Categories: Market

Cryptocurrencies need a decentralized daily reference rate

“If you can’t measure it, you can’t manage it” is probably the most quoted quote from Peter Drucker, who is known as the father of management thinking. Although the quote is made up, it has earned its place in the business books as it underscores the importance of reliable numbers in making informed business decisions. In the crypto space, we are still missing one of the most important metrics: the official daily reference exchange rate.

The reference rate is important so that accountants can assign a specific exchange rate between two or more currencies on a given day, even though those currencies may vary over a certain period of time. The reference interest rate is a common standard for companies, investors, auditors and regulators.

It is no coincidence that we are still missing this important indicator in the ecosystem more than 10 years after the first Bitcoin (BTC). In the fiat economy, central banks are responsible for setting a reference exchange rate based on a regular, daily coordination process. But with crypto we don’t have a concept of a central bank – we completely reject the concept of a centralized monetary authority. However, the result is a decentralized landscape of unofficial tariffs with different exchanges and aggregators offering different tariffs, which can lead to confusion and, in some cases, fraud.

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You may be wondering: Why is that so important? Perhaps the decentralized economy does not need an official daily reference interest rate. Maybe a few years ago, but not anymore. The cryptocurrency market is constantly growing in size, market capitalization, and acceptance. Studies show that we’ve reached over 100 million crypto holders worldwide – roughly the size of Egypt’s population. There are approximately 43 million active crypto traders and up to 500,000 unique daily users sending or receiving crypto.

We know the recent crypto rally will spark a new wave of interest in the crypto asset, especially given its predictable hype. But we also know that the industry is getting bigger with every wave of “blockchain tourism”. This time the market and the players have behaved differently than in the last crypto craze in 2017. More and more institutional investors are entering, which makes the market more and more demanding and complex, definitely more mature.

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Those of us who have been in the crypto space long enough know that behind the ups and downs of the market there is a legion of brilliant people building amazing projects in the blockchain and crypto space. At this stage, the decentralized ecosystem has many companies operating in a variety of areas of expertise in different jurisdictions. However, this means that you need to calculate the value of these transactions. You’ll have to budget, value assets, pay taxes, and handle activities that involve multiple currencies – cryptocurrencies and fiat – at different times and even different days during the week to accommodate the time zone.

Decentralized exchange rate

The “Wild West” cryptocurrency is over, and assets can no longer be explained with it. We need an official reference interest rate, and without it, accountants cannot accurately value the cryptocurrencies held on the balance sheet. This opens the door to fraud and slows the growth of cryptocurrencies as a major asset on the company’s books. According to PricewaterhouseCoopers (PwC) “Global Blockchain Survey 2018”, audit and compliance concerns are among the six biggest obstacles to the introduction of blockchain.

The reference interest rate benefits the main players in the decentralized financial sector. For accountants, this would be a standard common way of valuing crypto assets, giving them stronger fraud protection. For investors, it will allow apples and apples to be compared when evaluating investment opportunities. For auditors, it provides a tool to independently verify that a company is valuing its assets correctly – and that there is no fraud.

From an accounting perspective, the current system is a nightmare. A handful of players have set up the governing body to set the odds. Lack of proper rules and details about where and when information comes from. This leads to significant price differences between different sources of unofficial exchange rates.

For those of us who are committed to building decentralized accounting logs, it is only natural that we look for decentralized solutions. Now that Chainlink’s decentralized price feed becomes the de facto standard, it is time to continue innovation and develop an official reference rate for all transparent, independent crypto assets. A widely used daily exchange rate that investors, corporations, and auditors can rely on to evaluate crypto assets and foreign exchange transactions at the end of a given period of time.

The current consensus is to “keep” your cryptocurrency on the balance sheet as a hedge against inflation. But we need to prepare for a future where traditional businesses start experimenting with their preferred cryptocurrency for goods and services, signing cryptocurrency contracts, paying suppliers and employees, and paying taxes in cryptocurrencies. This is the future we are working on and therefore cryptocurrencies need a decentralized daily reference rate.

Chris D’Costa is the founder of Totem Accounting, the creator and driving force behind the implementation of the Peer-to-Peer Direct Accounting Protocol. Prior to Totem, Chris spent more than 20 years designing and building corporate accounting, business intelligence, and enterprise resource planning (ERP) systems.

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