This article first appeared in ICAS’ CA magazine.
Lee Wilson CA, Head of Finance at Elliptic, is helping some of business’s biggest players get to grips with cryptocurrency. He gives Ryan Herman a whistle-stop tour of an industry set to influence all our lives.
One of the more surprising aspects of the pandemic has been the number of sectors that have thrived during the past 18 months. The one that has perhaps generated the most headlines along the way – at least once the universal overnight discovery of Zoom and other video-conferencing tools subsided – is cryptocurrency. Many observers had assumed digital assets such as bitcoin or ether, the currency associated with Ethereum, would be recession-proof, but without a market-wide shock since their boom in popularity, there was no way to prove it.
“Tragically, it took Covid to put theory to the test,” says Lee Wilson CA, Head of Finance for crypto compliance and analytics firm, Elliptic. “There was always a question mark about how quickly crypto would gain mainstream adoption, too, by which I mean traditional financial institutions. They are slow-moving beasts at the best of times because of regulation and their sheer size.”
The resilience of cryptocurrency during the pandemic has sped that along. In March 2021, Morgan Stanley became the first major US bank to offer its wealthier clients access to bitcoin funds. The market cap for all cryptocurrencies now stands at around $1.5trn (£1.08trn), of which bitcoin represents about half. The number of people worldwide invested in digital assets is now estimated to exceed 100 million.
But to the uninitiated, cryptocurrency can resemble a minefield. Enter Elliptic: the London-based blockchain analyst works to demystify the market, providing analysis and training to businesses looking to improve their understanding and performance in crypto. The starting point is always to explain the four different types of assets.
“In the first section, you have assets like bitcoin, which will be used as a store of value,” says Wilson. “They’re designed to be extremely robust, and long-lasting. You can transfer their value more easily than a very large bank payment, but not as easily as something like a Visa card transaction. And that’s what makes it more of a store of value than a currency.
“Then you’ve got assets designed to act more like currencies, now dominated by stablecoins. The idea is that the price fluctuates as little as possible, or at least in line with more traditional fiat currencies, such as the dollar. There are stablecoin assets such as tether and diem, the Facebook-conceived digital currency yet to come to market.
“Then you’ve got platforms, such as Ethereum and Polkadot, that enable people to build applications, and with which you’re effectively buying a bit of exposure to the success of that platform.
“Finally, you’ve got the applications that are built on platforms that are decentralised finance apps, of which Uniswap is probably the best known. These decentralised apps are the things that are really shaking up the finance world. They are seeking to provide an alternative to, if not replace, some of the age-old, traditional centralised finance functions such as exchanges, lending, banking and insurance.”
Most of the money in cryptocurrency is now controlled by the world’s biggest financial institutions and investors. But the market has grown so quickly that it has risked outpacing the knowledge and skills required for informed decision making. Fortunately, Elliptic is there to fill that knowledge gap.
“The big traditional financial institutions now have significant direct or indirect exposure in digital assets. So they require the services of companies such as Elliptic to manage that exposure responsibly,” says Wilson.
“Elliptic enables customers to screen specific transactions, assets or entities to assess the level of risk that may be associated with money laundering or illicit activities. We have very large customers with huge volumes – they include Santander, Coinbase and Revolut – and what’s important to them is being able to take those actions and decisions at scale.”
One of the biggest concerns around cryptocurrencies is that by bypassing the traditional routes of making financial transactions, they can be used to transfer criminal assets. The Metropolitan Police seized £180m worth of bitcoin in July 2021 as part of a money-laundering investigation. Elliptic has software tools that allow financial institutions to monitor their clients’ crypto activity, as the history of those transactions will be stored on blockchain.
Wilson adds, “We also provide training services. We run crypto-compliance workshops, both introductory and advanced, as well as bespoke training. We partnered with a leading Canadian financial crime training provider, ManchesterCF, to create the first university-recognised crypto-asset compliance certification at the University of New Haven in the US. It’s all about helping market entrants and compliance professionals get to grips with the ins and outs of crypto.”
Invented in 2008 by “Satoshi Nakamoto” to create a peer-to-peer method of financial transaction – though no one knows who Nakamoto is or if “he” even exists. In 2010, a hungry programmer spent 10,000 bitcoins on two Papa John’s pizzas, a sum that could today buy £279m worth. Critics say putting each coin into circulation is a complex business, consuming vast amounts of power and contributing to global warming.
Created as a meme in 2013, dogecoin satirised the hype around the fledgling cryptocurrency market, in which people invested fortunes without due diligence. Now it is being traded at around 20¢ a coin and there are 129 billion in circulation, even though co-founder Jackson Palmer has disowned it. Its price often follows the whims of Tesla founder Elon Musk’s tweets.
The third-largest cryptocurrency and a stablecoin, linked to – but not, as was falsely claimed by its owners, backed by – the dollar. In February, Tether, along with trading platform exchange Bitfinex, was fined $18.5m after the New York Attorney General accused it of covering up huge financial losses. Its executives are still under threat of investigation for alleged bank fraud when it was launched in 2014.
Musk expressed concerns recently about the environmental impact of bitcoin and Ethereum’s ether. Polkadot, launched in 2020 by the latter’s co-founder Gavin Wood, is seen as an eco-friendly alternative because it holds coins instead of creating them. It first traded at around 5¢ but surged to almost $45 in May before falling back to around half that, though it is still among the top 10 currencies by market capitalisation.
On 5 August, Ethereum 2.0 was rolled out. This will do away with “mining” (the energy-consuming process of creating coins) and instead rely on validators, verifying every transaction and rewarded for their work with ether coins. Will it be an eco-friendly, game-changer? Watch this space.
Tools of the trade
Wilson’s responsibilities as Head of Finance span the breadth of Elliptic’s activities, covering both the financial reporting and control and compliance side as well as the commercials. He joined the business at the end of 2018, prior to which there was still an element of the Wild West about the market. Hundreds of currencies were being launched; many would disappear within a matter of months, even weeks. But the market’s overall growth rate, as well as that of Elliptic, was enough to convince Wilson that this was an opportunity that was too good to be passed up.
One could say Wilson was born to work with figures. His father, Mervyn, ran several successful bookmaking firms, including Surrey Racing, the first independent bookie to be listed on the London Stock Exchange. Wilson’s interest in business led him to undertake a degree in accounting and economics at the University of Bristol, before deciding to become a CA.
“I joined EY, which had a very innovative and excellent rotation programme around its transaction advisory services division,” he says. “That gave me a lot of commercial experience while qualifying to become a CA with ICAS. It was quite unusual, in the sense that a lot of people would go down the audit route. But that rotation gave me exposure to the corporate restructuring side of business early on in my career. It meant that I was covering areas such as valuations, M&A, advisory and due diligence.”
For CAs looking to move into digital assets, Wilson says that the very nature of the qualification offers a head-start: “Being a CA provides you with the skills required to approach any new industry. Because you have a fundamental understanding of the commercial aspects of a business, through both the qualification and your experience, you tend to get your head around the specific characteristics of a new product or asset class – the margins involved, the ratios, and quite a few of the nuances – very quickly.
“The skills you need to approach crypto revolve around the ability to research, listen and home in on what matters because you’re almost always going to be short of time. There’s just an incredible amount going on in the market, but there’s also so much noise. As a result, it’s a real challenge doing the day job, keeping up with the developments, having time with your family and friends and any other outside interests.”
He adds: “There are many different roles within this industry that you can go down as a CA. Increasingly, as CAs know, these days the CFO is expected to be the right-hand person to the CEO. Understanding strategy and operations and the knowledge of what drives performance across every team in the company are important and are pretty much expected of you. The CFO remit is broader than it’s ever been.”
And for CAs looking to upskill, Wilson is unequivocal in his view that digital assets are the future of finance. Indeed, one of the key trends of the past 18 months is how state banks and jurisdictions have started introducing their own central bank digital currencies (CBDCs). This includes China, which, earlier this year, proposed a set of guidelines for how CBDCs could be used and monitored around the world. It has already trialled the e-yuan in several major cities, including Shenzhen, Chengdu and Suzhou.
Looking to the future, Wilson concludes: “The regulatory environment is still in its infancy, and you could get either more or less restrictive regulations being introduced. But there’s no way that we won’t all be using digital assets in the future.”
Catch up with the ICAS and Robert Gordon University webinar, “Accounting for Crypto”