Q&A: Bringing Automation to Security Token Tax And Accounting

Posted by Polymath

Digital assets, and security tokens in particular, can present major challenges when it comes to tax and accounting. Organizations interested in the benefits of tokenizing securities may be put off by the idea that it adds complexity to tasks like tax calculations and reporting. In order to be fully embraced, security tokens need to streamline and automate capital markets, rather than introduce new problems or add material complexity where there shouldn’t be any.

Polymath sat down with Geeth Jayaweera, Chief Executive Officer of Cryptoworth, to talk about how businesses can simplify digital portfolio management, why tax and accounting for digital assets requires an automated approach, and what’s needed for greater enterprise adoption of security tokens. Cryptoworth is a member of the Polymath Service Provider Ecosystem.

Polymath: Why is it important for market participants to have a birds-eye view of all their digital assets in one interface?

Geeth Jayaweera (Geeth): Cryptocurrencies and other digital assets are a complex asset class due to the large number of them available, each with its own architecture and underlying infrastructure. These digital assets are built in different ways and exist in different places, which means they cannot be easily consolidated. The uniqueness of each blockchain further adds to the complexity.

Organizations have a vital requirement to consolidate their financial data into a single source of truth. Often this is done using many different third-parties, which can be cumbersome and expensive and makes it very difficult for SMBs and SMEs to enter and grow this market.

We believe reducing complexity for businesses is an essential step in bringing crypto to the masses, and synchronizing digital asset management and accounting into a single view is a big piece of that.

Organizations have a vital requirement to consolidate their financial data into a single source of truth. Often this is done using many different third-parties, which can be cumbersome and expensive.

 Transaction Settlement CTAPolymath: What challenges do organizations have when it comes to tax accounting for security tokens?

Geeth: Tax accounting for security tokens is far more complicated than other tokens because of the legal implications surrounding securities laws. Tax treatment of security tokens is often impacted by three factors:

  1. Whether the security token is promising a right to shared ownership
  2. Whether it’s a structured investment vehicle (debt vehicle)
  3. Whether it’s tied to equity
In each case, there will be different tax calculations and reports required for compliance, which can be very challenging if done manually.

Polymath: Despite technological advances, a lot of accounting and reconciliation work still happens in Excel. Why is this especially problematic for digital assets?

Geeth: Tracking digital assets is not a straightforward task as the sources of data exist both publicly and privately. Some information only exists in the exchange’s database, for example. Therefore, it’s essential to use a CSV file or an automated approach—such as an API—to fetch the necessary data.

This process requires a significant level of programming, as each exchange and blockchain operates differently and so many organizations end up having to do this manually. Businesses need a solution that can scale and tackle these problems effectively and accurately.

Polymath: How do standards (like ERC 1400) help make security tokens more functional and what still needs to happen on this front?

Geeth: The standardization of the token security protocol created by Polymath provides a regulatory-driven, technically-enforced and clear set of rules and guidelines for new security token issuers to follow. With this security token standard in place, the process of creating and launching a security token is made much easier, which encourages more projects to take the security token path and ushers in greater enterprise adoption.

Geeth Jayaweera

Chief Executive Officer of Cryptoworth

Since co-founding Cryptoworth in 2017, Geeth has identified the market needs in different sectors and executed product development, business development, sales and marketing efforts in the company.

Prior to Cryptoworth, Geeth gained experience in entrepreneurship and more than 7 years of experience in the technology sector. He also previously founded a software company. Geeth has worked on projects for multiple Fortune 500 companies in multiple sectors such as healthcare, defence and energy. He graduated from Plymouth University in 2014 with a degree in Software Engineering and from Concordia University with a Masters in Software Engineering.

All views expressed or claims made above solely belong to Geeth Jayaweera  and do not reflect those of Polymath. Polymath does not endorse or recommend any product or service provided, or to be provided, by Geeth Jayaweera or Cryptoworth.

The information in this document does not purport to be complete and has not been independently verified. Polymath gives no undertaking, and is under no obligation, to update this document or provide any additional information or to correct any inaccuracies which may become apparent.

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