The Hot Trend of Crypto Accounting and Financing Under Stricter Regulation: Current Development, Major Projects, and Trends

Author: flowie, ChainCatcher

2022 was a year marked by frequent negative events, but it was also a crucial year for the cryptocurrency industry as regulatory pressures pushed for compliance and transparency in crypto finance. Compliance, auditability, and crypto taxation have become important regulatory directions.

In an interview with Bloomberg after the bankruptcy of FTX, SEC Chairman Gensler hinted that regulators would continue to focus on the financial records of crypto companies. "Crypto companies should do this by adhering to time-tested custodial, customer fund segregation rules, and accounting rules."

In 2022, several important policies in the field of crypto accounting and finance were implemented. First, the Financial Accounting Standards Board (FASB) issued new regulations regarding fair value accounting. In June 2022, FASB released a ruling requiring companies to use fair value accounting when reporting crypto assets in their financial statements. This means that companies need to accurately report the value of their cryptocurrency assets on their balance sheets, raising the bar for financial management in crypto enterprises. Additionally, FASB recently revealed in an interview with The Wall Street Journal that it is working to establish clear accounting and disclosure rules for companies holding Bitcoin and other crypto assets, with proposals expected to be released in the first half of 2023.

Second, the Organisation for Economic Co-operation and Development (OECD) released its new global tax transparency framework, the Crypto-Asset Reporting Framework (CARF), developed with the participation of 38 member countries. Many governments have confirmed that they will implement these standards in 2023, including EU member states. The CARF draft includes potential tax reporting rules related to DeFi protocols, stablecoins, and NFTs, which may lead to increased tax obligations for businesses or individuals after the OECD requires crypto companies and platforms to provide additional data.

As regulatory compliance in crypto finance is bound to tighten, it compels businesses and individuals in the crypto space to invest more in financial management and compliance, leading to a rise in projects and innovations related to crypto accounting.

According to RootData, in 2022, there was frequent financing for crypto projects related to finance, accounting, taxation, and on-chain financial solutions, with over 20 financing events in this field, involving well-known funds such as Sequoia Capital, Paradigm, Tiger Global, Coinbase Ventures, and Distributed Global. However, most projects are currently concentrated in early financing stages like seed rounds, and the majority of these protocols are headquartered in the U.S., where policies are stricter and regulatory frameworks clearer. Among them, Coinbase made significant investments in crypto accounting and taxation in 2022, with over half of the funded projects involving Coinbase as an investor, and most projects having Coinbase as a client or partner.

Despite being in a bear market, many crypto accounting protocols have seen considerable growth. For example, the crypto accounting and tax platform ZenLedger saw its sales grow fivefold in 2022; the on-chain payroll payment protocol Zebec Protocol on Solana generated $20 million in revenue in 2022, bringing a net profit of $2 million to $6 million to the ecosystem.

This article reviews projects with financing amounts exceeding $10 million and briefly analyzes their main business directions and some future development trends.

Data Source: Rootdata

1. TaxBit

TaxBit was founded in 2018 and is headquartered in the U.S. It has disclosed a total of four rounds of financing. After raising $130 million in Series B funding in August 2021, it became a unicorn with a valuation of $1.3 billion, with notable investors including Paradigm, Coinbase Ventures, Galaxy Digital, and PayPal Ventures.

TaxBit was founded by certified public accountants, tax attorneys, and software developers, serving individual users, businesses, and governments. For ordinary users in the crypto space, TaxBit allows for quick integration of cryptocurrency asset data, providing standardized data and tax calculations to complete crypto tax form filings. For businesses, it also offers enterprise-level asset management and tax solutions. On the government side, TaxBit collaborates with some of the largest regulatory agencies in the world, providing data analysis, tax calculations, and audit support services.

The government side of the business is one of TaxBit's competitive advantages. In May 2021, TaxBit secured an exclusive partnership with the Internal Revenue Service (IRS). The latest strategic investor in 2022, Haun Ventures, was founded in March this year by former federal prosecutor and former a16z general partner Katie Haun, and TaxBit's CEO stated that Haun's experience in government collaboration has been beneficial.

It is worth mentioning that after the bankruptcy of FTX, accounting firms Mazars and Armanino withdrew from crypto auditing, and the Big Four accounting firms announced that they would no longer conduct reserve proof audits for private crypto companies. However, shortly thereafter, one of the Big Four accounting firms, Ernst & Young LLP (EY), chose to form a strategic alliance with TaxBit (EY--TaxBit) to help businesses engaged in digital asset transactions provide better tax solutions, avoid costly fines or audits, and enhance industry transparency. EY--TaxBit mentioned that innovative tax reporting solutions could help taxpayers and regulators address an estimated $50 billion tax gap.

As of now, TaxBit has submitted over 30 million tax returns in 2022, with over 5 million taxpayer users, supporting more than 500 protocols across verticals such as exchanges, wallets, DeFi, and NFTs. Major crypto enterprise clients include Binance US, Uniswap, Coinbase, and Okcoin.

2. CoinTracker

CoinTracker was founded in 2018 and is headquartered in the U.S. It has disclosed two rounds of financing, with notable investors including Coinbase Ventures, Kraken Ventures, and Y Combinator. After raising Series B funding in January 2022, its valuation rose to $1.3 billion, making it a new unicorn in the crypto tax field.

The founding team of CoinTracker consists of engineers from Google. From a product perspective, CoinTracker can help crypto investors track and manage data from almost all mainstream exchanges, NFTs, and DeFi. It also provides professional tax accounting and tax solutions for individual cryptocurrency holders or enterprise clients, which can include CPAs, funds, or other businesses involved in crypto finance and tax.

Representative enterprise clients include Coinbase, TurboTax, and OpenSea. CoinTracker's advantage lies in its expansion among enterprise clients, gaining significant traffic after integrating with major platforms like Coinbase and TurboTax. Currently, the platform has over 1.2 million users and supports the U.S., India, the UK, Canada, and Australia, with partial support for several other countries.

3. Zenledger

Zenledger was founded in 2017 and is headquartered in the U.S. It has raised four rounds of financing, with major investors including Vestigo Ventures, Castle Island, and CoinGecko Ventures.

Compared to TaxBit and CoinTracker, ZenLedger primarily serves frequent traders and tax professionals, helping them simplify DeFi, NFT, and crypto tax accounting processes. In addition to tax tools, it also offers more specialized crypto accounting and tax consulting. ZenLedger plans to launch new products tailored for registered investment advisors (RIAs) and certified public accountants (CPAs).

ZenLedger supports over 400 cryptocurrency wallets and exchanges, as well as more than 30 DeFi protocols and 10+ NFT platforms. Compared to other competitors, ZenLedger has a more comprehensive integration of crypto platforms. ZenLedger currently has over 50,000 users. In a financing statement in May 2022, ZenLedger revealed that its sales had grown by 500% in 2022.

4. Ledgible

Ledgible was founded in 2017 and is headquartered in the U.S. It has disclosed one round of financing, with major investors including Distributed Global, TTV Capital, Commerce Ventures, Nathan McCauley, and JAM FINTOP.

Ledgible's core team consists of experts in crypto, tax, and accounting from various industries. Similar to ZenLedger, Ledgible focuses on tax professionals, businesses, and institutional clients, helping clients simplify accounting operations for corporate cryptocurrency and digital assets, tracking crypto assets according to institutional and business needs; it also provides crypto tax software integration to help clients serve tax-exempt users on their platforms.

Currently, Ledgible's representative enterprise clients include ACUITY, Agorand, Aprio, and Blockchain.

5. Bitwave

Bitwave was founded in 2018 and is headquartered in the U.S. It has disclosed two rounds of financing, with major investors including Hack VC, Blockchain Capital, Nascent, Nima Capital, and Arca.

Bitwave primarily serves enterprise clients, with a broader scope of services. In addition to crypto accounting and taxation, it also provides compliance solutions for businesses. After last year's financing, it focused on developing the Bitwave Institutional product, aimed at custodians, exchanges, financial institutions, wealth management firms, and other organizations facing significant risks, regulatory challenges, and complexities in holding, managing, and investing digital assets. It offers services such as digital asset accounting, taxation, bookkeeping, invoicing, and other functions like separate balance sheet tracking, reconciliation with internal and external systems, debt proof, and reserve issuance.

Bitwave's main clients include Near, BlockDaemon, Cimpound, OpenSea, Messari, Fifment, and Bankless.

6. Zebec Protocol

Zebec Protocol was founded in 2021 and is headquartered in the U.S. It has disclosed four rounds of financing, with major investors including Coinbase, Solana Ventures, Distributed Global, OKX Blockdream Ventures, and Circle Venture among over 20 leading global investment institutions.

Zebec Protocol is a streaming payment protocol in the Solana ecosystem, supporting real-time and continuous payment methods for sending funds, applicable in payroll, investments, and other scenarios. Throughout the streaming payment process, the payer connects their Solana ecosystem wallet with Zebec, enters the recipient's wallet address, sets the time interval, token type (any SPL token), and amount, and then starts the streaming payment. The recipient can instantly receive funds in their wallet and withdraw at any time, with the entire process handled entirely on-chain.

Zebec has also launched a solution based on Zk-Rollup for its streaming payment public chain, Zebec Chain, to further enhance privacy protection and compliance, and has nearly completed its migration to the BNB Chain, issuing the BEP 20 standard $ZBC token.

In a recent interview, Zebec's founder stated that about one-third of Solana projects use the Zebec system for payroll, and over 250 projects have been built on Zebec. The early user base of Zebec Protocol has already reached over 30,000, and its TVL once exceeded $300 million without any staking mining.

In terms of revenue, Zebec is expected to achieve $20 million in revenue in 2022, bringing a net profit of $2 million to $6 million to the ecosystem, with projections of $40 million to $50 million in revenue within a year (by August 2023). Additionally, Zebec Protocol plans to launch its own stablecoin when revenue reaches $1 billion.

Currently, Zebec Protocol's Web3 partners include ARB, Synchrony, Francium, Mirror World, HalkSight, Drippies, Rewards Bunny, Aver Exchange, and Moonlana. Through collaboration with Rewards Bunny, Zebec Protocol has indirectly partnered with over 1,000 Web2 companies, including eBay, Alibaba, Travel, and Booking.com.

Furthermore, Zebec Protocol has acquired five Web2 payment companies with over 10,000 users.

7. Coinshift

Coinshift was founded in 2021 and is headquartered in India. It has disclosed two rounds of financing, with major investors including Tiger Global, Spartan Group, Ethereal Ventures, Polygon Studios, Sequoia India, HashKey Capital, ConsenSys Mesh, and Alliance DAO.

Coinshift primarily builds multi-chain financial management and large-scale streaming payments for Web3 enterprises and DAO organizations using multi-signature wallets like Gnosis Safe. Coinshift allows users to consolidate multiple Gnosis Safe vaults across chains and manage fund balances using multi-signature functionality, creating dashboards for easy operation viewing. Users can access contacts, labels, budgets, reports, as well as advanced access control for vaults, signers, and non-signers.

In addition to financial management, in September 2022, Coinshift integrated the streaming payment protocol Superfluid, allowing users to create, view, manage, and edit real-time fund flows directly from the Coinshift dashboard, and automatically batch payroll, such as transferring funds from Gnosis Safe to 100 people in a single transaction, saving 90% on gas fees. Coinshift is also expected to launch features like asset allocation, risk assessment, and insurance to help users more efficiently develop asset allocation strategies and mitigate risks from various DeFi protocols.

Currently, Coinshift's clients include Consensys, Messari, UNI Grants Program, and Balancer Grants.

8. Tactic

Tactic was founded in 2021 and has disclosed one round of financing, with major investors including FTX Ventures, Coinbase Ventures, and Lux Capital.

Tactic's business mainly involves aggregating crypto asset data from different sources, allowing enterprises to "have a complete financial view of their balances and activities," and helping companies automatically categorize transactions and apply accounting logic, such as calculating dollar gains and losses and taxable events. Accountants can then reconcile the company's crypto sub-ledger with traditional Web2 accounting software like QuickBooks.

The founder of Tactic stated in an interview that "DeFi" transactions or other decentralized finance activities have the highest financial complexity, as an interaction with a smart contract can generate hundreds of "nested transactions," all of which need to be broken down for accounting purposes. Therefore, Tactic has collaborated with accounting firms to help explain accounting standards for DeFi-specific activities (such as staking, NFT minting, and airdrops).

Tactic currently serves dozens of clients in the NFT and DeFi sectors, ranging from early-stage startups to multi-billion dollar enterprises.

The development of the crypto accounting sector still faces many challenges

Despite the increasing influx of funds into the crypto accounting sector, related projects still face numerous difficulties and uncertainties.

After the bankruptcy of FTX, the auditing firms Armanino and PragerMetis may face scrutiny. Learning from past experiences, and due to concerns about their reputations, Mazars and several other accounting firms have withdrawn from crypto auditing, while the Big Four accounting firms have announced that they will no longer conduct reserve proof audits for private crypto companies.

The "hot potato" of crypto auditing stems partly from the constantly changing crypto policies and innovations in crypto projects, making it difficult to establish effective auditing standards. Additionally, it exposes the poor processes and infrastructure most crypto companies have in handling financial matters.

The core issue lies in the incompatibility between on-chain transactions and many traditional financial infrastructures. Crypto companies often manually input and verify financial issues such as tax reporting, transaction tracking, payroll, and invoicing using Excel spreadsheets. As the scale and complexity of businesses grow, these solutions become inefficient, prone to errors, and unsustainable.

Moreover, crypto companies have unique systems in both organizational structure and financial transactions, differing significantly from traditional enterprises. Due to the innovative and diverse nature of cryptocurrencies, it is challenging to adopt a unified accounting standard. Although cryptocurrencies share certain characteristics with intangible assets and inventory, existing accounting standards do not provide clear guidelines for intangible assets and inventory held for investment purposes.

Additionally, due to the inherently international nature of Web3 enterprises, the accounting industry, which heavily relies on regulatory policies and laws, urgently needs unified crypto accounting standards across countries, rather than solely depending on U.S. policies. Therefore, crypto accounting protocols will face prolonged pains from unclear and inconsistent policies.

Of course, the driving force behind the rise of crypto tax solutions is the gradual clarification of crypto tax-related policies. As more relevant policies are implemented in 2023, this field will maintain a certain level of financing enthusiasm; and streaming payments, as a new paradigm of payments based on blockchain technology, have many application spaces beyond crypto finance.

It is believed that in 2023, under the external drive of tightening regulations and the internal drive of improving operational efficiency and cost-cutting, the crypto accounting field will see more noteworthy solutions emerge.