Part 2: Building an automated crypto accounting process

This article is Part 2 of Loop Crypto's web3 Financial Operations blog series. The author is Mackenzie Patel, founding partner of Hash Basis, a crypto native accounting firm.

Introduction

Earlier this year, Loop Crypto came to Hash Basis for assistance building out its crypto accounting operations. As a payments company, the Loop team knew it was critical to build accounting operations that could scale cost-effectively. At the time, they were losing days trying to reconcile their crypto transactions and spending a significant amount of money for manual accountant support.

Loop Crypto is the Stripe for web3. The company is on a mission to make it simple for businesses and projects to get paid and make payments in crypto. Founded by crypto veterans Eleni Steinman and Shane van Coller, Loop was incubated based on a pain point that Eleni and Shane experienced first-hand at another startup: crypto payments are difficult for businesses and projects to manage, especially when those payments are recurring.

Since its beginning in late 2021, Loop has developed a full suite of payment solutions now used by leading web3 companies, DAOs, and projects. With the maturation of the web3 space over the last few years, financial operations have become a critical topic. As a payments provider, Loop is a key piece of the financial operations stack and handles a large number of on-chain transactions across several networks: Ethereum, Optimism, Arbitrum, Polygon, Base, and BNB Smart Chain.

Loop values being compliant with US laws and doing things “by the book” so they can be upstanding crypto citizens (even in this era of regulation by enforcement 🙂). The team came to Hash Basis to help design and implement their accounting infrastructure to handle their current crypto transaction volume and plan for the future as they scale. Crypto transactions are a key component of Loop’s revenue and expenses, so they needed to accurately capture their crypto transactions to close their books monthly and prepare for their annual tax filing with the IRS.

Under current US GAAP (Generally Accepted Accounting Principles) rules, digital assets are treated as intangible assets. As Loop takes in and spends crypto, it needs to track the value of this crypto on its balance sheet. As we will dive into shortly, the nature of Loop’s business meant it had a few particular challenges that Hash Basis partnered with them to solve during the implementation.

The problem

As Loop looked to set up its accounting procedures, the team faced three particular challenges common to other startups and projects operating in web3. The first challenge was the number of crypto wallets Loop was using for its business and therefore needed to track for accounting purposes. As a startup building and iterating on its product, the Loop team was spinning up numerous Metamask wallets and multisigs for testing and product development. Additionally, Loop’s smart contract architecture necessitated the use of numerous new wallets for every new chain they deployed on.

The second issue was Loop’s need for real-time visibility into its wallet balances and activity. Loop’s business hinges on facilitating crypto payments. It needs to monitor activity with numerous smart contracts and ensure crypto payments are processing as expected. In addition, a portion of Loop’s expenses are also on chain, so the team wanted to be able to monitor which service providers it was paying and ensure that its wallets had sufficient balances for those payments.

The final challenge was time. As a web3 startup rapidly iterating and scaling, the team did not have hours or days to spend on transaction reconciliation every month. When we first met Loop, the Head of Operations was losing over a day every month just tracking down and reconciling crypto transactions. For a startup team like Loop, that was not sustainable.

The process

The Loop team knew it needed to do a little work internally before it engaged with an outside firm for help. The team started by building a robust wallet management framework. This ensured that each wallet was only used for one particular use case, which was documented in a central repository. Corporate wallet management is a whole topic in itself, which we will cover in a future article.

Loop also went shopping for a subledger solution to track the movement and value of its crypto assets. A crypto subledger is essentially a big database that houses all on-chain activity related to a predefined set of wallet addresses. You can read more about subledgers and why you might need one here. After testing several solutions, Loop selected Integral. They found Integral’s user interface and rule automation (more on this below 🙂) made it stand out from the pack and thought it would provide a solid baseline for building its crypto accounting operations.

With those pieces in place, Loop decided to bring in an expert to tie all the pieces together and implement its processes right from the start. 

Enter Hash Basis!

Hash Basis is a crypto-native accounting firm based in San Francisco. We empower crypto companies to implement crypto subledgers quickly and accurately so that month-end close is less painful. Our specialty is data cleanup and bug squashing. We love to get “into the weeds” to piece together what you did on-chain. We also offer crypto accounting, crypto tax, and fiat accounting services (i.e. we can help you get your full accounting stack - fiat & crypto - off the ground). 

We have a special recipe for getting subledgers implemented successfully👩‍🍳:

  • Reconciliation of all data sources. - Is the data in your subledger clean and reflective of what’s actually happening on the blockchain?

  • Wallet completeness checks. - It takes about two seconds to spin up a new Metamask, so it’s imperative that all company wallet addresses are accounted for and inputted into the subledger.

  • Determine the pricing source. - Is an aggregator tool like Coingecko sufficient or do you need principal market pricing (i.e. sourcing pricing from an accessible market with the most volume)?

  • What’s your token flow? - We recommend making a diagram of your token activity so you know where key processes (and therefore journal entries) happen. Example token flow: earn NFT royalties on OpenSea into deployer address, periodically send royalties into Fireblocks account, offramp ETH to USD via Kraken, deposit USD into Brex account.

We can summarize the implementation process blueprint like this: pick the subledger that’s best for your company’s activities, create a thorough wallet management framework, and partner with crypto accountants to bring the project to the finish line. Once Integral was set up for Loop, the crypto accounting was simplified greatly and (dare we say it) fun!

The solution

Implementation of rules

As we worked to implement Loop using Integral’s subledger platform, we knew that automation would be critical. Collaborating with the Loop team, we were able to design a set of custom rules that would automatically classify almost all of their transactions to accounts previously created in their Quickbooks Chart of Accounts.

Currently, only six rules are needed to capture the majority of the activity for Loop. This activity mainly consists of gas fees, testing fees, and transaction revenue. These transaction types are high volume and recurring in nature, which makes them perfect candidates for a rule.

The Integral rules engine is robust and reads just like a programming “IF” statement. The first piece of the rule specifies the condition (i.e. if wallet address = 0x123… and token = USDC), while the second piece defines the action for any transaction that meets the parameters (i.e. categorize transaction as revenue). Gas fees can also be categorized into separate accounts, which was a big bonus for Loop’s use case (more on that later).

To speed up the automation even more, there’s a checkbox for “automatically mark as ready to sync.” When enabled, transactions with this label skip the review bucket and are ready to be synced without any additional action. While we haven’t used this feature at Loop yet, it’s useful for transactions you know are consistently categorized correctly each month.

Simplified reconciliation and push to Quickbooks

What used to eat up eight to twelve hours now only takes about one hour each month! Since the rules capture all of the recurring transactions, Hash Basis mostly works with those transactions that “fall out” and don’t have a category automatically assigned. One-off payments, bridging assets, and fiat transfers from exchanges are some examples. We have real-time visibility into all wallet activity and can easily identify outlying transactions throughout the month as well.

Note: Integral has a wonderful feature that lets you ignore spam tokens as a global setting - this eliminates unnecessary research since spam tokens don’t even appear in the main transaction tab.

To streamline month-end even more, the Head of Operations at Loop will add notes in the memo field for any uncategorized transactions. This way, Hash Basis can categorize on the fly and avoid spending hours on Etherscan.

Once notes are added and Hash Basis has done the final review, there are a few steps to close out the books:

  • Move all transactions from “Categorized” to “Ready to Sync”

  • Download the Account Transactions (General Ledger), Schedule of Dispositions and Closing Positions report. Before syncing any transactions into Quickbooks (QBO), Hash Basis runs these reports and creates a view of what the books should look like once everything syncs in. This helps prevent and identify any errors that occur. Manual entries around bridging are also calculated since Integral doesn’t support this transaction type yet.

  • Sync all transactions into QBO and re-run the trial balance to make sure it ties to reports.

And with that, month-end is typically completed within ten business days at the latest.

Detailed reporting

As mentioned earlier, breaking out gas fees by customer is an important metric for Loop (and any other crypto company that deploys smart contracts). Integral can provide instant metrics around the gas fees consumed by each customer through their Contact feature. In the UI, the accountant can label the “To” and “From” addresses to see how crypto flows between parties. These contacts drop into the reporting so pivoting based on contact and gas fee becomes a two-second exercise.

The outcome

After 12 hours of implementation time and with two monthly closes under our belt, Loop’s crypto books are now in a steady state:

  • Rule automation in Integral handles 98%+ of all transactions

  • Crypto reconciliation takes ~1 hour each month

  • Detailed reporting allows Loop to track expenses at the client level

Overall, onramping Loop to Integral has provided better financial insights and reduced the workload associated with month-end. And with accounting standards rapidly changing in the US, it’s great to be on a solution that’s flexible and can scale as Loop continues to grow.

© Loop Crypto 2024. All rights reserved.

© Loop Crypto 2024. All rights reserved.

© Loop Crypto 2024. All rights reserved.