4 Key Internal Control Challenges for Cryptocurrency Mining Operations– March 17, 2022 by Will Coleman

Cryptocurrency mining refers to the process of participating in a consensus mechanism that includes Proof of Work components. Generally, this is done to collect mining rewards from the network. In other words, cryptocurrency mining is the process of contributing computing power to the network in exchange for some sort of reward. When mining is done on a large scale, it provides a vehicle that allows various types of investors to participate and, consequently, share in the rewards.

Of course, investors will need some assurance their investment is being handled appropriately. They are likely to ask about the proper use of resources, accuracy of accounting, and security and benchmarking, to name a few. Answering and alleviating these concerns require the creation of suitable controls. While we can’t cover all areas in one short article, the following provides initial food for thought.

1. Proper Use of Resources

Investors will want to know that the infrastructure they are funding is being used for their benefit and not redirected. That means resources need to be accounted for — from purchase and deployment through operation. Most operations do a decent job of tracking purchasing, but time between purchasing equipment and operations deployment tends to be a bit less well documented and tracked.

Additionally, a permanent record of uptime and interruptions should be maintained once resources are deployed operationally. Such records should ideally contain verifiable, accurate information on the machine configuration, including items such as machine identity, the chain being mined, pool identity (if relevant), MAC and IP address, hashes of configuration, etc. This allows auditors or other parties to verify operations after the fact.

2. Accuracy of Accounting

The controls around accounting accuracy are a bit more traditional, but there are still some challenges. One of the most obvious is volatility of digital asset pricing. Any asset that is mined will have a specific value at the time it is mined, but it is likely to change before it’s converted to fiat currency. This requires tracking not only the value at the point of mining reward, but then also the gain or loss when the asset is exchanged. The accounting system being used will determine how easy or difficult that task will be. There are also some issues related to fixed assets and the volatility of value of mining rigs, but we’ll leave that for another article.

3. Security

Both external threats as well as controls around internal misappropriation need to be considered. In addition to controls around misappropriation, digital assets require careful private key management to reduce the risk of losing access to the assets. Another area of consideration is the security of the log artifacts, which are the records that would be relied upon in any sort of audit or review. Today’s investors are savvy and recognize that a SOC2 report, which only covers the hosting facility, does not provide assurance over the operational and financial controls of the business housed there. The entire business process needs to be secured.

4. Benchmarking

Benchmarking provides insight to management on returns versus theoretical maximums. In other words, it allows management to easily see if operations are becoming more or less efficient over time. Benchmarking also allows investors and potential investors to gain an understanding of how efficiently their funds are being deployed. While one can simply look at gross return, that doesn’t always give the whole story, particularly when comparing the inherent risks of operations in various jurisdictions or when comparing investments in different protocols.

Use this information as a starting point to better understand and closely consider the complexities of controls around mining operations — and how mastering them can benefit your operations in the long term.

Contact Will Coleman at will.coleman@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.