system. It takes a bit of a manual process because you have to basically report each wallet’s transactions individually. But because we then let you see your position, they could actually quickly kind of have a look and go, all right.
[00:32:48] Jakub: So I’ve gained or lost on the whole operation. Maybe again, to give an example, a hundred dollars, thousand dollars depending how much it was. And you can actually do a quick analysis, but this is again, to be very clear where we are because I don’t want to, you know, sell it as something complete. This is where we always are getting better.
[00:33:05] Jakub: So we are looking at more automations, more kind of smart, call it, machine learning, or call it AI. But we, we don’t have built-in, but if we could do those things, then we are looking forward to do those things more automatically. At the moment, we heavily rely on the accountant understanding exactly the nature of those deposits, creating the accounts, then exporting the data into Xero.
[00:33:30] Jakub: And then, you know, calculating everything else involved with it. So we do allow it, but with, I would say you need an expert involved or someone who’s familiar to just make sure they’ve reported it correctly.
[00:33:42] Umar: I want to move on and speak a bit about the mobile wallet called AEM+ currently under development.
[00:33:49] Umar: There are many crypto wallets at the moment on the market. I want to ask you what makes AEM+ different?
[00:33:56] Jakub: Yeah so I’ll start again with our personal story. So the way the wallet came about, as I mentioned, we’ve been going for a while, since 2018, we’ve gone for this down period with our product where we really didn’t have that much funding and the work on the product that was going quite slowly.
[00:34:12] Jakub: Cause we’re just figuring out our infrastructure. So we started building a wallet centered around business process for businesses using crypto. And that’s really what this wallet is supposed to be. What we try and make it is a tool for business. So try and understand what business does. And one of the key features of the wallet is for example, creating an invoice, that let’s you request a payment from someone and just quickly convert it. Secondary feature that is actually being brought out soon will be something called Multisig that lets you have more than one person authorizing a payment.
[00:34:48] Jakub: So a standard practice if you take a business. You know, if you take an example of a bank account, often you have multiple signatories. This is something we’re trying to do, but what is again different about this wallet and perhaps where it’s going to go to it’s we often say we’ve been putting 10% of our effort into the wallet, and now it’s starting to catch up seeing the whole possibility around invoicing.
[00:35:11] Jakub: We want to see how we can integrate invoicing through to Journaler for raising of invoices, for people and requesting payments, and then see what we do. And again, where we try and keep it relatively simple, we try not to reinvent things. So we are sticking just to those standard scenarios that are ok for the business.
[00:35:34] Jakub: So they raise an invoice, they want that invoice perhaps go to Xero. That’s one. They want to authorize a payment in a secure way. Again security, being a major concern that, you know, if a business wants to enter the crypto space and be, feel safe about it, that they’re not losing the keys or there’s more mechanisms around the safety measures.
[00:35:54] Jakub: We give them that as well. So it’s that. And then there is one more element, sorry to go on a bit of a story, but it’s quite interesting. With the university, we’ve actually been developing a completely different module to this wallet, which is DeFi. So we’ve actually have a prototype for a mobile browser, similar to Metamask, where we trying to see if we can perhaps go on a bit of a journey into providing more ability for users to deposit the funds into DeFi pools and other things.
[00:36:22] Jakub: But this is a long way away. I still think this is more next year then than anything, but we do foresee DeFi being a major factor for businesses. Again, where I look at it as a, something very promising is that DeFi gives very good returns if you know where to invest safely. And it gives easy means of investing into different pools, different places.
[00:36:45] Jakub: So we having a look around that space as well. So there could be some interesting features coming out next year from us in the DeFi area through the wallet itself as well.
[00:36:54] Umar: There’s something on invoicing. I want to ask you as a follow up question. Like, why do you see the need for building these invoicing module?
[00:37:03] Umar: And what’s currently not working with Xero at the moment that this invoicing module will actually solve?
[00:37:09] Jakub: So example, I just, before this call, I had a discussion with a client who contacted me. We had a zoom call and they said, we want to raise invoices in cryptocurrency. And we can’t do it with Xero, because it doesn’t do cryptocurrency invoicing, or it doesn’t have a cryptocurrency built in.
[00:37:26] Jakub: And interestingly enough, what we currently offer in Journaler is invoice post-settlement. So what I mean by that. After you received the money, we let you record that as an invoice transaction, we actually have an invoice export feature will create an invoice. But we haven’t really thought about doing the invoices at the beginning until we started diving into our wallet.
[00:37:50] Jakub: And that’s when it kind of became apparent that people want to request money in crypto and want to do it quickly. So especially if you’re doing multiple invoices. I can give you simple examples. Like you could have maybe sold hundred items of somthing. And you’ve just rolled them out all at once. And you wanted to put a price tag on them.
[00:38:09] Jakub: You want to do it quickly and smoothly. So Xero will let you do, you know, multiple invoices copying them, importing multiple invoices. But again, because there is no cryptocurrency involved in Xero accounting, that’s, that’s the limitation, right now.
[00:38:25] Umar: Perfect. We don’t have so much time left, but I want to ask you, and maybe that will be my last question.
[00:38:32] Umar: One of the barriers for crypto adoption lies in accounting. And I’ve mentioned that in the beginning. What are some of the challenges that you’re facing today for more adoption and for scaling your operations of the company?
[00:38:48] Jakub: So the barrier to adoption is the lack of automation and second, so forgetting about our product, like people not having a automated process to just do the accounting for crypto with, with accounting system. And then the challenges for us are those that there’s more chains, more integrations now. A lot of our work goes into integrating with individual chains at the moment.
[00:39:15] Jakub: And then again, challenges for us, which I’ve mentioned before, are those of using APIs by using APIs, they can be, you know, back to your example of blockchain explorer if you’re going to query an API for a lot of data all at once, you might hit limits, you actually have to start doing cues and other things that actually mean that you slowing down the way you get the data through. And when it comes back to the user experience, that often can already be a barrier to the user because they want to do lots of transactions.
[00:39:43] Jakub: They want to have a cheap solution. For us to build those solutions, there are substantial costs involved, and most of us in that space, you know, there are no government programs for building crypto accounting systems. I mean, you kind of apply for them. You know, you can apply for research grants, you can apply for commercialization grants and other things.
[00:40:01] Jakub: But at the moment, the amount of work at hand we have is a lot. And that’s probably the key thing. We can’t wait quick enough to serve as the number of people in this space yet. And to circle back to big picture, what is the barrier to adoption? So people know that the reporting processes might be flawed because let’s say they are transacting on a brand new chain that it just hasn’t been integrated anywhere.
[00:40:25] Jakub: Or they are transacting in a brand new way? Like NFTs came about this year, we’ve actually started servicing a lot of NFT clients. Coincidentally because our features are quite good. It just so happened, we build those features well that worked for them. But if those NFT clients didn’t really have a solution, I mean, it creates a problem and a risk because they will be worried about how to report this correctly to the government, if they are just locally registered business.
[00:40:49] Jakub: So there’s numerous things why, back to automation and how the systems works. Until the systems are complex yet made simple to the user, there will be challenges. And finally, you know, cryptocurrency accounting is not really taught at school yet, or maybe it’s just only starting. So there are those things that are thus creating problems.
[00:41:12] Umar: Perfect Jakub, we’re coming to a close the episode today. As closing thoughts and to summarize the whole episode for people who are currently looking to transact in crypto, who are already doing so, what message do you have for them that could simplify their life for crypto accounting?
[00:41:31] Jakub: Yeah. So I will be very clear here and I’ll try and act more like an advisor.
[00:41:36] Jakub: So if you’re doing transactions or purely on an investment nature as an individual, there are packages built for that. And that’s why, you know, there are much bigger systems that people use for those. And I encourage you to use them because it gets difficult to track your gains and losses. And, you know, your liabilities. If you’re there as a business, I want to say that there are now ways to do this automatic reporting and they’re getting better and better.
[00:41:59] Jakub: I entered those discussions a lot of times and the clients are quite happy with what we provide. So I encourage everyone get into that space. And I would say, definitely try understanding that space. If you’re an accountant, it’s really a time you start getting into it more as well. So you are prepared because the discussions I’m having with accountants, a lot of times is, they’re sitting on a lot of data that they trying to figure out what to do with it when clients submits them.
[00:42:22] Jakub: But a lot of them don’t have a plan. So that is really my opinion here. And finally, you know, in terms of us AEM Algorithm, if you ever have questions, we happily can provide answers. We actually putting a lot of work lately. If it kicks off will be quite exciting, trying to even build a blog and have contributors there and work more with educators.
[00:42:40] Jakub: So that is one thing where I think it’s very important that once you start getting educated about blockchain cryptocurrency and what people do and how it actually is being used by the business. And that will be it.
[00:42:51] Umar: Yeah, I think that would be really useful as well, to have a blog on the different use cases, on the different accounting methods that we can use AEM journaler for.
[00:43:00] Umar: There’s the last question that I usually ask to my guests is, do you have a quote or a Maxim that you live by?
[00:43:06] Jakub: Yes, there will be a few, but they likely change as well. So I’ll, I’ll give you two. That’s one of my business partner says this like slow and steady wins the race. I think this really applies to AEM.
[00:43:18] Jakub: We’ve been around forever yet. We’ve really been the turtle. Like we just moved like a turtle, very steady. Some of those people they’ll just ask, sometimes they don’t. I still think we’re going to win this race. You’re not the rabbit that’s going to jump. And you know, you see it. So we though, long time we really invest in long-term partnerships.
[00:43:35] Jakub: Same as you know, how we work with university. And another one is you don’t fix something that’s not broken. But that works on different levels. So with our system. I don’t always agree with it. I actually find that there are better ways to do things. And there are some processes that work currently for accountants but can be improved.
[00:43:52] Jakub: But I say, if you have a, you may sometimes be misled thinking yeah, this is, this process works and is fine, but the biggest challenge in crypto accounting is very manual, very process-driven right now. And it’s a barrier to adoption side. Say we do have to keep fixing it, even though it may seem okay. And accountants seem to be lodging the taxes because I can tell you that there’s better ways to do it.
[00:44:18] Jakub: That’s that’s my story about our models.
[00:44:22] Umar: I like the motto of slow and steady wins the race. It’s something that I always tell myself. I tell myself that as long as I’m progressing, I’m winning. So I just compare myself to like who I was the week before. Jakub thanks a lot for coming in today. I’m sure you’ve provided a lot of answers to people using Xero for their crypto accounting.
[00:44:46] Umar: I had recently attended an accounting conference in London. And a lot of the questions I had was regarding the accounting software, like QuickBooks, the Xero and once they’re not very clear on that, I mean accountants, they’re a bit fearful or reluctant rather to start using crypto.
[00:45:06] Jakub: Yep. Yeah. I can tell you, I hear those questions a lot of times, but they’re good.
[00:45:13] Umar: Yeah. And Jakub, if people want to learn more about AEM Algorithm or want to follow your work, where should they do so, and reach out to you on social media.
[00:45:23] Jakub: Yeah. So please, go to our website, we have a short domain as well. That is easy to remember, which is aem.ac. Or you can go to aemalgorithm.io.
[00:45:33] Jakub: You can also find AEM Algorithm on LinkedIn, Twitter, Facebook. We do more and more work with posting about what we do and yeah, just follow us through there, and remember that the key product is actually Journaler, AEM Journaler. You may be looking for that more than AEM in Xero marketplace, soon also in QuickBooks marketplace and AEM+.
[00:45:52] Jakub: So AEM Algorithm is a brand, but we are actually venturing into different elements. And this is what’s unique about us. So, so definitely, you know, give us a like, or follow and see what we do this year, next year, this is a lot more to come.
[00:46:03] Umar: Perfect. I’m going to include all those in the show notes of the episode.
[00:46:07] Jakub: Thanks Umar.
[00:46:08] Umar: I would like to thank everyone for listening to this episode, you will find all the links of the episode, shownotes 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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[00:46:46] Umar: In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn. We hope to have you with us next time. Bye for now.