Episode 36

Pat White from Bitwave on Institutional Adoption of Digital Assets & Compliance

Pat White from Bitwave on Institutional Adoption of Digital Assets & Compliance

What We Discuss With Pat White

If you have the intention to run your business on crypto, the traditional back office operations stack won’t make the cut.

Your current processes around your invoicing and payments, accounting and reporting, tax compliance and treasury management requires an overhaul to remain compliant and mitigate the risks involved.

The transition to having crypto on your balance sheet thus requires establishing a new workflow for running your operations and getting your team upskilled.

To discuss how companies can redesign and thrive in the era of digital assets, I spoke to Pat White, the CEO and Founder of Bitwave.

Bitwave empowers enterprises to streamline all of their back office crypto operations & remain compliant by providing a platform for their bookkeeping, treasury management, AR/AP tooling and DeFi support.

In this episode, you will learn;

  • The different reasons businesses are adopting crypto today
  • A framework to adopt and reap the benefits of using crypto
  • Considerations to have when transitioning to crypto from a compliance perspective
  • Bitwave’s approach to help companies manage their back office crypto operations
  • How to upskill your back office team with crypto, and much more.
Connect with
Pat
Pat White
Founder & CEO @ Bitwave

[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 prefer 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 36. If you have the intention to run your business on crypto, the traditional back office operations stack won’t make the cut. Your current processes around your invoicing and payments, accounting and reporting, tax compliance and treasury management requires an overhaul to remain compliant and mitigate the risk involved.

[00:00:58] Umar: The transition to having crypto on your balance sheet thus requires establishing a new workflow for running your operations and getting your team upskilled.

[00:01:07] Umar: To discuss how companies can redesign and thrive in the era of digital assets, I have the pleasure today to speak to Pat White, the CEO and Founder of Bitwave. Bitwave empowers enterprises to streamline all of their back office operations and remain compliant by providing a platform for their bookkeeping, treasury management, accounts receivable and accounts payable tooling, and DeFi support.

[00:01:35] Umar: Bitwave also recently held their first ever digital assets enterprises summit in Austin to discuss the unique challenges organizations deal with when transacting in cryptocurrencies.

[00:01:48] Umar: In this episode today, you will learn the different reasons businesses are adopting crypto today, a framework to adopt and reap the benefits of using crypto, considerations to have when transitioning to crypto from a compliance perspective, Bitwave’s approach to help companies manage their back office crypto operations, and how to upscale your back office team with crypto.

[00:02:13] Umar: Pat, welcome to show. I’m really excited to be having this conversation with you.

[00:02:18] Pat: Thanks so much for having me. I’m excited as well. I didn’t even realize you would’ve been mentioning EDAS, but in the next few weeks, we’ll be announcing our 23 EDAS and Umar will have to have you there, to live podcasts. We’ll get you there to do interviews and stuff like that.

[00:02:31] Umar: I’d love to do it, man, cool. So to start the episode, could you tell us a little bit more about your personal background Pat, how you first became interested with blockchain and share the story of how and why you founded Bitwave.

[00:02:45] Pat: Yeah, absolutely. So my background is actually enterprise software. So it’s something that’s a little bit interesting about Bitwave is, you know, our, the primary product and sort of our first product that we have is designed for is exactly what we’re gonna talk about today. It’s tax accounting and enablement for businesses, but honestly, we actually didn’t get into this business necessarily to focus on accounting.

[00:03:06] Pat: We actually got into focus on enabling digital assets for enterprises. So my entire background is enterprise software. I started my career. I graduated from USC as a computer engineer. I started my career at Microsoft. I been at Microsoft, Cisco, 4 to 5, 5 9 into it. A few other companies. Did a long stint doing enterprise CRM and ERP implementation consulting. So I have this like really deep enterprise software background and I, and honestly I love enterprise software. It’s one of those really funny things. Like there are two different types of people in the world when it comes to this stuff, you know, there are people who like high volume, low margin kind of software that is, you know, bring as many people onto your platform as possible and that’s it.

[00:03:44] Pat: And then there’s people that really enjoy the craftsmanship of engineering and like building tooling with customers, working on bigger deal sizes that are really complicated, like really complicate deals with weird rollups and all that kind of stuff.

[00:03:56] Pat: We’ll talk about that a little bit later today, but you know, one of our customers does 40 million transactions a year. That you can’t do that in normal accounting systems, right? Like you have to build something that can handle 40 million transactions a year or more. And so that’s, you know, we got into this because we posed the question, my co-founder and I, we posed the question to ourselves.

[00:04:15] Pat: What problems will businesses have around crypto. And then we just started burning down all the different problems that we think businesses are gonna have around crypto, tax and accounting are number one, AR/AP is number two, treasury management is number three, financial operations, FPA, and a like everything that sort of flows after that is 5 6, 7, 8.

[00:04:31] Pat: And that’s how we kind of approached it is like, how do we build the tool that helps these businesses get into it? So my foray, I actually, I don’t know if it’s, it’s a claim to fame or not, but I did. I actually got Satoshi’s white paper delivered in my inbox. Like when I worked at Fortify, yeah. I was a Product Manager that was on a soft security product, and I was in all of the mailing lists, like every different mailing list for security, you can imagine, including the cryptography ones. Cause one of the things we did was monitor for cryptography issues. And so I got Satoshi’s white paper delivered in my inbox. I immediately loved it cuz I’m a computer scientist really first and foremost.

[00:05:02] Pat: So it was a very, very clever solution to a very difficult computer science problem, Byzantine General’s problem. If you, if you ever read the white paper, which was spectacular, I mean, it was a really, really clever way of addressing this particularly hard problem. So I loved it right away. I did a little bit of mining.

[00:05:16] Pat: I have some code contributors and the core nodes out there, and I just, you know, I just enjoyed it. Like it was fun getting to crypto. It was a fun hobbyist project. But when I looked, when I was getting into it in like 2009, 2010, there was not really a lot of enterprise software around crypto. Right. You know, what I always sort of say is like, cuz I like enterprise software.

[00:05:33] Pat: If I wanted to create like an enterprise software at that time, probably the only option would’ve been a custodian. And like, I don’t know if you remember this, but like, this was when like Zappo was around and Zappo had bought a bunker in Switzerland. They literally bought a mountain in Switzerland and they had airlocks and arm guards and like custodianship was nuts and so like, I’ve done a lot of my life to make sure that I don’t have arm guards around me at any point in my life.

[00:05:59] Pat: And so custodianship was not particularly interesting back then. So anyway, so I sort of sat on it for a while. And then 2017, 2018 rolled around, there were businesses getting serious about digital assets, like real businesses doing real stuff with digital assets. And it just sort of seemed like the right time to finally go and start Bitwave.

[00:06:14] Umar: The title of the episode today is institutional adoption of digital assets and compliance. Why don’t we start by the different reasons why companies with slightly different profiles have been adopting crypto over the past months. Some view crypto as a hedge against inflation, and they only holding onto those assets in their treasury. Some are actually accepting crypto as a method of payment and earning their revenue in crypto.

[00:06:39] Pat: Yeah, I think yet. And when I think about crypto in general is crypto is very use case driven. You know, what happens when you’re deep in the crypto ecosystem and you get into these really pitched religious wars between Bitcoin and Bitcoin Cash and Ethereum and Dash. And like you have all the various communities that are kind of fighting these pitch battles. I think that everything about crypto really comes down to the use case you’re trying to solve for, which is also, it’s kind of one of those funny things. Like when I look at the Bitcoin cash community, they’re a kind of a, I actually like Bitcoin Cash.

[00:07:08] Pat: I think it’s a super interesting application for the technology. The problem is they’ve sort of taken this approach in general that they want to be all things for all people. They want to have a smart contract platform. They want to have the spend ability. They want to have the deflationary aspect that Bitcoin has.

[00:07:22] Pat: So they’re trying to be everything. And by doing that, you end up in a situation where you’re not really the best of anything for anybody. And so that’s like, that’s always how I evaluate cryptocurrencies. Like when I’m looking at a new crypto or something like that, I evaluate like what use case they’re trying to solve?

[00:07:36] Pat: Is it Ethereum where they’re trying to solve really complex, smart contract use cases, things like that. So the same goes for enterprises, like. There are different reasons that enterprises get into digital assets, Micro Strategy got into it, cuz Michael Sailor hates the federal reserve, right? That that’s he does not trust the Federal Reserve to be a good steward of the US dollar.

[00:07:53] Pat: He believes that. And I guess rightly so. I mean, we look at where we are today with 8% inflation. Like he was certainly right on inflation, although it’s yet to be seen, if he was right about Bitcoin as a deflationary, as an inflationary hedge. But that’s why Microstrategy is. They thought it was a good idea.

[00:08:08] Pat: They thought it was a good investment and they bought a bunch of Bitcoin as an inflationary hedge. And I think they’ve done relatively well on their investment. Like they’ve had to take a big impairment expense, but they’ve done relatively well on a pure cash basis on their investment. Someone like Tesla, they got into it.

[00:08:21] Pat: I would argue it was for the publicity. I mean, honestly, like I, Tesla was never really serious about crypto. I don’t think that Elon had a particularly coherent long term strategy, considering he like brought it on, let it go, brought it on, canceled this. Like took crypto, didn’t take crypto, took Doge coin.

[00:08:42] Pat: Just the whole thing was just, it all struck me as like publicity as a kind of a publicity stunt. And that’s totally fine. I mean, you know, the world is full publicity stunts, so that’s reasonable. But then we started getting to really exciting people was like Stripe, you know, Stripe, Visa, Mastercard. Those guys all have crypto on their books.

[00:08:57] Pat: And that’s because they’re all terrified about what a payments network, what a world looks like with a peer to peer payments network. There’s probably has been no larger existential threat to those companies than crypto. There’s really a world where from your phone, you can buy anything. And as we get more into DeFi, you can even do it on credit.

[00:09:16] Pat: I mean, there’s absolutely no reason that you can’t have credit cards on crypto. We haven’t done it yet, but it’s, it’ll be there. I mean, it’s absolutely gonna be there. Basically like a revolving, a credit line where you can send money directly off of a vault that automatically takes collateral. I mean, like that will get there eventually.

[00:09:30] Pat: So the idea of, if I’m Visa and I’m looking at this. You know, the way I tend to think about this is that they are in a very precarious position because they have this 3% stranglehold on so much of the financial world right now, right. That is like their stranglehold on the world. And there’s a paradigm coming.

[00:09:51] Pat: They could basically cut them out entirely and everyone starts like, only pays 3% less. And it’s interesting because like, up to this point, We’ve really been focused, like Visa makes their money or Visa like has their cachet because they do their points. And so people love paying with their Visa car cause they get their travel points.

[00:10:07] Pat: But like, everything’s so expensive right now that a world where you save everyone 3% by moving to payments like this is really compelling. So you look at someone like Visa, Stripe, MasterCard, all those guys, they’re terrified of a payments of a world where the payments rails are all on chain and they basically need to understand if they can, if they can compete.

[00:10:24] Pat: Now, it’s gonna be very difficult for them to compete. Because of sort of a classic innovator’s dilemma problem, but cuz they mean essentially they have to blow up their own business to compete, right? Like if you’re a Visa, you more or less have to start to dismantle your 3% margins and get that down to half a percent and lay off a bunch of people and change your infrastructure in order to reasonably compete with crypto or a web 3 native company doing this.

[00:10:48] Pat: But if they can do it, they’ll, I mean, they have the money to do it. It’s just that they have the ambition. So different people get into it for different reasons. You know, you see more people like GameStop obviously has their NFT marketplace. So they got into it as a revenue play. Cause you know, a GameStop again, another really interesting use case here from the outside, because GameStop, they look at a world where Xbox has their store. PlayStation has their digital store. Where’s that leave GameStop. So GameStop really had to figure out a way to create a digital store that would engage with gamers. And that could be licensing for games.

[00:11:18] Pat: That could be anything else like that. So that pulled them into it. Missiles are a tool like rockets are a tool. They either drive a missile or they take you to the moon. You know, crypto is a tool. It can be used for nefarious purposes like Tornado Cash, although that’s very, very debatable or it could be used for things like enabling, enabling new business models for companies that are worried about their current business models and need to have new ways to approach this stuff.

[00:11:39] Pat: So that’s why different businesses are getting into it. Last thing I’ll mention would be NFTs. You know, we are seeing a lot of companies get into NFTs more than I actually expected. To be super honest, if you had asked me five years ago, What is it that’s gonna bring enterprises to digital assets. I would’ve said marginal efficiencies around supply chain.

[00:11:58] Pat: I would’ve said that people are gonna look at their supply chain and realize that they can fire a hundred people outta their AR/AP department and move to these like smart contract based automated bill, like solutions. Walmart saves half a percent on their supply chain. That’s 5 billion, right? Like that’s what I thought would bring people to crypto.

[00:12:12] Pat: What’s actually brought people like the big names in crypto is like Nike. You know, Nike is now engaging with people in the metaverse because their super fans are going to the metaverse. And that doesn’t mean that they’re going necessarily to like sandbox or any of those VR things, but they are the personas that they are projecting in the metaverse, which I kind of include Twitter in the metaverse.

[00:12:33] Pat: I know that’s, that’s not a very common way of thinking about it, but it’s how I like to think about it, which is like the metaverse is any place online where you’re projecting an identity, that really is not who you are if you and I met at a bar and had a beer. And so that’s like that covers all of it.

[00:12:48] Pat: That covers LinkedIn, that covers Facebook, that covers Twitter, that covers Discord, that covers Reddit. Cause all of these things are projections of yourself that you have scrubbed to appeal to that particular audience, you know. So that’s the uptick of net of NFTs on Twitter. You know, people think it’s dumb and things like that.

[00:13:03] Pat: And that’s fine. Like it doesn’t really matter if you think it’s dumb, the person who has a Bored Ape as their, as their profile is not doing it for you, right. They’re doing it for the people that know what Bored Ape is. In the same way that a guy walking down the street with a, Supreme sweatshirt is not doing that for you, if you don’t know who Supreme is.

[00:13:21] Pat: They’re doing it for the people who knows who Supreme is. And so more and more enterprises are finding their super fans are in the metaverse are projecting these things and they wanna bring along their fandom. So an NFT of a Nike, an NFT of a Bored Ape wearing an, a pair of Nike sneakers is projecting two sets of super fandom is projecting NFT Bored Ape fandom. It’s projecting a Nike fandom and we’re gonna see more and more of that. So that’s why the big brands are really getting involved in, crypto and the metaverse in general.

[00:13:49] Umar: Next I’d like to speak about the digital assets maturity model crafted by Bitwave.

[00:13:54] Umar: So this is a model I came across and it’s a model for the listeners. It involves setting up all your back office operations on crypto and having a strategy and different internal controls and workflows on the different verticals I mentioned in the intro. Before we go into, what Bitwave does, could you provide the listeners with a condensed insight into this model, around the different levels you’ve crafted for this model.

[00:14:21] Pat: Yeah, absolutely. So if anyone’s interested, bitwave.io/damm, digital asset maturity model, and you can download it. It’s a great read. It’s about 25 pages. The idea is that enterprises get into this. There are a lot of unknown, unknown problems.

[00:14:36] Pat: Like I don’t think that if you get into digital assets, As an enterprise, you understand that you have to get a board resolution. That’s gonna allow you to do that. You might not understand that you might suddenly have a thousand wallets across your organization. That treasury needs to monitor with a fiduciary duty.

[00:14:52] Pat: So this is the most difficult thing I can kind of imagine here is that you really need, like, if you are not used to this, one way that I tend to put this is that basically every single person in the CFO stack is impacted by digital assets. Every single part of the CFO from the Controller to the tax, FP&A, financial operations, audit, everyone’s impacted by digital assets.

[00:15:14] Pat: But if you have just like, if it’s your product team, that’s doing the work, they are not necessarily going to the CFO and explaining this full impact. So a lot of how we think about this is like, look at, we’re gonna give you a, a platform where you Day 1 is like someone in your organization just bought digital assets.

[00:15:30] Pat: What do you do, day 1. What do you do, Day 2. What do you do, Day 10. You know, the way that we sort of structure the, the maturity model starts with. Someone has pulled us into this mess, right? Someone bought digital assets and we, as the, the finance team have to kind of deal with it.

[00:15:42] Pat: Step 2 is, oh, you know, digital assets are actually pretty cool. I wonder if we could streamline our AR/AP processes. I wonder if we could streamline our billing, our collections, like, is there anything that we could streamline around that. Step 3 is like, okay, you know, we’re gonna rework our product lines.

[00:15:56] Pat: So instead of actually, you know, if we are Ebay. Instead of doing everything through credit cards, let’s start offering on chain marketplaces and actually start to see a real revenue stream coming off of digital assets. And then step 4 is, okay. We’re now sitting on a lot of digital assets.

[00:16:10] Pat: How do we revamp the whole finance team to start to do things like, you know, borrow money off of blockchain, issue debt, you know, bonds, debt on the blockchain, go into liquidity pools. It’s this idea of, you know, you’re starting with like just dipping your toe in, and then you’re getting into like this idea of, of how do we adapt current business processes to digital assets. Then next is how do we create new business processes because of digital assets. And then finally it’s like, how do we entirely rethink our finance team because of digital assets? That’s the high level of the maturity model. And there’s a lot of like different considerations that you have to worry about between point A and point B there.

[00:16:45] Umar: Now let’s say I’m a CFO of an entity and I’m pushing for the company I’m working for to start using crypto. I’ve obtained the green light from the board of directors that I can do it. Now, if I need to put crypto onto my general ledger and subsequently onto my balance sheet, this requires an overhaul of all the kind workflows and processes.

[00:17:04] Umar: I’ve heard you mention before. Cryptocurrency transaction is both an accounting and taxable transaction. So what should be, let’s say if I had to devise a project plan and prioritize and allocate my resources to run my business on crypto, let’s say in the next 30 days, what would be like the first step I would need to take and how to prioritize this?

[00:17:26] Pat: So step 1 is, and this, we talk about this in maturity model is get a tiger team together that cuts across the CFO word, right? So we’ve seen this where it’s like just the tax team has decided to take on crypto entirely, and that’s gonna end up in a disaster. Like everyone’s gonna hate them. It’s gonna be disaster.

[00:17:42] Pat: They’re not gonna get the right tooling for it. Like, it will be very, very difficult. So step 1, before you do anything else is basically bring together Controller, Tax, potentially FP&A, if you’re gonna have revenue from it and then potentially your operations team, cuz they’re gonna be the ones with the keys and they need to have the full view of the visibility into all the different wallets.

[00:18:00] Pat: So bring that tiger team together and start understanding what like start basically educating them about the different things that they’re gonna have to do. The majority of, of work does fall on the accounting team. So the accounting team is there, like the way that we built Bitwave in particular is very bookkeeper centric.

[00:18:15] Pat: Like our assumption is that we’re gonna build a bookkeeper tool. The bookkeeper will go through and do all the book cost type work. So they’re gonna do the book cost of revenue. So what is the cost basis, fair market value of the revenue that comes in, which essentially sets the book cost for that particular inventory item.

[00:18:30] Pat: What is the book cost? Anything that we spend? So when we spend expenses in digital assets, the bookkeeping team is ultimately responsible for basically selecting a transaction in the Bitwave UI saying, okay, this is an expense. Here’s the fair market value. We suggest a fair market value, but you have to kind of approve it and accept it.

[00:18:46] Pat: And at that point, the accounting team has sort of created that base ledger that then is gonna get projected into a US GAAP ledger into a tax ledger, into a management reporting ledger, into a DeFi ledger. You’re basically creating, you have one person who who’s doing the heavy lift of creating that base ledger that then pushes everything else out to everybody else.

[00:19:05] Pat: So that’s like the high level of Day 1 is get everyone on the same page. Get everyone to understand the impact they’re gonna have. Pick a software solution, like Bitwave, pick Bitwave, and then make sure that you have your bookkeepers trained up to begin to do it. Cuz they are the heart, soul and core of any processes that are happening around digital assets.

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[00:21:18] Umar: And can you tell us a little bit more about Bitwave and how today you help organizations run their back office with crypto? Also some use cases about the kind of clients that you have today and how they actually using Bitwave.

[00:21:31] Pat: Yeah, absolutely. So Bitwave, it’s a full stack CFO solution for digital assets and enterprises.

[00:21:36] Pat: Part of that includes bringing in general ledger. It’s a full tax and accounting subledger. So that means that today we will integrate with the blockchain. And then push that through, into your accounting system. A big part of our philosophy is we don’t wanna replace any current processes, accounting systems or anything like that.

[00:21:53] Pat: So like, this is not a new general ledger that’s crypto only like, because I mean, at least the way we look at the world is that for the next few years, almost every company has to have a bank account. We may get to the point at some point where you really could have a fully segmented general ledger product just for web 3 companies with no bank accounts.

[00:22:10] Pat: But you. Until every government in the world is taking crypto, businesses are gonna have to have bank account. It’s just the absolute base necessity of it. So what Bitwave does is basically bridges the gap from all of the digital asset sources into your primary ledger. So essentially we have connections into Bitcoin, into Dash, into Ethereum.

[00:22:29] Pat: We have connections into exchanges like Kraken, Gemini, all of those connections into custodians, Fireblocks, Anchorage, you name the custodian. We connect with it. And what we’re gonna do is we’re gonna bring all your data together. Kind of like a bank fee. I mean, I sort of say that in a facetious way, cuz it’s like a very, very complicated bank fee, but that’s ultimately what it is is that we’re going out to all these other places we’re creating the, we are pulling all the day together to view it as a bank fee that then enables you to categorize it.

[00:22:53] Pat: We pull in your full chart of accounts, your full, all your invoices, bills, everything you possibly need from your accounting system gets pulled into your, uh, into a Bitwave here. And then we let you categorize everything. And as part of the categorization, you are basically doing fair market evaluation.

[00:23:08] Pat: So part of that is that we actually have a really powerful pricing engine. So depending on your requirements to follow US GAAP or your requirements from the IRS, you can set up incredibly complex pricing rules that says like for this asset, for this time period, go to this source for this asset. During this time period, use this hard coded price.

[00:23:25] Pat: We actually enable that entire set of use cases. It’s actually really, really cool. And. You go through, you do your categorization. We have an automatic 2 way sync with QuickBooks. So as you save transactions, it pushes into QuickBooks and then you’re basically done. I mean, we have, you know, closing periods and all that sort of stuff you’d expect from it, but it is a overall process of how you kind of manage a full subledger.

[00:23:44] Pat: And then the coolest part that we do is that our subledger really exists as a series of like a base ledger with a series of adjustments on top of it. So that if you’re just sort of a private company and all you care about is your subledger and then your tax adjustments, you can do that. All the numbers are the same.

[00:23:58] Pat: It’s really easy to tie that all out. If you’re a Fortune 500 company that maintains a separate accounting ledger, a US GAAP ledger, a management reporting ledger, a tax ledger. We also can support that kind of a workflow. So we can basically within the one system, you as the bookkeeper, do the once set categorization that then gets projected into US GAAP with impairment, into taxes, with realized gains and losses off of original cost basis, all that sort of stuff.

[00:24:23] Pat: So Bitwave sits right in the middle and some of the new stuff, we have, you know, abilities to pay bills directly outta Bitwave. And this is like some of the stuff that’s like really getting excited. Like we are we’re in this phase right now where we have, you know, a really like the by far market leading and best solution for kind of the accounting components.

[00:24:41] Pat: And then what we’re starting to overlay on that now is all of the operations pieces. So going and paying bills. If you get a crypto bill, we can accrue a crypto token based liability in Bitwave. You can then age it, you can then market to market, and then you can open up the financial ops product and actually pay it.

[00:24:56] Pat: It is kind of a whole, like an entire suite of solutions around this. And the whole time is gonna be integrated with your GL. So the day that you pick up that liability, we push that invoice into NetSuite, QuickBooks, you know, Sage & tech, Oracle, Fusion, whatever the day you pay it. We push in the actual invoice payment along with a forex adjustment.

[00:25:14] Pat: So it’s just, it’s the whole idea for us is to like, any work process that you might have, we’re gonna enable through Bitwave for digital assets. I mean, we have customers doing all this kind of stuff. One other customer type that I’ll mention that is actually really, really interesting is I mentioned the beginning of the pod, but that’s, you know, we have customers doing tens of millions or hundreds of millions of transactions a year, just a phenomenal amount of transactions a year.

[00:25:37] Pat: So in that situation, we are doing a lot of work on rollups cause there’s like no system can handle a hundred. Like you can’t push a hundred million transactions into NetSuite. Our tax match would take like three days to handle gain loss and a hundred million transactions. So you have to figure out ways to basically make that while adhering to GAAP principles, make that more manageable.

[00:25:58] Pat: So we can do a one day rollup or a one hour rollup where we’ll look at all your transactions over one, one hour. We’ll roll up all of the revenue for that one hour period. We’ll book it as a single line item. We keep all the records in our data warehouse in the backend. So you have full auditability.

[00:26:11] Pat: We’ve done full audits with all of the big four at this point. But then, then have a manageable you’re pushing in, you know, whatever it is, 24 transactions a day into NetSuite, as opposed to a hundred million or whatever, a million transactions a day. And that’s, it’s just ways like that. Like we tend to think about this space in terms of scalability.

[00:26:27] Pat: That’s the end all be all of it is that we think about scalability more than anyone else, because our customers care about scalability. Like our customers are doing hundreds of millions of transactions a year. We have to be able to handle that. It’s really fun. it’s a really fun technical challenge. I always talk about that.

[00:26:43] Umar: And a follow up question I have on this is for business founders and CEOs listening, how much crypto operations do I need to have? And at what point would it make sense for me to use Bitwave? I mean, if I’m just holding onto crypto and I’m just reporting that at the end of the year, Would that make sense?

[00:27:00] Umar: Or I need to be actively transacting in crypto to come to Bitwave.

[00:27:04] Pat: If you are an individual that just bought some crypto and you’re gonna sell it, you don’t need Bitwave. You know, you could even just use turbo tax and, and imports for that. If you are a, a family office, you know, a hedge fund, a family office, you bought some crypto, you’re gonna hold it and sell it.

[00:27:18] Pat: You don’t, you don’t necessarily need Bitwave. If you are a business and you are kind of running the steps of the maturity model, where you’re gonna buy a little bit today to understand how it impacts your books, because you think that in year, you actually will have significant transaction volume in digital assets.

[00:27:32] Pat: That’s when you do want to get, when you want to get Bitwave, and then obviously if you are a business that is paying people in digital assets that has expenses, like if you have expenses you wanna write off in digital assets, you know, like gas fees are not cheap . So if you are paying a lot of gas fees, you need to make sure that you are accounting for that correctly, and able to write that off and report it correctly on your assets.

[00:27:52] Pat: So anyone that has any revenue in digital assets, any expenses in digital assets, and then anyone who really expects over the next year or two pick up expenses or revenue, digital assets. That’s when you need Bitwave and that’s who we, we talk to all the time.

[00:28:05] Umar: I also want to ask you, what are some of the considerations to have in mind when transitioning from fiat payments to crypto payments on a compliance perspective and both for the business that is billing, for services in crypto and also for the employee who wants to start accepting, their salaries in crypto.

[00:28:24] Pat: Sure. So the two questions are one about employees and paying employees in crypto. And the other one about like payments AR/AP in crypto. The main consideration for AR/AP in crypto is that it is a, you have to treat it like forex.

[00:28:36] Pat: Right. So if you pick up an AR in crypto, you have to market to market or impair it depending on your, the guidance that you get. A lot of people have done the ASC 849. I think I got that wrong. There’s a derivative analysis treatment that basically people are treating crypto invoices as a derivative, which means they’re marking to market as opposed to impairing it.

[00:28:56] Pat: I think hopefully we’ll get some additional guidance on that at some point, cuz it seems like if you’re impairing digital assets, you should also be impairing the invoices, the receivables for digital assets, but neither here nor there, but essentially like you will have a forex drift, right? And this is not like regular forex where you have a penny up or down a day, right?

[00:29:14] Pat: This is crypto where a receivable yesterday could be worth 5,000 less today. A token based receivable yesterday can be worth 5,000 less today. So think deeply about that. Are you accepting payment in crypto for USD denominated invoices? Or are you creating token denominated, invoices and accepting payment in tokens, in which case you really have that’s when you have to really use something like Bitwave cuz we do all the tracking of the token based liabilities, all the mark to market, all that kind of stuff. So that’s sort of the first thing to think about is just like, are you just accepting crypto for USD payments or do you imagine a world where you actually might have to pick up receivables that happens more than you’d expect.

[00:29:52] Pat: Like a lot of our NFT companies, what they do by, what their auditors would advise them to do is scan the blockchain. Like we, we keep a full record of all blockchain NFT sales. So what we would do is we would actually scan the blockchain to create a receivable based on all of the sales for that particular user.

[00:30:10] Pat: So that when that gets settled at the end of the month, different, different marketplaces work, different ways. But one of them sends out payments on a monthly basis. When they actually create a receivable that is accruing over the entire course of that month, that then gets settled sometimes after, and they can have very significant deltas on their forex.

[00:30:27] Pat: I mean, you know, cause if you, like, if you imagine from the first of what was the month April, like the 1st of April to the end of April was a $3,000 swing for Ethereum. That is a real hit to your P&L and to your forex gain/loss. So that’s the first thing to really think about is like, just think, are you, is it token based receivables or is it actually USD, you’re just gonna take crypto for.

[00:30:46] Pat: If you’re an employee taking it, it’s kind of the same thing. I mean, it’s certainly possible. We pay some of our employees in crypto. We reimburse expenses in crypto. I love using crypto for things cuz that’s we believe in it. Like that’s like a big part of it. I’d ask like why you’re doing it in some ways.

[00:30:58] Pat: Like I think we are gonna see a lot of really interesting stuff coming out over the next few years that is very employee friendly based on crypto. So the things that I think about all the times. Yeah, it’d be cool to get paid in Ethereum, but you know, most of my bills are still in USD. So like, you know, I don’t get paid a lot in Ethereum.

[00:31:19] Pat: I do, uh, reimburse myself in expenses with Ethereum sometimes, but that’s like. But let’s say the other side of this is like, if we get to a world where we have real streaming payroll, you know, streaming payroll, where every single block of the blockchain, a little bit of my payroll that’s due to me for that period is released to me.

[00:31:37] Pat: Boy, I would love that. You know, I always have reasons I need money. Like everyone has reasons you need, you need money. So that’s the stuff that we’re really waiting for. Before, before we think we’re gonna see serious uptake in payroll for crypto, we actually think there’s gonna be a new set of infrastructure layers that are doing kind of the next generation stuff. Cause like we’re so much in this phase right now where crypto is, we’re basically taking the old model of, well, the example I use sometimes is like Yahoo when Yahoo was first invented, right? Yahoo for web1, they had this idea where they’re like, Hey, yellow pages were really cool.

[00:32:11] Pat: What if we did a yellow page for the internet? Honestly for a little while that worked really well. Like they became a big company, it was a great thing. And then Google came by and they’re like, guys, like, this is insane. Like, you can’t do a yellow page for a trillion webpages like that doesn’t work and you can’t curate it.

[00:32:27] Pat: And so then Yahoo just got, you know, stomped out of existence because they didn’t adapt to it. So I sort of feel like we’re in this phase right now, where a lot of people are trying to adapt current web current, like payment models, like invoicing. And they’re trying to move from T3 to T0 settlement on using blockchain.

[00:32:43] Pat: But that’s not Google. That’s not the Google of this world. The Google of this world is totally new payment models that are based on smart contracts, where funds are slowly getting released to you. But then you can actually like latch on a smart contract. That’ll basically take a small portion of your streaming payroll and shunt it over to somebody else.

[00:33:00] Pat: And you can borrow money against it. Like that’s the world that’s coming down the pike and that’s, what’s gonna change the world. So where we are today is all fun and games, but the next couple years are gonna be incredible for this.

[00:33:09] Umar: Earlier this year, but we’ve hosted the enterprise digital asset summit, where you had members from the AICPA. For people who don’t know it’s the American Institute for CPAs.

[00:33:19] They develop guidance for accounting and financial reporting. The lack of guidance on accounting standard at this point means recognizing and the subsequent measurement of digital assets remain somehow subjective. And I know the AICPA is working a lot to bring more clarity and guidance there, but I want ask you if at this point based on the clients and how the industry has let’s say accepting crypto, is that a bottleneck today?

[00:33:47] Umar: And for you, where would you like the AICPA to publish more guidance today?

[00:33:53] Pat: The AICPA has been an interesting kind of like component of the overall crypto journey today. There are some things that are still, you know, I think one of the places that I think is gonna be really interesting, like, you know, impairment is one of the US GAAP models for this, that sort of, it wasn’t even the AICPA.

[00:34:10] Pat: It was really the Big4 got together, wrote a white paper in whatever 2013, they kind of led to intangible asset treatment for digital assets. I think where we are today, I don’t think we’ll back up that entirely. I think that you will always have a world where you are doing intangible asset treatment. For some of the long tail digital assets, because they are super weird like, I think that that’s sort of the nature of this.

[00:34:31] Pat: But I do think that we should be moving off of it for Bitcoin and Ethereum. Like I think for the major, the major digital assets we should moving off of it. I think that sort of guidance needs to come from the AICPA.

[00:34:41] Pat: USDC, stablecoins guidance as well. Like we have a lot of customers who have a lot of different opinions about whether or not they should be booking USDC as a cash equivalent or not. Like these are big questions that no one really wants to take stances on. And that’s fine, but that just, I mean, it’s kind of silly cuz it gives, it actually gives a lot of air cover to the, to the different accounting, to the different accountants doing this.

[00:35:03] Pat: Like if no one will tell you what to do, you make a best effort, you know, at best judgment and you roll with it. And then the worst case is that you have to switch a couple years from now, but you know, that’s the way that these guidelines work. No one’s gonna really have to do retroactively. So I think that there’s, we’re all just doing ourselves a great disservice by leaving this all up in the air, around the ambiguity there.

[00:35:21] Pat: The biggest one, honestly, that the biggest like black hole in all this today is DeFi.

[00:35:25] Pat: Defi is incredibly poorly understood by the AICPA. There’s no guidance, even about what going into liquidity pools looks like. And even to the extent, like there’s stuff that really bugs me. And so like there’s stuff that bugs me in the industry today in a really funny way. Like one of the things that we see a lot it’s really, really interesting is if you are going from an L1 to an L2 with let’s say like USDC, there is a lot of debate about whether or not that is a taxable event, like is the token, is USDC on Ethereum the same or different than USDC on Polygon. Tons of debate around there.

[00:36:04] Pat: What is oddly less debated, which is crazy to me because I actually think that that’s less of an, an issue. What is oddly less debated is when you’re bridging between chains. Most of the people I talk to day in, day out when you bridge from Eth to Solana, USDC, they’re like, oh yeah, of course that’s the same.

[00:36:23] Pat: It absolutely couldn’t be further from the truth, right? Like you never pick up a bigger risk than when you bridge from Eth to Solana, for USDC, all the wormhole hacks approve that. And so it’s one of these things. Like I just don’t, I don’t think that people are fully thinking through. Like crypto is the merging of technical issues, right?

[00:36:40] Pat: Technical solutions, technical questions, technical issues with accounting. And I sometimes worry that like a lot of these, the governing bodies on stuff, they don’t actually think deeply through the technical, like what’s happening on chain, the technical bits and bites of what is happening when they’re giving their guidance and when they’re making adjustments and stuff.

[00:36:56] Pat: And that sort of like, it’s a big issue. So anyways, like it’s, we, you know, I think that a lot more guidance has to be given. I think DeFi is like a very, very classic. But, you know, if I were to stack rank, it, it would be, you know, bridging and L1, L2s and then, you know, DeFi, let’s start with, let’s start with simple things like Compound, Aave, and then let’s get into liquidity pools.

[00:37:14] Pat: And then finally, let’s really hammer down this thing to get at least Bitcoin, Ethereum off of intangible assets and into a more reasonable treatment stance. Even if we leave, you know, weird long tail coins in that intangible assets.

[00:37:26] Umar: Pat, I’ll have a last question for you today, which is around upskilling accountants for crypto accounting.

[00:37:32] You can be brief on the topic. I wanna ask you, what should companies know today about upskilling their accountants? Crypto accounting is complex and should all skills be placed in one basket? I mean, I’ve recently had Mackenzie on the show, speaking about Proof of Stake accounting. That’s like a completely different topic.

[00:37:49] Umar: So accountants need to, I believe like specialize and maybe focus on different verticals, such as maybe revenue accounting or DeFi accounting, or some would specialize more in like the treasury aspect of it or monthly financial reporting and yearly financial reporting. It’s very different to what we have right now for fiat payments.

[00:38:09] Umar: So how not to make it overwhelming for the accountants, because even if blockchain is supposed to make the life of the accountant in simple, right now, we are very far from there.

[00:38:19] Pat: Yeah, it’s really interesting, right? Like at a very high level, it is really, really interesting that essentially there is a lot of specialization. We often talk about, it’s like, you know, it’s tools like Bitwave that essentially will help upskill bookkeepers. So when Mackenzie talks about this stuff is that essentially crypto is the combination of a bunch of different disciplines of accounting, right? So you have the bookkeeping aspect. If you are going to bring in, you know, one Eth of revenue that is traditional Rev. Rec., a Rev. Rec accounting you know, methodology there and anyone in the world can kind of do that.

[00:38:49] Pat: The problem is, you know, what Mackenzie gets into is then the next step is of course you have to do taxes. So when you move crypto between two wallets, when you are a bookkeeper, making a choice, you are making an accounting decision.

[00:39:01] Pat: You are making a tax decision, right? Because. When you say that something’s an internal transfer, you are saying, do not count that for tax purposes. That is a very like, that is a tax decision. Not all bookkeepers are comfortable making tax decisions like that. Right. You know, when you, when a tool like Bitwave the way we tend to think about this is you have to upskill bookkeepers in a couple directions.

[00:39:21] Pat: You have to upskill them to be able to deal with crazy tokens. Like there are really weird name tokens out there that they have to be able to look at, understand, fair market value and then move on with their life, cuz they don’t really care, right? They don’t wanna learn about whatever this token is. They just wanna move on with their life.

[00:39:36] Pat: So you have to upskill them to be able to deal with crypto, but you have to upskill them or at least create a system whereby they are not having to deal with the day to day hard tax questions. A great example of that is Eth to Eth wrapping. This, by the way, goes back to the other question about the, AICPA, is another great question.

[00:39:53] Pat: Would Eth to Eth wrapping that I’d love to get some, like, really clear guidance on. Eth wrapping, that is a non-taxable event for certain people, but other people think it is a taxable event. So you’re asking a bookkeeper to make a very difficult tax decision. When they’re doing bookkeeping, like, is this a wrapping action or is this not well.

[00:40:12] Pat: The way Bitwave approaches this is that we just treat everything like a trade. Anytime you see a transformation between tokens, you just, you as the bookkeeper, just call it a trade and you move along with your life. The tax team can then come along behind you and actually set up wrapping treatments for different coins. They can say this coin to this coin is wrapping treatment.

[00:40:27] Pat: This coin to this point, isn’t like, yada, yada. So you need is to sort of separate that out and like make the bookkeeper’s life easy. They just have one treatment. The tax seems life easy. They have to go and do the actual hard, heavy lift there. That’s part of it is just making their life a little bit easier and all that kind of stuff around it.

[00:40:41] Umar: Pat, the time has gone really fast. The way I like to end my episode is ask my guest whether they have a favorite quote or maxim that they live by. Do you have one?

[00:40:52] Pat: It’s , you know, it’s funny. I probably do have a few that I kind of tend to live by, I’d say the biggest one and it come, this is sort of like coming from a startup founder.

[00:41:01] Pat: This was a quote my aunt used to always say, so my aunt was also in IT, and she did like project management for like large scale ERP implementations, actually. And she used to always just say like, we are where we are. And that’s, it’s kind of this idea that like, you know, different people have different responses to things going wrong.

[00:41:17] Pat: And at the end of the day, like, you know, my general philosophy on all this is that. Things go wrong all the time. Like the world is an imperfect place. Human beings are imperfect. Like things go wrong, literally all the time. It is just a part of human of the human experience. And you can either get really upset and yell and scratch and scream and shout.

[00:41:33] Pat: Or you can sort of just say acknowledge that, you know, we are where we are. We need to move on. That doesn’t mean you ignore mistakes. You do retrospectives. You fire people if they keep making them. But it is this idea that, you know, you need sort of, you know, acknowledge that. When a mistake happens when something happens, you there’s a line of stand to that point.

[00:41:50] Pat: You gotta like move forward from there, fix it later, but move forward. A lot of it, like I, I do, like in my, a lot of my jobs, I’ve been responsible for like on call duties for technical stuff. And like, there’s this thing where you, sometimes you get on these on call, like the servers are all crashing, the Internet’s on fire and people just wanna blame each other.

[00:42:06] Pat: It’s like, guys, like we don’t have time for that. All the servers are on fire. Like let’s actually go and do something right now and then we’ll deal with it after the fact. So that’s, that’s my main quote that I really live by is like, we are where we are just sort of understand that position, learn from it, but really don’t hold grudges.

[00:42:22] Umar: It’s funny because it’s one that I also live by is. To love your fate and that you control how you play and you, you don’t control what happens to you. Pat, this has been great having you today. I really enjoyed the episode before we go. If people want to reach out to you learn more about Bitwave, how should they do so?

[00:42:40] Pat: Of course, www.bitwave.io, you can email someone that will reply to you. info@bitwave.io. And if you need to talk to me directly, I am pat.white@bitwave.io I’m also at patwhite on Twitter. Although I, I don’t know if I really use it, but I’m Pat White on LinkedIn. That one, I probably post on LinkedIn a little bit more.

[00:42:59] Umar: Perfect. Well, thanks a lot, Pat.

[00:43:01] Pat: All right. Thanks so much everybody.

[00:43:04] Umar: I would like to thank everyone for listening to this episode, you will find all the links of the episode, show notes and transcript on the website of The Accountant Quits at theaccountantquits.com.

[00:43:15] Umar: Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them.

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