SuiteWorld #3: The Debits and Credits of Crypto

Patrick White, CEO and co-founder of Bitwave, joins Blake and David at SuiteWorld '22 to discuss the what, why, and how of crypto accounting, wandering down into the debits and credits weeds.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Blake Oliver: [00:00:00] It's like 90- 99% of coins are scams.

Patrick White: [00:00:04] Yeah. Yeah, because it's really easy. It's really easy to spin up a coin.

Blake Oliver: [00:00:06] I can make a coin.

Patrick White: [00:00:07] Anyone can make it. Make a coin right now. The last, like, whatever the next 20 minutes I get you guys the. Yeah, yeah. The Cloud Accounting, the CAP coin.

Blake Oliver: [00:00:14] Yeah. There we go. If it doesn't exist, it could.

Patrick White: [00:00:17] Code right.

Blake Oliver: [00:00:17] Now. And somebody listening to this could make it and then start selling it.

Patrick White: [00:00:21] Yep. Yep.

Blake Oliver: [00:00:24] This episode of The Cloud Accounting Podcast was recorded at the Oracle NetSuite SuiteWorld Conference in September of 2022. To learn more about NetSuite and the SuiteWorld Conference, visit Welcome to The Cloud Accounting Podcast. We are coming to you from SuiteWorld in Las Vegas. I am Blake Oliver.

David Leary: [00:00:48] And I'm David Leary.

Blake Oliver: [00:00:49] And we are joined today by two very interesting people from a very interesting company. This is our second interview, and it's another company specializing in crypto.

Patrick White: [00:01:01] We prefer the term digital assets. It's a little bit more professional.

Blake Oliver: [00:01:04] Patrick White, Pat White, thank you for joining us. You are the CEO at Bit wave.

Patrick White: [00:01:09] That's it. Thank you for having me. Much appreciated.

Blake Oliver: [00:01:12] And we also have Rafael Casas, who is the VP of business development at Big Wave.

Rafael Casas: [00:01:18] Great to be here, guys.

David Leary: [00:01:19] And also a huge fan of the podcast. He's been a huge supporter. It used to be at Oracle and before that I think it was at Sage. Before that, did you do a zero stint to.

Rafael Casas: [00:01:28] No, no, no, not there.

Blake Oliver: [00:01:29] You didn't get the trifecta?

Rafael Casas: [00:01:30] No, not yet. I'm behind a few other of my colleagues on that one.

David Leary: [00:01:35] But you been around a long time.

Blake Oliver: [00:01:36] It would have to be there.

David Leary: [00:01:36] Thank you for supporting the show.

Rafael Casas: [00:01:38] Of course.

David Leary: [00:01:38] I love it all these years. It's been.

Blake Oliver: [00:01:39] Great. Thank you. Also, we know that you lost your voice. It has come back to some extent. So thanks for being with us.

Rafael Casas: [00:01:46] Thank goodness for green tea mining trouper.

David Leary: [00:01:49] So let's just jump in. So I'm on your website. I'm on bit wave dot IO. And my question is going to be like, what is betway? Oh, you check to make sure I was on the right side. I'm just, just looking at the website solutions and it's like accounting, bookkeeping, pay bills is crypto defy accounting impairment reporting an API crypto tax tracker that's a lot like what do you guys do?

Patrick White: [00:02:09] Yeah. So to put it really simply like we started Betway with a really simple vision actually, which was to enable digital assets for enterprises. So if you think back, we started Big Wave in about 2018 and we, we kind of were me and my co founder are both enterprise software people. So we were not actually I don't actually personally have an accounting background, although I, I do like accounting a lot. Like there's, I'm a computer engineer and there's a, there's an elegance to accounting that is not present in a lot of computer stuff that I really enjoy. So we can talk about that later. But so I'm an enterprise software guy in my entire life, worked for Microsoft and Cisco and Intuit and a few other companies. And I'm also like a deep crypto supporter. I love crypto. I've been in it. I have some code contribute to the Bitcoin core node, like I've been in this forever. I love it. And so for me I'm like, Well, can I? Is there a way to bring together enterprise software and crypto? So we started a company that was that was setting out to enable digital assets for enterprises. And that just so happens that as we were doing that, the very, very first problem that every single company we talked to using digital assets had was tax and accounting. So that's where we started and we learned an incredible amount since then. And that's where you kind of get to the solutions tab there, which is there are tons of different problems you run into around crypto. It is not, you know, I think people think that you can kind of like, Oh, you just do, it's just taxes.

Patrick White: [00:03:23] Oh, you just got to figure out your taxes for crypto and that's it. But really there are complex accounting treatments that are kind of archaic in some ways. Like, you know, we talk a lot about impairment and I'm sure we'll get into this more. You know, impairment is a it's a treatment for intangible, intangible assets. The only intangible asset, like I'd say 80% of accountants deal with on a day in, day out basis is like a domain name or something like that, which you would never impair. Like, how are you like maybe the guys who started Enron, like a bookkeeper at Enron probably impaired Enron. That's maybe the one domain in history that got impaired down, but no one does it. So this is there are these relatively archaic rules that, like a lot of bookkeepers, don't actually know intangible asset treatments. They don't know about this stuff. So you end up finding people where, you know, if you want to be able to do us GAAP. So then that problem comes up. So that's how impairment ends up there. People are doing defi defi accounting is incredibly complicated and no one agrees on how to do it. So that's how you end up with that on there. It's, you know, but stepping back from all of it, we are here to enable digital assets for enterprises and we have a full suite of tools for any sort of tax accounting, anything we do around digital assets.

Blake Oliver: [00:04:24] And when you say digital assets, what's an example of a digital asset?

Patrick White: [00:04:28] I know I love it. It's we try to be professional, which I maybe you think it's one of those things like when when businesses grow up, you have to you have to stop saying cryptocurrency and start saying digital assets, anything. So Bitcoin is a digital asset. Usdc is a digital asset board app, Yacht Club, NFT is a digital asset. We have customers that have all of those things on their balance sheet and many, many, many more. I think right now in Bit Wave, we track something like 20 million different tokens. There's just a lot of tokens out there. So all of those be considered digital assets. One thing I did learn even actually to sort of expand it slightly, you're also even seeing carbon credits are now turning into digital assets. So carbon credits are super interesting because they follow the exact same accounting treatment as digital assets. They are an intangible asset that you keep on your balance sheet. You have to impair down and more and more that we're seeing people doing carbon credit trading on the blockchain. So now, you know, I wouldn't call carbon credits a digital asset, I'd call them a ESG asset or something like that, but they're falling into our wheelhouse and we're seeing people actually using Betway for them. So it's an interesting world we all live in now.

David Leary: [00:05:29] So are you just like a software solution? You're just moving data into the accounting systems, are you? I'm kind of thinking like a payroll service, right? They're providing some extra services or filing some tax returns for you. They have expert. And what you need to be filed or what needs to be filed. Like, are you kind of in a little bit of a service company as well?

Patrick White: [00:05:45] We are mostly in enterprise SaaS product, so we are mostly a piece of software that pulls data from the blockchain, does some manipulation on it, and it helps you push it into net sweet, whatever your whatever ERP you're using, things like that. We have a solutions team that is some incredibly crack CPAs that also happen to be crypto gens. So like guys that, you know, own random nfts and love trading this stuff. So we, we have a group of people that really know this stuff like, like nobody else in the entire world. But we, we tend to not do that kind of service providing and that's actually very intentional. So like one of the really crazy things about crypto is there's, there's a lot of stuff that is settled, right? Crypto is a is an intangible asset. It is treated for tax purposes as property. So you can kind of think of crypto as a forex that you keep in inventory, right? So that's why it's why QuickBooks and NetSuite know these guys can handle it because normally in these ERPs you have either inventory or Forex. You can't really if you're if you're paying a bill, you can't pay a bill in widgets.

Patrick White: [00:06:43] And if you have widgets, you know you're not if you have forex, you're not really tracking the inventory on it, things like that. So we we bridge the gap between those two, allow you to handle it. But there's still so many things that aren't decided that we actually we stay away from actually giving a lot of advice. Something it's like kind of unique about us is that we don't give you advice. We'll tell you the 35 different options and then you have to kind of make your own mind. So a great example, if we're getting deep into crypto, would be like, there's this thing called Etherium. Everyone's familiar with that. There's this other asset called With, which is Etherium. When you wrap it in a ERC 20 token, it essentially is a one for one. It is a smart contract on chain guaranteed, one for one wrapping action. There is great debate in the industry as to whether that's a taxable event or not. So like you could think of that.

Blake Oliver: [00:07:29] As I'm sorry, you said like five words there altogether, and I understood maybe one of them. So could you go back and.

David Leary: [00:07:37] What.

Blake Oliver: [00:07:37] Are you you're wrapping.

Patrick White: [00:07:38] So you you take an Ethereum and you go to a smart contract and you are basically you give that smart contract the ether, and it gives you back this token called wife. That is, you will always be able to trade it back for a Etherium like there is a very, very strong guarantees the Etherium network would have to break before I could not trade a week for Etherium. So it's like you could almost think about like, let's say you have a stock piece of paper or a stock certificate.

Blake Oliver: [00:08:05] It's like Usdc, right?

Patrick White: [00:08:06] It's a USDC except Z, even stronger guarantees because Usdc you still have circle that's holding it in the bank account, right? So if, if someone from Circle somehow steals all the money, the usdc token itself isn't worth anything, right? So like, it's, it's one, it's even more, it's even more guaranteed to have that ethe backing because it's all on chain. Like there is no one that can move it. It's all controlled by the smart contract.

Blake Oliver: [00:08:30] So, so the Etherium that I trade for my with. Yep. It stays.

Patrick White: [00:08:36] It stays in that smart contract and.

Blake Oliver: [00:08:37] Nobody else can use it.

Patrick White: [00:08:38] No one else. Well, anyone because it's all fungible so anyone can pull out with from that smart contract. It's not guaranteed to be your ETH in there. Anyone could pull it out. But you are guaranteed that if everyone in the world pulled all of their ETH out of that smart contract and you had the one last week, there would be one eth in that contract and you could, you could give it your wife and get your eth back out of it. Okay, So this is, so this is sort of interesting one because depending on which of the big four you talk to, they disagree about whether that's a trade or not. Like is that a disposition? When I give that smart contract my IEF and it gives me with is that a disposition or not. And about half the big four think it is and about half think that it isn't.

Blake Oliver: [00:09:17] And so can I ask you just like why, why would anyone do this? Like, what's the point?

Patrick White: [00:09:22] You know, the reason you do this is that ethe by itself. So what's happening? The reason crypto is so incredible, like I know you'll hear a lot of different reasons why people like crypto and like you hear some people that take the real libertarian side of that, like, you know, they hate the Federal Reserve and they burn down the whole world and things like that. And that's fine. That's, that's a totally fine position to take. That's not my position. Like crypto is incredible because it answers the question like, let's say you take 100,000 engineers and you give them a real API for money. And I don't mean like Stripe and I don't mean like, you know, a bank that can do this. I mean, like you give people a real API where you can actually program money. What happens? One of the building blocks of that API is a is an interface called an ERC 20, which is this token interface. So every token that you're familiar with Usdc we just talked about with Matic, all these different tokens adhere to this ERC 20 spec so that any single building block that wants to use it can. So the reason like Uniswap is such a cool protocol, it's a, it's an on chain Dex, right. It's a distributed I'm sorry, a decentralized exchange. The way it works is that it can take you give it to different ERC 20 tokens and it doesn't care what tokens are. It knows how to use that. Wrap that. Interface and you can give them any two ERC 20 tokens and it can create a trading pool between those two tokens. So one of the problems is that ETH itself is not an ERC 20 token, so you have to wrap it to turn it into an ERC 20 token to then be able to take care, to be able to use all these building blocks that are out there. So it's a long, long way.

Rafael Casas: [00:10:58] It's convoluted.

Blake Oliver: [00:10:59] And so this brings me to one of my core questions about cryptocurrency. And I'm a crypto skeptic. I fully admit it. I'm a professional skeptic. I'm a CPA, as I'm supposed to be. And one of the problems I have with the crypto barrows and the crypto Bitcoin maximalists and all that, Yeah, I want to know if you are one, by the way. But well, that's, that's another question. What I want to ask now is one of the promises of crypto is that we're going to eliminate the trust that is necessary between independent third parties in order to do a transaction. A lot of our financial industry is around these trusted intermediaries. That's what a bank is essentially, you know, they maintain the ledger and the global financial system is all these middlemen. And, you know, crypto can disrupt all that. Right? Just connect us directly.

Patrick White: [00:11:48] Is a great disservice to.

Blake Oliver: [00:11:49] The middleman. We don't have to trust each other to use cryptocurrency. Yeah, but it gets really complicated. And so instead of trusting a banker, now I'm trusting you, Pat. Yeah?

Patrick White: [00:12:01] Who wrote the code, right? You're trusting a person who actually wrote the code, right?

David Leary: [00:12:04] Because. And these thousands of engineers that are inventing money. Yeah.

Blake Oliver: [00:12:07] So, like, you know what? If there's a gap in the.

Patrick White: [00:12:10] Code, as there often.

Blake Oliver: [00:12:11] Is, and that's what we see is we cover the news. And every week I see some sort of crypto project got hacked and millions were taken out or the rug was pulled.

David Leary: [00:12:22] Yeah, or worse than hacks. It's just simple accounting errors. They're just careless like they went too fast and they're just it's just simple, stupid mistakes. Now. It's not even things on purpose.

Blake Oliver: [00:12:31] Yeah. So like, how do you address that question?

Patrick White: [00:12:34] You know, I think there's a few different ways you can address it. So first of all, you can look at addressing at the protocol layer. So more and more protocols are asking the question of like, Hey, what if we do have some way to rewind transactions? And there's the thing you have to understand about crypto. People always do this with everything, right? You like you like to sort of think about groups of people doing stuff as very homogenous and like cryptos like that. Like when I when a lot of people talk about crypto, they think about the crypto bro and the dude with his like trucker hat, like smoking a j like, you know, this guy like telling you to buy and smash subscribe button and things like that. Like that's a part of crypto.

Blake Oliver: [00:13:06] And for our listeners, Pat does not look like a stereotypical crypto bro in his defense.

Patrick White: [00:13:11] Yet like, wait till wait till after the show is over. And so that's part of it. The other side of it, though, is, is is these people. So I say like kind of one thing way to think about is like there's people who think they're going to buy crypto and become a billionaire. And I think they did a survey that like 30% of people who buy crypto still think they're becoming a billionaire from doing that. And that's again like not to judge like, that's fine. Whatever. There's this other side of the world. There are people that are looking at the marginal efficiencies. So you brought up the number one use case that I talk about, which is disintermediated financial institutions. So if you're going to go through this process of disintermediation, Bank of America, like today, you can go and borrow money from a protocol called compound for 3% interest. Right. Which is significant. If you go into a bank today to borrow money, you're going to be paying prime, which is what, 3% plus 6%, 5%. So you'll be paying 8 to 9%, something like that.

Blake Oliver: [00:14:01] I was just talking to a banker who does accounting firm transactions and he said they try to make 10% on every deal. Yeah.

Patrick White: [00:14:09] So, so and so like, the question you ask is like, well, why is that? Well, Bank of America has, you know, 100,000 employees. They have office buildings in San Francisco and New York. They still run as four hundreds. Like there's I have never proven this, but there's got to be a dude out there who makes chips for as for hundreds, like in his living room and sells them for like $10,000 to Bank of America to run. These like servers are still that are like literally from the 1960s. So you take all of those those costs and you compare it to a company like Compound, which is, I don't know, 50 to 100 people that runs no servers. All of their code runs on the public blockchain. You as the user pay the fees like you as the user are essentially paying the maintenance cost for this supercomputer, running your your lending code and all that kind of stuff. So within that context, like the Crypto Bro's get really hung up on decentralization and all of these like the deflationary aspect to centralization, all these different like I wouldn't say it's not political, but it's, it's an ideological argument.

Blake Oliver: [00:15:11] Libertarian.

Patrick White: [00:15:12] Yeah.

David Leary: [00:15:12] Religious.

Patrick White: [00:15:13] Religious. Yeah. Even religious. Yeah. 100% feels religious. Yeah. The people who are pragmatic about this, they don't they don't care about that. Like they they see this world where you're literally taking a company and doing 1/1000000 the size of a company and being able to provide the exact same services. And what does that look like in marginal efficiencies and costs and all this kind of stuff and direct, You know, basically me being able to borrow money from you and get better interest myself than I get at a bank account because it's not like I get that. If I put my money to Bank of America, it's not like I'm getting 10% like they're getting it. And so so for those people, like there are people now looking at how do you do protocol level rewinds, how do you do better lockout periods so that if you do find a hack, you can protect it. You know, it's it's going to be a it will absolutely be a progression that we get to. But it's not to think that Bitcoin is not inherently tied to a one way door that you go through and every transaction has to be like that. It's just where we've kind of end up today because a lot of the early adopters were a little bit more ideological about it.

Blake Oliver: [00:16:10] Do you support more cryptocurrency regulation?

Patrick White: [00:16:14] That's an interesting question. So my general answer to this is I like cryptocurrency a lot because you have people like us that are trying to do the right thing, like we are genuinely trying to bring digital assets into the fold in terms of regulation and tax and all that kind of stuff. And our customers are also trying to do the right thing. Crypto has a release valve like you can't shut down tornado cash there. You can do it. Ofac, the OFAC, the Treasury can come out and do an OFAC sanction of a of tornado cash, but it is still out there running and everyone in the world can still use it. So crypto has this natural release valve where it cannot be stopped. Like you can do stuff to make it harder, but you can't stop it. So regulations with those things that I actually think that we can come to a world with smart regulation for crypto because if you go too far on the regulation for crypto, people just move to the Cayman Islands and don't give a crap what the US says and do whatever the hell they want anyway.

Blake Oliver: [00:17:09] Just like we get black markets for goods when they get, you know, banned 100%.

Patrick White: [00:17:13] And so crypto has a release valve. So I think that a we should see more regulation. I think we should get more guidance on a lot of this stuff. I think it'd be great if someone came out and said that we should not be doing an intangible asset treatment for digital assets like that would be. I mean, it's a module we sell, so I like it.

Blake Oliver: [00:17:27] Like you've built a solution for it.

Patrick White: [00:17:29] You got a solution for it. So maybe that's maybe I'm biased, but, but like, I mean, all that stuff will happen. So it's, it's.

Blake Oliver: [00:17:34] It'll take a while. You're safe for a while, say.

Patrick White: [00:17:36] For a little while. Is it fast? Be move.

Blake Oliver: [00:17:38] Slow, fast, be fast. We moves incredibly slow. Yeah, that's true.

David Leary: [00:17:42] Yeah. It's time to get a lobbyist and sway your way.

Rafael Casas: [00:17:45] Anyways. You didn't make a good point though, when you the reservations that you had because I had that coming from the CRP 20 years background of jumping into this space. And one thing that was really interesting and impressive to me is that, you know, the amount of people that came over from the Googles, the Facebooks, the Oracle, and they're really anti Bitcoin Maxy. So, you know, me building partnerships and speaking with these guys, they're not here to, to build or help anyone that's doing it get rich quick. They want to build a real infrastructure, real utility, and really help businesses that have legitimate projects succeed. And so that's one thing that's been really impressive to me, that there's where I'm not speaking to these guys, like you're saying, smoking weed and had a head backwards, like, I've got this cool idea. We're really speaking to legitimate players and good actors. And so that's impressive.

Blake Oliver: [00:18:30] Yeah, Well, tell us a little bit then. You know, like, who are you working with? Who uses Bit wave?

Patrick White: [00:18:36] We have over 250 customers at this point across the entire board. It's really easy to think about crypto again as as a homogenous group. You're like, Oh, there's this web3 industry out there. It's all web3 companies. It's actually this really interesting group of like tiny little micro markets that are out there. So the one that I love is my favorite is energy. Like energy is a huge market. One of our first customers was a company called Greenidge Generation, which is a power plant in upstate New York. And these guys aren't hardcore crypto people by any means, like they are a set of guys that kind of got interested in Bitcoin, owned a power plant and said like, Hey, you know, one of the this gets deep. But like one of the things about Power Plant is it takes 8 hours. You have to you have to project you have to forecast your energy usage 8 hours ahead. Yeah. So you turn the knob and 8 hours later that's what you get at that point in time. So if you guess wrong, that means that you waste your energy. So they have this thing where you have this supply and demand delta between your energy that goes for solar, it goes for wind.

Patrick White: [00:19:29] All the different renewables have this. They realize that really early this is like, well, hey, you know, half the time we end up having a surplus of energy, we just burn it off like it comes off as heat off of our generators. What if we pump that into a bitcoin mine? So they bought a bunch of Bitcoin miners They did like I think they even did like a financing with somebody to pay for it and then just pump that into bitcoin and ended up making it. And then now they've expanded that and they're doing it other places and it's really cool. So you have energy companies are getting to this. All the solar companies are looking at it now. All the gas and electric companies like right now Exxon, Shell, all these guys are looking at, hey, can we put a can we take a Bitcoin? A little bitcoin miner and a little power plant, put those in our in our fields and our gas fields and use the flare from natural gas to drive a power plant to mine bitcoin. And hey, that's just a little bit more that's CapEx to OpEx. I mean, honestly, like it's just a straight calculation at that point.

Blake Oliver: [00:20:17] Well, and what I love about that is the criticism of crypto is that it's very wasteful. Yeah, it uses a lot of energy, but in this sense, when it uses the excess capacity, it actually encourages companies to create more capacity because they know that if they create it, they can sell it or they can mine it.

Patrick White: [00:20:33] It's without being too hyperbolic. It's to me the way that we do actually get to sustainable renewable. Because if you if you spin up a renewable plant, you have this issue where you have this terrible supply and demand problem, where you're solar has a great supply during the day and terrible at night and things like that. So, you know, the idea of of cryptocurrency as a smoothing function to make solar plants and other plant like renewable plants more sustainable long term is a phenomenally good use case for it, where it makes them profitable and it makes crypto greener. Now, where you run into problems, of course, is like people using subsidized dirty power in China to mine Bitcoin. And that's like, that's terrible. Like we and I tend to think that those problems will solve themselves over time. Like the Chinese government is not a fan of using subsidized power to mine bitcoin. So they are cracking down. There's incredibly severe punishments for doing that and we'll just see that happen more and more.

Blake Oliver: [00:21:25] So one of the promises of Bitcoin is this idea of like a limited supply. Yeah, right. That's one of the features of it. But I feel like Defi has undone that because now what is happening is you can create coins, an infinite number of coins that has. So you, you have an infinite supply of crypto. And how, how do you with an unregulated or a, you know, a regime that's impossible to regulate, like you said, they can just go abroad and people can use crypto anywhere in the world. It's impossible to stop it from going across the Internet. How do you stop bubbles from building? Yeah, like, like we saw just recently with the evaporation of $2 trillion of market value.

Patrick White: [00:22:07] Absolutely Crazy couple. Couple of ways to sort of think about that. So the way that I always talk about crypto in general is crypto is a story about use cases like it's you can't clump all crypto together. Bitcoin is a designed currency, is a deflationary design currency, which is really interesting. Like it is a social experiment. You know, I don't know what else to say about besides that. It is a social experiment to design a currency that's deflationary. Not every cryptocurrency is like that. Etherium is not deflationary. It is. It is designed to be a relatively stable. It's like low.

Blake Oliver: [00:22:39] Inflation, right?

Patrick White: [00:22:40] Low inflation. Usdc is designed to be inflationary, like usdc, like USD. So you have to you look at all these different coins and you analyze the actual use case around them. Bitcoin was designed to be incredibly conservative. The development of the protocol moves incredibly slowly. It is designed to be deflationary. It's designed to be an inflation hedge. Now what's so interesting about that is that it hasn't worked great during this period of high inflation. And I joke about this a lot. You know, I'm 38. I've never lived through a period of inflation in my life. So and a lot of people who love Bitcoin are like my age. And so it's really interesting that we were all thinking about, you know, we're all sitting here pontificating about deflationary and inflation resistant instruments and stuff like that, where the world hasn't seen inflation for 30 years. I mean, there was like a little bit in the 1990 to 93, something like that. But like not really not 8% like we're seeing today. So, you know, crypto is it's a it's a experiment at a grand scale. It is a social experiment first and foremost, because it's human beings putting value onto this. And some of them will work like Bitcoin seems to be having sustainability, but it's designed to be inflation deflationary. Then you will also have scams and you, just like crypto, is a caveat emptor to the absolute extreme. Like be careful.

Blake Oliver: [00:23:56] So many scams. It's like 90 99% of coins are scams.

Patrick White: [00:24:01] Yeah, yeah. Because it's really easy. It's really easy to spin a bitcoin.

Blake Oliver: [00:24:04] I can make a coin.

Patrick White: [00:24:04] Anyone can make it make a coin right now. The last like whatever the next 20 minutes I get you guys the Yeah, yeah. The cloud accounting. The cap cap coin. Yeah.

Rafael Casas: [00:24:12] There we go.

Blake Oliver: [00:24:13] If it doesn't exist, it.

Patrick White: [00:24:14] Could could right now.

Blake Oliver: [00:24:15] So. And somebody listening to this could make it and then start selling it. Yeah.

Patrick White: [00:24:19] Yep. So there's, there's use cases around this stuff so you have to like be kind of aware of that. But all that being says it doesn't like scams don't diminish from the opportunity that is here. I mean like when KKR, KKR was sort of the biggest entrance recently where they just announced that they're tokenizing $4 billion of their assets. That is a super interesting use case because this isn't tied to deflation or inflation. This isn't a this isn't a currency per se. This is the idea that like a company like KKR that traditionally has through hostile takeovers, their main liquidity option has been to take a company, sell off the piecemeal parts. And then that's how they're getting liquidity out of it. What if they didn't do that? What if they take companies maybe sort of like mish mash them, mash them up, put some together and then tokenize that, and then sell those for $10 a token to actually give retail investors access to KKR type instruments. I mean, it's kind of crazy. It's kind of far out there, but it is this great democratizing aspect of cryptos that could happen and that's happening today.

Blake Oliver: [00:25:14] So yeah, I do like to wonder, am I going to someday work for a digital autonomous organization?

Patrick White: [00:25:21] Probably not. You know, Daos are one of those things. Again, like all these things are social experiments. What we've seen in our in our expertise there is there was just a big lawsuit over this with it was a DAO called BGG that essentially they one of the DAO holders who got scammed out of a bunch of money is suing. The Dow, of which he is a one of the interpretation for Dow is in the US. If you don't have a general, if you don't have an LLC around it, is this just a general partnership? And so he's suing the general partnership, which is he's suing himself. And then whatever the other 10,000 people in the Dow for damages relating to him getting scammed out of it, this is going to trigger every Dow to like just do an LLC. And they're all they're going to approach normal businesses with maybe a slightly different governance structure. But even that, like it's it's a social experiment because no one has yet proven that that everyone voting is a better social experiment than for businesses, than a CEO. Right. And in fact, we have co ops like ARIA is a co op. Their people, their employees vote. You know, there's co op grocery stores. They haven't taken over the world like voting is has been around for a long time and command and control generally works better for companies.

Blake Oliver: [00:26:33] So well we just need to put an AI in charge of a Dow.

David Leary: [00:26:36] There we.

Blake Oliver: [00:26:36] Go. And then and that's the next Amazon man.

Patrick White: [00:26:39] I'd give my job.

Rafael Casas: [00:26:40] Up to him. It works really well on Twitter, right?

Patrick White: [00:26:42] Yeah, I forgot about that.

Blake Oliver: [00:26:43] But I think some people might prefer working for an AI to working for their actual boss, right? Yeah.

Patrick White: [00:26:48] I give up my.

David Leary: [00:26:48] Job in a second. Only in the big four.

Blake Oliver: [00:26:51] I feel like actually a big accounting firm would would be great as a Dell. You know, you just got to record your time. Yes. Those projects, it could issue all the invoices. It could do everything.

David Leary: [00:27:02] Can we roll this back to simpler, simpler terms and simpler use case. So with podcasting 2.0 in theory, Blake and I could actually with there we have the app earmark. We in the earmark app, we could actually just have a lightning wallet and our listeners can send money to us through the Satoshi. So with one 600,000 of yeah what eight decimal points whatever of of of a bitcoin and they can send it to us so then they're sending it to us and then we could actually have that portion out. Some of it goes to our engineer and another portion goes to somebody who made the artwork or what have you or show notes. And so it all goes out to. So what's left in our wallet is ours. So we have to somehow record that in or let's say we're huge and now we're on net sweet, right? We've got to put it into that suite. Yeah. So what does that look like? Are you guys just taking the balance and making a journal entry? Is it do you. Do you help me facilitate changing my satoshis into real cash? Yeah, because when my bank account, I love it. Like, where's the real use case here?

Patrick White: [00:27:59] Totally. Totally. Okay, so let's let's walk through that use case. So you're getting you're getting crypto as revenue, which is a great use case here. Yes. Right. So you get you get crypto's revenue. What we're going to do is we're going to monitor the blockchain and we're going to see that Bitcoin hit your wallet. So we say, Hey.

David Leary: [00:28:12] So I've connected to my wallet somehow.

Patrick White: [00:28:14] Yeah, you put it in the wallet, address, you put it, you hook us up to your lightning node. There's a bunch of different ways that happens.

David Leary: [00:28:18] Give us in a way you're going to go swipe on my bitcoin.

Patrick White: [00:28:21] Yeah, I know. We can't. We can't do that. It's only. It's only the read only side or you give us read on the API keys to your your custody read on the API is to Coinbase. So we see that we see the bitcoin hit your wallet. What we do is we're going to fair market value it and that's essentially what you're doing is you're setting up your book cost. You can kind of think about bit wave as a so we are a digital asset tax accounting sub ledger and we are what you are doing is you're building a sub ledger and then adjusting ledgers on top of it. This is another thing. We're like it's you get into this stuff and like, I don't know, probably half the accountants we talked to are bookkeepers we talked to. Don't know what adjusting ledgers are. These are these are weird concepts and not everyone deals with on a day to day basis. So you're building up a base ledger. So in this case, it would be debit, digital assets, credit sales, right? Nice and easy, weed, fair market value it. So we're going to fair market value of the Bitcoin debit digital assets. Let's say it's one bitcoin. So you get so it's today is 20,000 20,000 debit digital asset credit sales. We then are also going to take that Bitcoin and add it into an inventory. So because you're because it's again it's a Bitcoin is a for accounting purposes, it is a forex that you inventory. It's the best way to think about it.

Blake Oliver: [00:29:24] And forex meaning foreign exchange.

Patrick White: [00:29:26] Yeah. So it's, it's a foreign currency that you inventory. So mostly when usually we do for foreign currencies you don't you do cost averaging or like you're just looking at like deltas between invoices and this, this is a it's a foreign currency you have to track on a lot by lot basis with inventory.

Blake Oliver: [00:29:41] And that's that ledger that you're talking about. It's every lot that has been sold or exact.

Patrick White: [00:29:46] So every time.

David Leary: [00:29:47] 2000 listeners each send us $8 apiece. Yeah, we have to record 2000.

Patrick White: [00:29:53] 2000 lots.

David Leary: [00:29:54] Now what if they're paying us per minute. Listen there's it's even cheaper because that's the beauty of this. It's Microtransaction.

Patrick White: [00:29:59] Microtransaction.

David Leary: [00:29:59] So you have to track each one of those separate lots.

Patrick White: [00:30:02] We have customers doing 100 million transactions a year. Easy. It's crazy.

David Leary: [00:30:07] So we would summarize that into my ledger or we would.

Patrick White: [00:30:11] We would tend to do roll ups. So we would do our buy our roll ups or something like that. Like we would not track individual at that level. It depends on what your auditors want. This is every question in crypto is it depends, right? It depends what your orders want. Depends like what you guys think. But for the most part, if you were in that situation where you're getting that much, we would roll it up on an hourly basis and then we would just do one entry per hour. We'd price it on on an hour. So we take the our close, like all the bitcoin you got for that one hour, the price for that one hour turned that into an hourly like a. Fair market value and a lot or like a layer for that for that particular crypto. So that goes into your inventory. You have you're going to have to inventories. This is where it gets really, really complicated as this let's.

Blake Oliver: [00:30:49] Let's get into this as.

Patrick White: [00:30:49] If we haven't yet made it inventory complicated. So first of all, you're creating a US GAAP inventory, so you're going to take that one Bitcoin. The way we work is that we give it the ID, the ID of the transaction on the blockchain that becomes the inventory ID, So it goes into your US GAAP inventory, your US GAAP inventory can be impaired, right? So you're running an intangible asset treatment on your US GAAP inventory, so you can impair that down. So it goes in with a carrying value of 20,000. But if Bitcoin goes to 18,000 tomorrow, we're going to create an impairment action. We pick up a 2000 impairment and the carrying value of that inventory item goes down to 18,000. With me so far.

Blake Oliver: [00:31:27] And you're journaling the impairment loss.

Patrick White: [00:31:29] That would be part of your adjusting your US GAAP adjusting ledger. So that would be that impairment is us GAAP adjusting. And then when I sell that Bitcoin we then pick up a realized gain that is going to be the contra of the impairment plus whatever the new price is. So let's say we sell it for 21,000, you'll then see your you're adjusting ledger for, for us GAAP will have a -2000 credit, 2000 impairment and then a realized of 3000 that gets put in there. So that's the that's your US GAAP adjusted ledger. You then also have a tax adjusting ledger. So on your tax adjusting ledger, you're not doing impairment. The cost basis is the cost basis is the cost basis. So in that same transaction that I then when I sold that Bitcoin, whereas my US GAAP adjusted ledger picks up 2000 impairment, 3000 realized my tax ledger just picks up a 1000 realized. So that's what Bitcoin is doing behind the scenes. I don't normally go into this much detail. This is you guys are getting this.

Blake Oliver: [00:32:22] Special I love.

Patrick White: [00:32:22] It as an accounting podcast.

Blake Oliver: [00:32:24] Debits and credits.

Patrick White: [00:32:24] Man. We're we're picking up a base ledger that's debits and credits of of the book cost of the action. So debit digital loss is 20,000 credit sales debit or credit digital assets 21,000 debit marketing expense, whatever it is. And then the adjusting ledger is how you get between all those numbers.

Blake Oliver: [00:32:40] Got it. I feel like that's the best the only good explanation I've ever gotten of this on a on a podcast. So thank you so much.

Rafael Casas: [00:32:47] That's why there's something similar to this on our CPA Academy. A long time ago before I joined, he and I did one and he goes really deep in where we like. We had to cut it off really quick.

Patrick White: [00:32:57] I pull back, buddy, like, Polo, pull out the spin. Here we go. We're going.

David Leary: [00:33:00] To deep. So now you've pushed it on my ledger as an asset I'm tracking. So now I'm ready to convert that to cash. So I might do that in the app itself. It just applies to my breakout. Now, are you watching the wallet and you're going to go enter the journal entry for me to my bank account or what?

Patrick White: [00:33:15] So the way that we work, we have different ways we can set the system. The way we work by default is that we're actually going to track all of your all of your digital assets and cash equivalents. So if you have a Coinbase account, we're going to track that in bit wave so that when you do that trade, it actually trades don't hit your book. It's one of the ways that we like what we're trying to do is we're trying to make your life a little bit better on this stuff because it's really hard. Like as you're hearing me talk about this, there's obviously a lot of like nonsense that you're doing to kind of handle this. And so we try not to. So a trade, if you're capitalizing fees, a trade is actually net neutral to the primary ledger, to your general ledger, because it is you capitalize the fee into it that stays within the cost basis, all that kind of stuff. So we actually tend not to push trade data and stuff like that up, but we're tracking that in big Wave. So we know all of your balances. We know all of your minute by minute balances. After all the trades and all that kind of stuff. It might not hit net sweet, but it'll be in big wave. All right.

Blake Oliver: [00:34:05] So there's one other thing I want to nerd out with you on, which is the NFT Sure aspect of your business, because Dave and I were talking before we started recording, before you guys showed up and we were thinking, Well, why do you need to track Nfts? Because once I sell them, like I don't own them anymore, like why it's not the same. Yeah, like, so why would I?

Patrick White: [00:34:24] Well, there's a few different reasons. So first of all, we work with a few customers that are NFT collectors and traders, so they are buying nfts for a cost basis, selling them for a different cost basis and picking up some sort of realized loss on that.

Blake Oliver: [00:34:37] Okay.

Patrick White: [00:34:37] So that's that's day one for someone. Like if you are an open C, you probably don't care about Nfts at all. You are not really inventorying NFTS, you're not really tracking them. When an inventory changes hands, it's a direct user to user trade. You're somewhere in the mix there because you're getting a fee off of that. But the NFT never hits your wallet, so you don't really care about it. If you're a mentor you might like. There are some interesting use cases that people have talked about where you can, if you mint nfts to a wallet and then you sell them piecemeal, you can kind of make an argument that you would you could capitalize kind of the way. Well, it wouldn't be capitalizing at that point. But like if then, by the way, like artists work like you, you buy your paints, you buy all the stuff, so you have a cost of goods and then you sell your painting and there's ways you could treat it where you do a cost of goods against the the revenue coming off of that. So there's reasons to track it for those purposes. Like if you want to track your COGS against your actual revenue off of it. But the real reason would be people who are collecting nfts like they or are even there's even like one edge case too that I'll mention, which is like if you're a. Gaming company and someone like like imagine a kid buys a $100,000 sword and then his dad is like, Oh, hell no. So you have to basically you have to buy that sword back. So you now actually do have 100,000 sword sitting in your treasury, kind of whether you wanted to or not. So you you end up in these situations like that.

Blake Oliver: [00:35:56] I think that makes a lot more sense.

Rafael Casas: [00:35:57] You have some of these larger companies that are customers of ours that, you know, have the NFT marketplaces, right, so that.

Patrick White: [00:36:03] They're often like they will often do that where someone, even though they're not the middleman per se, like if someone buys something that they did not intend to, they'll give them a refund and then they'll buy the NFT. And then suddenly you have an NFT on your balance sheet kind of whether you want it to or not.

Blake Oliver: [00:36:19] And personally, you know, I'm just dreading the day my seven year old figures out how to buy Nfts because it's like all he wants to do is spend money on roadblocks.

David Leary: [00:36:26] Yeah, it's already been happening.

Patrick White: [00:36:27] As I was saying, he's already doing it. He's putting money on robotics. It's already happening. Yeah, just not quite the same currency yet.

Blake Oliver: [00:36:33] Not yet. Well, hey, thanks, guys, for coming. Really appreciate having you, Raph. Where can people find out more about Betway follow you online?

Patrick White: [00:36:42] Yeah, absolutely. So a couple of things. So a bit wavy. Oh, that's the easiest one if you are interested in this at all. One of the places I always point you to is we have a maturity model that we publish that's called the Digital Asset Maturity model. So Betway obviously Dam dam. It's easy way to remember it. They just walks through. It's a four step process for like it starts with like the CTO at my company had a fever dream and bought a bunch of ETH on his credit card. What the hell do we do through like step number four is, Hey, we are an organization running a sophisticated defi operation and we're taking down the banks one step at a time and that's us. So it's it's all the different stuff that's can come up from a Treasury perspective, from an internal accounting perspective, from a tax perspective, from a controls and operations. Like we didn't get into this, but like one of the ways that Bitwage looks to the world is that you as a business, when you bring digital assets on every one of the CFO, every part of the CFO office is touched by that. The controller ship is touched by that taxes, financial operations, treasury, all of these different parts. So we end up having a lot of solutions around there. So the digital asset maturity model is a great place. Like if you are curious about this and you're wondering what the next 510 years are going to look like, it's a great place to kind of get into to learn about it. I'm on Twitter, I'm at Pat White. I don't really tweet, so I don't know. But if you want to say hi, feel free.

Blake Oliver: [00:37:57] Don't at me.

Patrick White: [00:37:58] Yeah, I know, Tony. You can. I mean, it's just not it's not very interesting but big wave dot I o and, and oh and the other thing I'll, I'll plug is we have a bit wave channel on YouTube so if you enjoyed this we do this kind of thing on our bit Wave channel we do webinars and just general things like talk to you about how because we didn't even talk about Defi like we did even we did the 100 level stuff here. Like when you start to about Defi, it gets you get so deep in this craziness like so quickly. It's not been funny. So we have a whole thing about how to do defi accounting, all of that.

Rafael Casas: [00:38:28] So yeah, we work constantly with the, you know, the largest firms and you know, Armani, you know, Armani know very well. Yeah, we were actually doing a session with them at another conference coming up at one just specifically with them on wallet hygiene and really looking deep on level one, Level two, blockchain.

Blake Oliver: [00:38:45] Hygiene.

Patrick White: [00:38:45] Wallet, hygiene.

Rafael Casas: [00:38:46] So yeah, it's really, really interesting. So we make sure to make from an integrity standpoint that we're doing the right things in our product. We're constantly having meetings with these large firms to making sure that we know what's going on with the SEC, how we're treating it. They're asking for our advice. So it's a really supportive community, which I love.

Patrick White: [00:39:03] Wallet Hygiene was a term that I think we coined it. I don't think anyone else did, but it's this idea. So one of the things about think about crypto.

Blake Oliver: [00:39:10] The term should be honest.

Patrick White: [00:39:11] It should be we should get that. We should definitely get that one. Think about like so the difference between crypto and bank accounts, There's a lot of them obviously, but when you do a vendor transaction, your bank account, you get a nice little memo line that says like, I just bought a burger from Burger King or like Burger King for $5. You don't get that in crypto, right? You see an address and an amount and that's it. So you either have to be really good at recordkeeping, which some people are, some people aren't. We have some tools to help with that. Or you can go the other direction where you have really good wallet hygiene, which is you have a wallet where all your revenue hits, You have a wallet where you pay all your contractor expenses, you have another wallet, where you pay all your fees for your NFT trading, whatever it is. That way you can make your accountant's life a lot easier because they know, hey, if something happened, if I spent five Bitcoin in this wallet, that's a contractor expense. If I spend it in this one, it's a fee.

David Leary: [00:39:57] All right. So I'm going to repeat what you just said. So one of the greatest things of cloud accounting is the bank feeds. Yeah. And so now we're getting rid of this super progressive. And basically you've ruined the bank fees. Yeah. And so because of that, you can be like, Hey, go create a bunch of individual wallets. So you get the same experience you get currently in bank feeds. Yep. Yep. Jesus, you guys are a mess, man. I like you guys. Like you guys are not making the world any better. I honestly.

Patrick White: [00:40:21] There's a lot of cool stuff happening around here, too. Like, this is. I mean, this is part of it is like, is that there's a lot of stuff happening around this to fix this. And this even gets into what we're talking about. Like ideologically, the crypto came about because people wanted that pseudo anonymity. This was an early feature of crypto, not a bug. But now where we are, where people don't want that, you're actually now finding people come up with clever solutions for digital identities so that you actually can get that bank feed back with potentially even more information in it. So we'll get there eventually. It's a yeah.

David Leary: [00:40:49] I can see where it could be an extra perfect bank feed, right? It would be perfect, yeah. Bank feeds coming in eventually because you could control the data coming through there.

Patrick White: [00:40:59] But we.

Blake Oliver: [00:40:59] Can hope. We can.

Patrick White: [00:41:00] Dream it'll get.

David Leary: [00:41:01] Back first, right?

Patrick White: [00:41:02] Yeah, it is. It's exactly right, because it's trying to adapt to currency design for pseudonymity for accounting. And then now everyone's like, Oh, crap, we kind of maybe should have thought of that beforehand. And now people are working on really cool stuff. That's normal evolution of technology.

David Leary: [00:41:15] And so the term is wallet, hygiene. Wallet, hygiene is keeping your wallets clean. That's the you to make that as a sticker.

Blake Oliver: [00:41:21] I like it. Wallet hygiene is the that could be the name of this episode.

Rafael Casas: [00:41:25] So someone like Platt is actually working on this, right? Yeah. So they're really there. That's good. They're cutting edge on this.

Blake Oliver: [00:41:31] Thank you, Pat. Thank you, Raphael. Appreciate having you on the show.

Patrick White: [00:41:35] Spectacular. It was our pleasure. Thank you.

Rafael Casas: [00:41:36] So much for joining.

David Leary: [00:41:37] Us. Thanks, guys.

Creators and Guests

David Leary
David Leary
President and Founder, Sombrero Apps Company
Patrick White
Patrick White
SF Software Entrepreneur, CEO @BitwavePlatform (Crypto Accounting) Angel investor, bitcoin fan. Former @Synata, @Cisco, @Microsoft
Rafael Casas
Rafael Casas
Vice President at @BitwavePlatform 🌊 | Member of @WallStreetBTC | @Oracle, @Netsuite, @SageGroupPLC alum
SuiteWorld #3: The Debits and Credits of Crypto
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