The recent LUNA crash calls for the need for clear, consistent, and iterative audits for all crypto assets, especially stablecoins, according to Wall Street Blockchain Alliance advisory board chair Sean Stein Smith.
Specifically, the spectacular failure of the Terra stablecoin, alongside the Luna governance token […] reinforced the need and importance of cryptoassets to undergo consistent, comparable, and objective audits.
He recently wrote on Forbes.
What is meant by audit in the crypto space?
Smith started by emphasizing the need for defining what a crypto audit is before setting the rules for an auditory process, which can drastically differ from one project to another.
He argued that audit reports should not be a detailed review of every transaction nor act as a guarantee of financial success.
Instead, audits should show whether the financial data is reported in compliance with the accounting standards appropriate for the project in question.
Three aspects of crypto audits
For a crypto audit to be meaningful for the investors and regulators, it needs to be clear in what it entails, be consistent across the market, and be iterative.
Clarity
Every crypto asset can be different in its fundamental characteristics, which require them to decide on their priorities for auditing processes to attract investors and increase the project’s valuation.
For example, a stablecoin audit could focus on confirming the underlying assets and reserves, while a DeFi project might choose to focus on interoperability and security.
Consistency
Despite their fundamental differences, Smith also mentioned the need for consistent and authoritative accounting standards set expressly for crypto assets. He wrote:
“Cryptoassets may indeed represent novel and innovative financial instruments, but ultimately must answer to the same law of economics as any other asset class.”
He also noted:
“[audit]standards must retain the flexibility necessary to navigate such a fast moving space.”
Smith acknowledged that the Financial Accounting Standards Board (FASB) has agreed to start working on some aspects of cryptoasset audits. While referring to these initial steps as “encouraging,” Smith warned that these standards must be implemented by regulators in the coming years.
Iteration
Finally, Smith concluded by mentioning the continuous and rapid improvement of the crypto space, which could easily pace out audit regulations.
Smith suggests that the best way to prevent such situations would be holding audits regularly, which can also signal whether the standards are still comprehensive enough to cover all aspects of the projects.
He finalized by saying:
“Cryptoassets have arrived, are permeating institutions and countries across the globe, and continue to drive market conversations; it is time for the accounting and audit profession to keep pace with these innovations.”