Bitwave Looks to Ease Accounting Complexities That Arise From Enterprise Adoption of NFTs
In an interview conducted at the NFT.NYC conference in New York, David Berlind engages in a conversation with Amy Kalnoki, the COO and co-founder of Bitwave. Bitwave is essentially an accounting solution that bridges the gap between an organization's traditional financial recordkeeping systems (e.g., NetSuite, Quickbooks, etc.) and its implementations of blockchain. The net effect, Kalnoki claims, is an automated consolidation of all financials (fiat and cryptocurrency) into one single source of truth in a way that's designed to simplify both financial recordkeeping and tax compliance. This arrangement overcomes the inability of the traditional financial systems to cope with the complexities of cryptocurrency recordkeeping.
Creating a single source of truth when public blockchains are involved is a highly nuanced process. Different organizations engage with different public blockchains for a variety of applications that involve different financial patterns. For example, whereas some organizations transact in certain cryptocurrencies as a part of their e-commerce workflows, other organizations rely on a public blockchain for non-payment-related applications that require crypto-based payment of a blockchain's service fees. In those and other use cases, organizations end up keeping some amount of crypto in their treasuries, and the tax implications connected to that activity are non-trivial. According to Kalnoki, it's not just fungible token activity that businesses must keep an eye on. Now, with businesses increasingly discovering the transformative power of non-fungible tokens (NFTs) to drive new or improved business outcomes – Kalnoki cites ticketing and gaming as two such applications – trying to track all blockchain-related financials using extemporaneous methods is not an option (which explains why Kalnoki was speaking at a conference about NFTs).
The conversation shifts to regulatory challenges, focusing on IRS regulation 6050I, which aims to treat crypto transactions over $10,000 as cash equivalents, necessitating detailed reporting. It's a rare example of where a small shred of regulatory clarity exists such that businesses (and solution providers like Bitwave) can work with blockchain in observance of certain legal guardrails. But a dearth of such regulatory clarity is still problematic for most American businesses. As the gears of blockchain law- and policy-making have essentially ground to a halt in Washington, DC, organizations are holding, back on their blockchain applications for fear of waking up one morning on the wrong side of the law. Kalnoki acknowledges the need for more clarity in order to foster compliance and, ultimately, innovation.
Finally, Kalnoki invites viewers to attend Bitwave's Enterprise Digital Assets Summit in Nashville (July 2024), where the conversation will address the challenges and solutions to the business adoption of blockchain amid regulatory uncertainty.
(The full-text transcript appears below.)
Published:April 11, 2024
13 min read
Audio-Only Podcast
Full-text transcript of David Berlind's Interview with Amy Kalnoki, COO and Co-founder of Bitwave
David Berlind: Today is April 4th, 2024. I'm David Berlind, and this is the Blockchain Journal podcast coming to you from NFT.NYC, [which is] a big blockchain event taking place on the west side of Manhattan at the Jacob Javits Center. [There is] a lot of conversation going on about NFTs – how to be successful with them, the implications of them – and one of the people that's here and has been a speaker today is Amy Kalnoki. She's the COO and the co-founder of Bitwave. I'm not going to try to describe what Bitwave is. First, thanks very much for joining us on the Blockchain Journal podcast.
Amy Kalnoki: You're welcome. I'm really excited to be here.
Berlind: For those of you who want to connect with Amy after you watch this video, at the end of the video, we'll throw some QR codes up where you can find her on social media. We'll also have QR codes for BlockchainJournal.com and [on] our YouTube channel and so on. So stay tuned for that.
But meanwhile, let's first remind our audience — because I've interviewed Pat White a few times — what Bitwave is.
Kalnoki: Yeah, Bitwave is a digital asset finance platform. And what we mean by that is that it's a full tool for businesses that are transacting in crypto due to its bookkeeping, tax tracking, and revenue recognition. Basically, it's everything the back office needs to keep good financial records when they're transacting in digital assets like crypto or NFTs.
Berlind: When you say transacting, there are some companies... I want to make sure we get down to what we mean by transacting, because we're not necessarily just talking about companies that are accepting crypto payments. You could be a company, for example, that has come up with a really cool, innovative application that runs on blockchain, and you have to pay the chain fees of whatever blockchain you're running on in crypto. That is technically transacting in crypto, right?
Kalnoki: Absolutely. Absolutely. That would be an expense. We work with a lot of companies like that, that are developing on the blockchain, and their developers have the kind of gas fees or whatever it is, and they take those as an expense. And so, you have to track that. If you're holding any sort of crypto to enable development on the blockchain, that can go up and down in value. And so, you want to be doing gain/loss reporting and things like that on anything that your company is holding.
Berlind: [It's] very tricky. So, Bitwave — I didn't expect Bitwave to be at an NFT event, so why is Bitwave here?
Kalnoki: Any business can get into NFTs. People are using it for ticketing, they're using it... Web3 gaming has been a big topic this year. A lot of the booths downstairs in the Expo Hall are focusing on blockchain and Web3 gaming. I think that's a really great business use case. It's [a] high volume of micro-transactions or treasuring tokens on behalf of players.
You know, games ultimately are a business, and so it's just a perfect use case. And so I think a lot more businesses will start to transact in crypto and digital assets in general, and one of the ways they can engage is through NFTs. And I still think that meaningful brand engagement can happen via NFTs. It's a great way to connect with potential customers and things like that. And so, we're really here to help enable businesses to feel confident when they start adding NFTs, because they have to do those bookkeeping and tax tracking and rev rec [revenue recognition] and all the things I mentioned at the beginning. And so, we want to enable enterprises to feel confident when they enter into this space that they still can meet their financial reporting duties.
Berlind: You want those enterprises to be focused on how blockchain and NFTs can add value to their business proposition, whatever that may be. They shouldn't be thinking about how to keep these books extemporaneously in a way that at the end of the year, they could be running afoul of some regulation, or they could get a knock on the door by a bunch of blue coats or the IRS or something like that.
Kalnoki: Exactly, yeah. That's exactly what we're about. So, we don't want the finance or accounting team or the ops team to throw up the red flag and be like, "No, no, no! You can't do this cool NFT project. You can't add this token or develop this app on the blockchain because we can't do our books."
That would be the... That's the worst thing, and that's what we're here to solve: that problem, so that people are able to be creative and develop on the blockchain or add a cool NFT project if that's what they want to do for their business and not worry that they can't meet their financial reporting duties.
Berlind: And, right, what Bitwave does, if I'm not mistaken, is you actually integrate with the existing financial systems like Oracle or whatever, NetSuite, etc. That way, you don't have to launch a whole brand-new system. You just go and use Bitwave and that will bridge all of this crypto activity into the existing financials in a way that you have a single source of truth.
Kalnoki: Correct. So we sit right between the blockchain and all the sources of digital asset data that a company has – wallets, exchange accounts, custodial accounts – we sync that data into Bitwave, give you the workflow, kind of tools, reports, things like that to do the work you have to do, and then we push that into whatever your existing fiat accounting solution is, like a NetSuite or a QuickBooks or a Workday or something like that. It's actually a two-way sync. So, you can bring in your chart of accounts, into Bitwave, match that with your blockchain data, and then reconcile that all back into your main chart of account.
Berlind: Oh, perfect. So, that's like a bit of an e-commerce where you are accepting crypto payments.
I was researching before I got in the interview. Yeah, I've spoken to Pat White a couple of times and trying to look for things that are new. And I see that one of the things you're talking about is what this [IRC Section] 6050I regulation is, why that's so important for companies to take a closer look at, and how actually to take advantage of the tax code. So, why don't we talk a little bit about that?
Kalnoki: Yeah, I think the 6050I is one of the most interesting cases. It was supposed to roll out at the turn of 2024.
Berlind: Is this... First, is it an IRS? What is it?
Kalnoki: So, 6050I is an IRS tax code. It's basically the 10K cash reporting rule. And so, in 1984, the IRS said if you do any sort of business trade activity for more than 10K in cash or cash equivalent, you have to fill out this form, 8300, which reports your name, social security number, a lot of information. So, if you were to go buy a car from a car dealership today in straight-up cash, they would file this form, and the thought process it's like [the] anti-money laundering, stopping financial crimes part of the Bank Secrecy Act (BSA) [also known as the Currency and Foreign Transactions Reporting Act] because it's maybe potentially shady to just be like walking around with a fat stack of cash. But, just this part of the infrastructure bill that was passed by Biden a few years ago during the [COVID-19] pandemic put the provision that they were going to consider crypto a cash equivalent. And so, any crypto transaction [of] more than 10K would be subject to rule 6050I and the 8300 form. And basically, what happened is, January hit, and the industry just threw their hands up, and the IRS, too, was like, this is untenable. People do not physically have the ability to know the name, address, social security number of someone who sends them an airdrop or if someone who sells them an NFT on OpenSea or – there are a lot of really very normal – [also,] mining rewards – normal type blockchain interactions that are more than $10,000 in value, where you don't necessarily have that issue.
And actually, Coin Center, if you know them, they're that group out of DC that does a lot of lawsuits and filing and advocacy. Basically, this is unreasonable to expect individuals to act like banks and maintain very important privacy-related details on someone else who they're buying an NFT from. And so, the definition was so broad and so... just basically unachievable for people that the IRS kind of was like, "Alright, pause. Time out. So, you're not actually subject to 6050I yet, while additional clarification and regulation is coming out." But, I mean, I think the community is going to really have to think about are we going to include these type[s] of details in airdrops? Are we going to have W-9s posted from blockchain foundations? We're going to have to get some information in order to comply with this, or it's going to really stifle a lot of the creativity and development on the blockchain.
Berlind: It's stifling innovation, because this is exactly... This sort of shifting regulatory perimeter – and I stole that phrase from Elizabeth Carpenter, who's the COO at Circle – is this exact sort of thing that prevents enterprises from diving into blockchain, because they have chief risk officers, general counsel, those type[s] of people who say, like a "Full stop. We just don't even know where this is heading, and we do not want to wake up one morning, six months from now, and find out that we're in the headlines for breaking the law or something like that." So, this is... How long do you think before we get some clarity around that?
Kalnoki: I mean, I wish I had a crystal ball, and I knew because I really do think it would encourage enterprises and financial institutions to feel more confident getting into the space because, like you said, no one wants to break the law intentionally. That's not what businesses are about. And so... I mean, most, unless someone's committing fraud, right? But most businesses want to follow regulations and have teams, like you said, on board. I wish we knew the timeframe in which we would get this clarity or at least get v[ersion] 1 of the clarity and then be open that things might change in the future. Just kicking the can perpetually down the road and leaving people in this state of limbo to try the best, to their ability, to interpret regulations just doesn't seem like a smart policy.
Berlind: Well, you know, some people in government say it's not our job to drive innovation, but we do see where these regulations are firming up in other jurisdictions, and then you see the innovation taking place in those jurisdictions. What I mean by jurisdictions is, internationally, like in Europe or Singapore or Dubai, any one of these other places that are "crypto-friendly", that's where companies are going and creating this innovation. Meanwhile, the US is kind of falling behind. There's a part B, though, to what I saw in your post, which is how to take advantage of the tax code. What did you mean by that?
Kalnoki: Well, yeah, so that was the session today. It was just helping people clarify: what is an expense? What are you able to track as a business expense – like gas fees, or minting fees, and things like that – for NFT creators? And then, what is revenue? And really smart ways to track via wallet structure. So, one thing we talk a lot about at Bitwave is something we call wallet hygiene, which is being really thoughtful and methodical about how you're setting up your businesses' accounts, your wallet accounts, so that all expenses are coming out of one, or all revenue from a specific NFT project is all coming into one wallet, so that you can more use a tool like Bitwave to just select all the transactions in this wallet and mark those all as revenue, or mark those all as expenses. So really, just understanding what is a business expense when you are developing on the blockchain or something like that.
Berlind: The timing of your talk is pretty timely given that we are, let me see, 11 days away from April 15th which in the United States is the day that everybody's taxes are due. And, I think one of the challenges there, people are probably listening to this saying, "Where's the personal tool for this?" Like the Quicken of this, because you guys are developing for the enterprise. I just went through a whole thing with my tax accountant where I was asked all sorts of questions, and I just was like, "I don't even know." Like, I have a lot of information in a spreadsheet, different tabs, screenshots, [and] all kinds of things. But, in general, the different parties that I'm dealing with, like the exchanges, don't make it really easy to do what you just talked about, which is like really kind of tightly tracked: "When did this get purchased? What was the value then? When did it get sold? First in, first out" kind of stuff. So, do you see a need for a personal tool that's a lot like Bitwave so that consumers can actually have the same benefits of reporting that you're giving to enterprises?
Kalnoki: Yeah, I mean, absolutely, especially if you're doing something complicated, like restaking and DeFi. But this kind of software is...
Berlind: That was a question that I got asked was, "Are you doing any staking?" I was like, "Uhhhhh?"
Kalnoki: Let me get into that later. But for us, this software is really complicated. It's a lot of data, and that's why we focus on developing for enterprises because it is, like, it's expensive. It's hard engineering problems to solve, and so for us, focusing on the enterprises allows us to really provide the excellent high-quality financial data that businesses need, and it's really hard to do that for something that is just $30 a year kind of Turbo Tax thing, and it's not where Bitwave is focused. Our expertise, my co-founder Pat, you mentioned, and I, our background is enterprise software and really thinking and developing for that and solving those tough meaty engineering problems 'cause it's really a big data problem, moving the amount of data that you're talking about. It breaks down really quickly if you try to do it on a spreadsheet. You need highly specialized software, that's reliable and to the standard of financial reporting requirements. And so, that's what we focus on. I don't really have a recommendation for a personal tool. It's hard. It's hard to solve this problem. Most businesses usually defer until October on their taxes, so we see most people kind of doing their work a little bit later in the year, but yeah, April 15th is coming up.
Berlind: Yeah, it sure is. So, one last question before I let you go. I know you're busy. You've got... For people who want to have more conversation about this very topic, you guys have a cool event coming up. I think it's called the Enterprise Digital Assets Summit. It's in a city that I love, Nashville, and I've never been there. I just love everything about it, what I hear about it. I play guitar, so... Tell us a little bit about that and how people can find out more.
Kalnoki: Absolutely, so go to edas.live, and it's coming up the day before the Bitcoin conference in Nashville, Tennessee, this summer in July, and it's a one-day summit that focuses on on-chain accounting, finance, compliance, basically all the things that we're passionate about at Bitwave. We have a lot of our accounting partners and experts in the industry come and speak on the latest on policy and accounting and finance, and how to run a business when you are transacting in any way in crypto. And it's our third annual event. It's grown every single year. We're really excited to have everyone. So [if] you'll please come out for a one-day kind of really business-focused, serious conversations about digital assets and on-chain accounting and finance.
Berlind: Great, well, Amy Kalnoki, COO and co-founder of Bitwave. Thanks for joining us on the Blockchain Journal podcast.
Kalnoki: Thank you so much.
Berlind: Okay, well, as I said, if you want to connect with Amy or Bitwave, we're going to throw some QR codes up at the end of the video here.
Thanks very much for joining us. If you want to find our content, more of these videos, you can go to youtube.com/@blockchainjournal, or you can go to our website, BlockchainJournal.com, and that's where you'll find all of my videos from NFT.NYC, plus plenty of other interviews that I've done, and also the full-text transcript of all of those videos will be there as well.
So, thanks for joining us, and we'll see you at the next video.