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Onchain Accounting for Crypto Startups: the middleware necessity that will unlock onchain crypto SME

Updated: Apr 22

One of the most illuminating questions I got after publishing my recent article on the importance of cash/treasury management for crypto startups led me to a problem applicable to every single crypto startups yet was hardly ever talked about.


While most crypto media talk incessantly about crypto prices, the topic of crypto startup’s onchain accounting hardly ever enter into mainstream crypto consciousness.


Yet it is a fundamental unlock for crypto SME onchain borrowing and lending. To give you an example, Huma Finance’s invoice factoring loan product, in collaboration with Request Finance is a direct consequence of being able to use crypto companies’ onchain payment data to do credit underwriting for lending purposes.

If a crypto startup wants to have a clear understanding of or provide information about its finances, how does it deal with recording, categorizing and reporting of crypto revenue and expenses?


The ramification of this question has far reaching consequences for a startup’s ability to comply with financial and tax reporting requirements and to attract funding capital. Let’s dig in.


Congratulations! You’ve made it.


Imagine you run a successful crypto startup with hundreds of customers who need to pay you in different USDC amounts each month. You send customers your Ethereum address and a kind reminder for payment. Your customers gladly pay you on time so they can keep using your service.


With all the money received, you start to make payments in ETH/USDC/own tokens to your employees, convert some of your operating ETH reserve to USD to pay AWS and Microsoft for using cloud infrastructure and the Office suite. After a day of hard work you managed to successfully receive all customer payments money and correctly paid your vendors in hundreds of transactions.


Life is good

So good in fact, you decide to expand the business by using your account receivables for the next year as collateral to borrow more capital to hire more developers to expand your product features and target market. Lenders are thrilled to have you as their customer and are happy to lend against your receivables because your customers are well known names in the space and they tend to pay on time. So they ask to see the audited financials from last 3 years.


Audited financials? Where do you get this? You have sort of used an excel spreadsheet to track ins and outs of your receipts and expenses. Do you need to make graphs out of the data you have in there? But hold on are you confident that the data in the Excel spreadsheet accurately reflects all the onchain transactions you have done? What if you’ve made a mistake in entering the exchange rate between ETH and USDC in Excel?

To fulfil the due diligence requirement from the lenders, you need to manually dig through tens of thousands of transaction lines on Etherscan to identify and categorize every payment and receipt you’ve had in the past 3 years before putting them into accounting categories such as salaries, general expenses, payables, receivables. Each transactions must have relevant data fields such as time stamp, exchange rates and purpose.

Not an easy task.


Most of us do not think about these questions terms when we talk about crypto. However, if crypto were to cross the chasm from experiments of innovators to mainstream enterprise adoption, it would need accountability and auditability just as other traditional companies do through management and financial reporting as well as tax and audit reporting.


Investment/Fundraising

Below is one of the ENS treasury addresses. It contains payment from customers. As you can see there are close to 5mil transactions associated with this address.

How long do you think it will take to comb through 2000 pages of this to identify, label and categorize every transactions? I don’t know the answer to that question, but I do know I don’t want to be the one to do it.


Let’s say that ENS wants to tap short term liquidity by doing a 180 days revenue financing, it needs to provide information on its receivables including receivable broken down by types (domain purchases vs domain renewal), time (last year and the year before) and customer profile (who are the biggest paying customers and their payment history).


All of this information is buried in the transaction data and needs a lot of organising to be useful for decision makers. Blockchain explorers such as Etherscan do not provide that functionality. Again we need a middleware that can take care of this in an easy to use and time efficient manner.


Tax/Financial Reporting

After you obtained the financing to expand business, you decided to expand your headcount to handle more customers. Your revenue jumps by 300% and you now have a team of 100 people in different parts of the world. Every month you check your Excel spreadsheet to ensure you are invoicing the right amount to your customers and venders while sending the correct salary amount to the right employee. It’s time consuming to do invoicing and payroll this way through Metamask but you wouldn’t let that stop you so you painstakingly check every addresses and amount are correct. You are proud of your work but you do wish there is a one click automated payroll solution.


Fast forward to the end of year approaches, you get a call from your accountant asking you to get the documents ready for end of year tax submission to the government. You decide the sensible thing to do is to ensure your transaction records is in order. So you open up your Excel again. Suddenly you remember you forgot to record and tag all those salary payments while wondering if you got all your invoice recorded and reconciled. What to do now?


Clearly as the example above shows, going to Etherscan to reconcile transactions is hardly the solution for your enterprise grade business. What you need is some kind of software that indexes blockchain and parses data to create auditable accounting trails. You need a back-office accounting software that can parse crypto onchain data.


Onchain Financial Data and Accounting

As more and more of our financial lives move onchain, the possibilities and necessities of having financial services based on our onchain transaction history become more concrete each day.


While onchain data along isn’t enough today for the provision of more complex financial services such as personal loans and mortgages, the starting point for such a system is clear. Crypto companies implementing an accounting software solution that can record, present and report crypto transactions that make up their day to day business as well as meet recognized accounting standards is the starting line of a booming onchain credit ecosystem.


While the market for SME accounting software has been refined, standardized through 40 years of iterations, the market for crypto startup accounting is both new and fragmented. SMEs have a host of solutions such as Xero, Quickbook, and Sage at their fingertips that address accounting and tax reporting needs. In contrast, crypto companies have a much shorter list of solution providers.


While a feature by feature review of every crypto accounting solution is beyond the scope of this article, I have listed a few names for you to explore further.


Cryptio - founded in 2017 and counts Metamask and 1nch as customers


Request Finance - founded in 2017 and counts Aave and Maker as customers


Utopia Labs - founded in 2021 and counts Sushi and Badger as customers


Summary

Last week, I wrote about the necessity for crypto startups to implement and optimize their cash/treasury management process. Being able to clearly record, label and categorize your cash inflows and outflows is a fundamental part of that process. Yet the topics of automated payments and invoicing, salary and expenses, accounting and tax reporting have barely made any appearance in the mainstream consciousness of crypto startup ecosystem.


To move forward and grow as an industry, crypto needs to professionalize. And that includes having a process-driven operations back-end. Being able to present financial information with confidence and auditability is a fundamental building block for crypto startups with long term ambitions.


Once the adoption level as well as the software capabilities mature, capital providers, including the $126bil stablecoin that sitting idly onchain, will be able to allocate efficiently to crypto SMEs, based on credible and auditable onchain financial data. This will not only further strengthen the crypto startups ecosystem to allow more projects to launch, grow and cross the chasm into mass adoption but also unlock new DeFi primitives such as onchain invoice financing.


If you are an accountant or an operations professional or a startup operator and would like to share your view on the topic, please leave your comment below or connect with me on LinkedIn or Twitter. Would love to cover this topic further on my podcast.


Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.








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