02 Risk

Cryptocurrencies: a new asset class

Despite downtrends in the broader financial ecosystem, 2021 was a record year for cryptocurrencies and the digital asset market. According to Chainalysis, the total transaction volume of tracked cryptocurrencies through 2021 was approximately US$15.8 trillion, representing an increase of 567% on the year prior.

Cryptocurrency is an efficient mechanism to transfer value anywhere in the world with enhanced privacy and minimal regulation. While this presents a number of business opportunities, cryptocurrency also poses risks which are not typically well understood by boards and management, including:

Financial investigations: The traditional methods of tracing funds through bank accounts, bank trace records and finance systems are now less transparent in the digital asset ecosystem. Due to their relative pseudo-anonymity, cryptocurrencies are replacing fiat currencies to secretly fund corrupt, illegal, or improper transactions. An inability to trace financial transactions presents a significant challenge.

Ransomware payments: As ransomware attacks increase around the world alongside demands for cryptocurrency payments, many companies have been left holding cryptocurrency wallets. Aside from the operational and financial impact of ransomware attacks, organisations must also understand the legalities behind making payments to internationally sanctioned individuals, entities and jurisdictions.

Auditing complexities: In insolvency and restructuring appointments, we are seeing an increase in cryptocurrency asset holdings which adds a layer of difficulty to auditing. The digital asset ecosystem and the ability for funds or assets to be transferred illegally, with exposure across multiple international markets, has introduced new ways of valuing and treating digital assets.

One of the positive features that defines cryptocurrencies like Bitcoin is that all transactional information is stored within an immutable distributed ledger that is globally visible and publicly available. Blockchain technology allows information to be stored and automated via smart contracts, creating a single source of truth across entities, locations, and currencies. This underlying technology streamlines the process of verifying transactions and can also be applied to identity management.

This year, we will undoubtedly see continued enhancement of digital asset tracing capabilities. As a result, we anticipate an increased need for Australian organisations and regulators to utilise specialist expertise as they seek ownership of digital assets.