Virtual Currency: Forensic Accounting Challenges and Valuation Considerations

by Howard Krieger, WithumSmith+Brown – May 17, 2017
Virtual Currency: Forensic Accounting Challenges and Valuation Considerations

You’ve likely heard the buzz words “virtual currency,” “digital currency” or Bitcoin more frequently as of late. Digital curren­cy, or digital money, is an Internet-based medium of exchange distinct from physical currency that exhibits properties similar to physical currencies, but allows for instanta­neous transactions and borderless transfer of ownership. Bitcoin is a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds operating independently of a central bank. Users have “wallets” which are anonymous, unique account IDs that have virtual cur­rency amounts associated with them. The virtual currency network self-regulates by giving all users a record of every transac­tion that has occurred between every wallet since inception. This is meant to minimize or eliminate cheating between wallets. It is this ability to screen out “cheaters” that is encouraging global banks to adopt forms of virtual currency logic to improve security around their millions of daily transactions.

Forensic Accounting Challenges

From a forensic investigation standpoint, tracing virtual currency transactions can create challenges when applying traditional forensic accounting techniques. Virtual currency is a decentralized currency and few banking or credit institutions (cur­rently) deal in this type of currency, so it is unlikely that bank or credit card statements exist for virtual currency transactions. A lack of documentation related to who owns the wallets and the purpose of each transaction creates traceability challenges. The existence of an unregulated, unau­dited ledger begs the question of how transparent any given observable virtual ledger transaction really is. To investigate a specific transaction or set of transactions, the forensic specialist will need to not only have access to transaction information, but also have a way of mapping a wallet to a particular person or institution. Addi­tionally, the investigator will likely require skilled information technology specialists to sift through the reams of data.

Tracing wallet transactions becomes more like tracing cash movement than trac­ing traditional electronic payment systems. In fact, the most reliable measure of virtual currency activity may only be the observed funding of the wallet and any transfers out of the wallet to a traditional currency account.

Another consideration from a forensic accounting perspective is verifying if a transaction happened through a third par­ty. While banks and credit card companies can be subpoenaed when dealing with traditional fiat currencies, the same does not hold true for virtual currencies. In a traditional setting, the forensic specialist can usually hold interviews with parties or subpoena the bank for account holder IDs. With virtual currencies, how does one determine if multiple wallets are actually held by non-exist persons or entities?

Valuation Considerations 

Valuation professionals face similar challenges around data verification when valuing virtual currency loans. If the two components of any valuation are a calcu­lated benefit stream and an estimated risk of not receiving the benefit, then virtual currency loans can be of varying degrees of risk depending on how they are structured. The virtual currency lender can see the balance of the virtual currency borrower’s wallet at all times. However, this offers little recourse to the lender, and only conditions and terms outside the virtual framework, like in traditional lending, can truly be en­forced. Lastly, virtual currency fluctuations make market uncertainty a major factor to consider. Therefore, valuing a virtual currency credit agreement should look a lot like the valuation of an unsecured, risky foreign currency loan.

Forensic accounting and valuation matters related to virtual currency can be performed using the tools used for tradi­tional assets and liabilities. Practitioners can gain a foothold on this leading edge of finance as long as they are willing to handle the high degree of uncertainty and limited information available around transactions in this space. 


Howard Krieger

Howard Krieger is a senior manager and team leader for WithumSmith+Brown’s Corporate Value Consulting Group. He specializes in the valuation of residential/commercial real estate loans, alternative investments, heavy equipment leases, portfolio valuation, fixed income and complex financial instruments across a diverse industrial set.

This article appeared in the May/June 2017 issue of New Jersey CPA magazine. Read the full issue.