9JULY 2021CTO,CRO, CEO, and board of directors perform their own research to have a clear assessment and understanding of the asset's risk profile before taking the decision to invest.What is the type of Exchange the selected listing takes place: The vast majority of coin trading volume is recorded by centralized exchanges (CEX) with the largest stablecoins in value to be Tether/usdt , Circle/usdc and Maker/dai. Decentralized Exchanges (DEX) account for a small percentage of trading volume in the alternative finance world. Numerous centralized exchanges are regulated by jurisdiction, and abide with the moral and ethical principles stipulated by the specific law. On the other hand decentralized exchanges are not regulated yet globally. To ensure compliance, it would be wise to seek advice from informed legal counsel.Stable coin investments' specific considerations: Out of more than 100 stable coin-projects, currently there are 57 Stable coins active on the market and can be used as an alternate store of value. Stable coins are associated with a traditional asset, e.g. a national currency (usually 1: 1 with USD , gold, or asset baskets) and seek to minimize their price volatility. The aim is for them to be more widely accepted and used as a means of payment and value storage for faster and cheaper transactions. Nevertheless, attentionis required, because their prices are volatile, despite they try to reduce their volatility by their association to traditional assets. Also, they have no intrinsic value and may carry liquidity risk (except in cases where the asset is controlled by audit firms) and their reliability depends on private companies and not governmental organizations. DeFi investment challenges: The Defi applications include decentralized lending services, exchanges, derivatives, insurance and hybrid assets. They operate via distributed open source code, which is used publicly and is not currently regulated. The stack of applications are automatically executed mainly using the smart contracts blockchain technology,and they have unlocked the liquidity of cryptocurrencies that were trapped without any transaction. In 2020, Uniswap represented the largest user base of all DeFi protocols. It is important to point out that the person (legal or physical) is the sole custodian of these assets (that become collateralized, and are borrowed as a result of which they get a higher yield than interest rate deposits).The specific challenges in this space that should be taken under consideration relate with a)market liquidity risks, due to the over- pledging of funds, or the fact that the securities are based on volatile assets, b) the concentration of liquidity in an automated code chain and not in a legal entity, c) the lack of a corresponding industry body for the development of standards for these assets (ISO/TC-307 Standards are expected), d) security risks, due to oracle attacks and lack of continuous security auditing of smart contracts and e) the fact that the KYC/AML rules only apply to CEXs at the moment and it may take governments a few years to regulate the Defi transactions. Accounting and Tax ConsiderationsSeveral national accounting standards bodies have published discussion papers regarding the treatment of digital asset transactions, and while there is still confusion, some commonly accepted assumptions emerge. Three categories of assets are widely accepted as applicable to digital assets: financial instruments, inventories and intangible assets. However, discussions on the application of accounting standards have so far focused on digital currencies and less on the broader concept of digital-assets.As mentioned before there is a variety of digital assets with different functions and purposes that one needs to take into consideration. In addition, one must consider why an interested party acquired the item (and how it did so). For example, when considering a token as an intangible asset under IAS 38, one question is whether the purpose is to sell the digital asset, as it should then be considered as "held for sale". Thus,it should be excluded from the scope of IAS 38 and probably be accounted for as inventory in accordance with IAS 2 (broker-trader of cryptocurrencies).Moreover, the tax treatment of digital assets is not yet harmonized in EU. Although the EUcourt of justice decided that digital currencies are subject to tax, in Spain they are considered intangible assets and do not qualify as money. In general, the tax and accounting rules are complex, are jurisdiction-specific and evolve, which requires ongoing monitoring, education and most importantly, understanding the detailed interdependencies of the tax and accounting implications.Concluding, while the investment opportunities are clear, the risks are also myriad. Blockchain technology already transforms the business models from a human-basedtrust model to an algorithm-based trust model, and exposes companies to risks that have not anticipated before. In order to respond to such risks, companies should consider upskilling their risk management, governance, and controlre sources to monitor the development of this technology and its application to various use cases in order to establish robust governance frameworks and proceed with the right investment decisions.
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