MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

CHAPTER I

RESEARCH TOPIC

THE IMPACT OF DIGITAL CURRENCY ON MANAGEMENT ACCOUNTING AND

FINANCE IN THE FINANCIAL MARKET IN ZIMBABWE (FROM 2019-2023)

BY

NATHANIEL GATSI

M225170

SUBMITTED TO GREAT ZIMBABWE UNIVERSITY IN PARTIAL

FULFILMENT OF THE REQUIREMENTS FOR BACHELOR OF
COMMERCE HONOURS DEGREE IN ACCOUNTING

YEAR: 2023

SUPERVISOR: MRS MANDIZVIDZA

1.0 Introduction

The aim of the study was to investigate the impact of digital currency on
management accounting and finance in the financial market in Zimbabwe. This
chapter is composed of the background of the study, statement of the problem,
research objectives, research questions, justification or significance of study,
delimitations and definition of key terms.

1.1 Background

Digital currency is an unparalleled technological advancement that has received

increasing attention from researchers, investors, financial institutions and regulators.
It is a mode of exchange that does not have a physical or tangible basis and exists
purely in an electronic form. It should not, however, be confused with electronic
money such as an online bank account, which shows the amount of cash that is held
in a specified account and is linked to a physical currency. Many businesses are now
pursuing digital currency as part of their wider financial management system, and
this should be appropriately recorded in their financial statements. Despite the rapid
increase in the amount and frequency of digital currency transactions, there is no
clear guidance from the International Accounting Standards Board (IASB). The
classification of digital currencies is a significant issue, and lack of guidance from
standard-setters affects the accounting treatment of digital currencies and
disclosures in financial statements.

The concept of digital currency was established in 2009 when the first
cryptocurrency,
Bitcoin, was made available to the public. A cryptocurrency is a transferable digital
asset which is secured by cryptography (White, 2015). Bitcoin was created by the
pseudonym Satoshi Nakamoto who in 2008 published a paper in which the idea and
technology behind Bitcoin was introduced (Marr, 2017). Digital currency was created
as a response to the financial crisis (Davis, 2011), and what was needed according
to
Nakamoto was “an electronic payment system based on cryptographic proof instead
of trust” (Nakamoto, 2008). The result was a peer-to-peer electronic network allowing
individuals to make anonymous transactions without the need for financial
intermediaries (Polasik et al., 2015)
After the publication of Nakamoto’s report in 2008, Bitcoin was made available to the
public in 2009, and the process of creating new Bitcoins and verification of
transactions
begun (Marr, 2017). However, it was not until 2010 when the digital currency was
firstly
traded, when a man purchased two pizzas for 10,000 Bitcoins. In the end of 2017,
these 10,000 Bitcoins were worth $100 million (Price, 2017). The popularity of
Bitcoin
increased during 2011, and alternative cryptocurrencies started appearing (Marr,
2017).
Since the inception of Bitcoin, the availability of unregulated cryptocurrencies has
risen
exponentially, from one digital currency to over 2000 available with varying size and
market share. The price of cryptocurrencies is known to be fluctuating, in 2013 the
price of Bitcoin reached $1000 per unit for the first time, but shortly thereafter the
price dropped to $300 leading to large losses for investors (Marr, 2017). The
invention of Bitcoin spurred the creation of several new cryptocurrencies (Lee et al.,
2018). These cryptocurrencies use similar cryptographic technologies but employ
different algorithmic designs.

Examples of other digital currencies are Litecoins, Peercoins, Dogecoin,

Counterparty, Ethereum and Ripple (Franco, 2015). Bitcoin is the first digital
currency and therefore it is the most popular example which is tied to the block chain
technology (Crosby et al, 2016). The majority of the literature about currencies uses
Bitcoins as an example cryptocurrency when explaining the functionality behind the
technology and the history of cryptocurrencies. The purposes of holding
cryptocurrencies are varying, initially one of the objectives of Bitcoin was to be used
for online payments as a form of electronic cash (Peters et al., 2015,).

Moreover, cryptocurrencies can be held as a medium of exchange, for long or short-

term investment purposes or for speculative purposes (Australian Accounting
Standards Board [AASB], 2016). Bitcoin has been traded since 2010, but its main
use has initially been for speculation, however, there has been a widespread of use
ranging from daily transactions to be used in mergers of companies (Peters et al.,
2015; Railborn & Sivitanides, 2015). In addition, cryptocurrencies are also used for
Initial Coin Offerings (ICO), which are used by start-up companies as a source of a
fast and easy way of funding as it avoids the regulated capital raising process
(Sontakke & Ghaisas, 2017).

The technology behind digital currency is based on a creation of digital value which
enables peer-to-peer transactions without a financial intermediary (Franco, 2015).
The Bitcoin network has a decentralized ledger containing the balance of every
Bitcoin
user (Franco, 2015). The users are identified by large lines of letters and numbers
and transactions are protected through a digital signature including two different
“keys”
(Crosby et al. 2016). The designated number and letter line that the users are
identified through is the public part of a cryptographic key, the private part of the key
is
only in the usage of the owner (Franco, 2015). To be able to spend money, the
owner of the cryptocurrency needs to prove his or her ownership of the private key
(Crosby et al., 2016). This enables both the buyer and seller have to their identities
encrypted and no personal information is transferred from on to the other (Murphy et
al., 2015,). With a Bitcoin transaction there is no third-party intermediary, the buyer
and seller interact directly (peer to peer), but their identities are encrypted.
Transactions do not come in the order in which they are generated, and there is a
need for a system which abolishes possible double spending of the cryptocurrencies.
The double-spend effect means that there is a danger that someone can spend the
same money any number of times (Davis, 2018). This problem was solved with a
mechanism known as the block chain technology (Crosby et al., 2016).

The block chain technology is intrinsically linked to Bitcoin and can be explained
through how Bitcoin works (Crosby et al., 2016). The block chain technology is
applicable to any digital asset transaction done online. New transactions which are
published to the Bitcoin network are periodically grouped together in a block of
recent transactions (Böhme et al., 2015). Blocks are compared with the most
recently published blocks, to make sure that unauthorized transactions have not
been added. This forms a sequence of blocks or a block chain. Transaction records
need to be practical and updated since it is the foundation of the entire Bitcoin
system. To encourage users to help, the Bitcoin system awards Bitcoins to the users
who are able to solve mathematical puzzles which are based on the pre-existing
contents of the block. When solving the puzzle, a user publishes a block which
contains a proof-of-work that a solution was fulfilled and referenced to the previous
complete block. Other users must approve the solution before continuing their work
with new block which contains new outstanding transactions. This process is called
“mining” and the users approving the solution is a “miner” (Böhme [Link]. 2015). The
innovative characteristics possessed by cryptocurrencies result in many concerns for
regulatory bodies. The main challenge for prospective regulators is where to impose
constraints (Böhme et al., 2015). According to Jacobs (2018) the legal status of
cryptocurrencies varies from country to country and is subject to frequent changes
as governments and central banks constantly study and revise their views and
opinions. Japan has one of the largest markets for Bitcoin, and the country has
accepted cryptocurrencies as legal tender. In other countries cryptocurrencies are
accepted but not viewed as legal tender, examples of such are, United Kingdom,
South Korea and
(Rooney, 2018). Furthermore, there are also countries where cryptocurrencies are
illegal, one example is China, which is one of the world’s biggest sources of
cryptocurrency mining (Reuters, 2018; Rooney, 2018).

Zimbabwe is not new to digital currencies. Mangudya (2018) noted that basically
cryptocurrencies are an electronic dollar, electronic money. Mangudya (2018)
denoted that Zimbabwe RTGS’ are basically electronic money, which is akin or
similar to a cryptocurrency so Zimbabwe are only using those as a nature but the
central bank of Zimbabwe is still studying them. Mangudya (2018) noted that the
Central bank of Zimbabwe is not well versed with cryptocurrencies. Mangudya
(2018) mentioned that cryptos are similar to RTGS’ is quite baffling and it begs the
question has the RBZ really shifted their stance. Mangudya (2018) stated that there
was a study by RBZ’s Fintech group (2018) which looked into cryptocurrencies. The
central bank (2017) categorically stated that cryptocurrencies are not welcome in
Zimbabwe. The RBZ made it clear that cryptos were endangering the public (RBZ,
2017). Mangudya (2018) mentioned that RBZ can change its decision and the RBZ
is
in an ongoing legal battle with Golix (Zimbabwe’s largest -and only- cryptocurrency
exchange) and they do not seem to be portraying a pro-crypto stance. Mangudya
(2018) noted that it would be unfair to speak of all this and not mention that the RBZ
has always had a soft spot for the block chain. They like the block chain, what they
have a problem with are the cryptos not the technical behind them (RBZ, 2018).

The Zimbabwe Minister of Finance Mthuli Ncube (2019) seems to have some
positive
perceptions when it comes to cryptocurrencies. Ncube (2019) urged the RBZ to take
up people knowledgeable in the sector and create regulation for cryptocurrencies.
This puts Mangudya and RBZ in a bit of a weird place. After vehemently denouncing
cryptos, they now have a new senior who seems to be very interested in
cryptocurrencies. Zhou (2018) noted that keeping the RBZ’s stance could be suicide
for Mangudya and thus the RBZ has to act as if they have been fans of
cryptocurrencies all along and start embracing them going forward.
Mangudya (2018) could have been trying to keep up with the times when he was
faced with the question of cryptocurrencies. In a bid to look as if Mangudya (2018)
understands cryptocurrencies and current trends, Mangudya (2018) went on record
and acted as if the RBZ has always been of the belief that cryptocurrencies are great
when the opposite is true. The problem with this is that if the RBZ really did believe
they were “protecting the public” when they banned cryptocurrencies in Zimbabwe.
RBZ (2018) noted that it will be illegal in Zimbabwe to accept cryptos as collateral,
opening accounts of exchanges dealing with them and transfer or receipt of money
in relating to purchase or sale of virtual currencies.

MMM was introduced in Zimbabwe and a lot of the guiders made a fair bit of money,
with many of them converting their “mavros” the MMM digital currency into Bitcoin
and bought cars from Japan and continue to enjoy their money safely stored in
Bitcoin wallets, which is probably why a few weeks ago Bitcoin in Nigeria was trading
at an all-time high, they knew this was coming, and they cashed out before you could
(John, 2017).Zhou (2018) mentioned that in Zimbabwe the first signs of MMM
Zimbabwe coming to a halt when the Reserve Bank effectively distanced itself from
any activity outside of its regulatory scope, they were powerless to either stop MMM
Zimbabwe or help those who could potentially be affected by its subsequent demise.
This made a lot of MMM Zimbabwe participants wonder what exactly was going on
to have the whole Reserve Bank come out and say they have nothingto do with
MMM, confidence remained but eyebrows started to get raised (Zhou, 2018).
Lack of regulations and the anonymity associated with digital currencies have raised
serious concerns that they would facilitate money laundering and other criminal
activities (Jacobs, 2018). Furthermore, transactions are not protected by
government
regulations or controls. The lack of regulations also concerns the accounting and
audit
professions, as there are no applicable IFRS standards regulating the accounting for
cryptocurrencies which have resulted in a variety of accounting practices used
(AASB,
2016). Nevertheless, the International Financial Reporting Interpretations
Committee [IFRIC], have in March 2019 issued guidance on which accounting
standards are applicable to cryptocurrencies, however, it is an interpretation, and
thus not an absolute solution on how it should be treated in financial statements.
Furthermore, it was also tentatively decided that no new standard will be issued
which regulatescryptocurrencies. Moreover, since no official standard is issued it is
not a requirement to follow the recommendations made, and there is room for other
interpretations.

Digital currency is associated with a lot of risks, both in general, and related to the
accounting for cryptocurrencies which may create concerns for stakeholders.
Furthermore, accounting for cryptocurrencies comes with challenges for accountants
too, as cryptocurrencies differ from other type of assets. An understanding of the
attributes of each cryptocurrency is needed as the features of different
cryptocurrencies vary (Deloitte,2018), thus, it is required that accountants not only
know possible accounting treatments, but also the technology behind
cryptocurrencies to be able to treat it correctly. In the absence of applicable
accounting standards there will be divergent accounting treatments in the
marketplace which may have consequences for financial markets and its
stakeholders.

According to Raiborn and Sivitanides (2019) digital currencies are subject to risks of
accounting fraud, particularly with violation of measurements and revenue
recognition criteria. Furthermore, there are risks with the non-mandatory accounting
guidance for cryptocurrencies as different accounting policies can exist. It is argued
that the choice of accounting policy can be used as a mean of achieving specific
objectives by management, which is one definition of earnings management (Scott,
2014, cited in Hasan & Rahman, 2017). Thus, the accounting policy applied to digital
currencies can be used as a mean to pursue earnings manipulation. Moreover, the
accounting challenges with digital currencies may have consequences for the
usefulness of financial information when the economic substance of the
cryptocurrency may not be represented correctly with for example the possible asset
classifications.

This can result in implications not only for reporting entities, but for the trust in
financial markets at large. The usefulness of financial information can be a concern
for investors, if information is not fairly presented or if there is a general distrust in
entities holding or accepting digital currencies. In such case information may not
facilitate efficient and effective decisions for financial statement users (Raiborn &
Sivitanides, 2014). Cryptocurrency accounting is associated with a high degree of
subjectivity where professional judgement is of importance. It is argued that
professional judgement is particularly important in situations when standards are
incomplete or when situations are complex or not clearly defined (Ivan, 2016).
However, the usage of judgement in accounting facilitate opportunities to select
reporting methods, estimates and disclosures which suit the entity and increases the
value of accounting as a means of communication (Healy & Wahlen, 1999). In
addition, there is a scepticism associated with digital currency currencies which can
be a risk factor. Cryptocurrencies offer global reach, speed, low cost to use and it is
difficult for authorities to track transactions (Brill et al., 2014).

1.2 Statement of the problem

The increased usage of digital currencies combined with its volatility has led to an
increased global interest and scrutiny by organizations, investors, regulators,
governments and others (Chartered Professional Accountants [CPA], 2018). The
literature on digital currency has proved that there is a lack of research on the impact
of bitcoins and cryptocurrency in Zimbabwe. It is believed that academic work on
cryptocurrency in developing countries is limited. Many authors observed that
bitcoins are not well adopted. Cryptocurrency merits, demerits and adoption
feasibility by banks and individuals in Zimbabwe are currently unknown. It is the aim
of this study to close this gap in knowledge. From the literature on digital currency in
developing countries the researcher noted there was need to explore on the
meaning attached to digital currency by RBZ and other Commercial Banks, the
impact of digital currency in Zimbabwe and the role of management accountant and
finance on digital currency. There are also limited amount of guidelines and
regulations governing how digital currency are accounted for in accordance with
IFRS standards. The lack of clear guidelines has resulted in a variety of accounting
practices used in the marketplace. There are significant risks associated with this
affecting not only accounting but also financial markets. In addition, there are
challenges present for preparers of financial statements who must rely on a best
practice in which professional judgement is needed. Furthermore, it is an area with a
limited amount of research, and practical perspectives to the issues with accounting
for digital currency have not been explored extensively.

1.3 Purpose of the study

The purpose of this study was to evaluate the impact of digital currency on
management accounting and finance in the financial market in Zimbabwe.
1.4 Research Objectives
 To gain an understanding of digital currency used by banks in Zimbabwe.
 To determine the role of management accounting and finance on digital
currency in the financial market in Zimbabwe?
 To find out if digital currency can solve liquidity crunch in Zimbabwe
 To ascertain factors that influence the adoption of digital currency by banks in
Zimbabwe

1.5 Research Questions

 What meaning is attached to digital currency by banks in Zimbabwe?

 What is the role of management accounting and finance on digital currency in
the financial market in Zimbabwe?
 Can digital currency solve the liquidity crunch in Zimbabwe?
 Which factors influence the adoption of digital currency in Zimbabwe?

1.6. Justification of the Study

The study sought to determine the extent to which digital currency has an impact on
management accounting and finance in the financial markets as well as the
general public in Zimbabwe .Zimbabwe has been experiencing a liquidity crunch and
the adoption of the digital currency can ease these problems .The emergence of
parallel markets as well as money laundering has resulted in weakening of the
Zimbabwean dollar leading to uncontrolled levels of corruption and high level
inflation there by creating a socio –economic problem on the citizens of the
country .This study sought to determine if the adoption of the digital currency has a
significant impact on the liquidity crunch in Zimbabwe .

1.7 Significance of the study

1.7.1 Financial Market in Zimbabwe

The encouragement of use of digital currency in the financial market in Zimbabwe is

crucial in view of the many challenges which the country is experiencing which can
be solved by different banks. Managers may have a better understanding of digital
currency which is an important aspect for the development of Zimbabwe.

1.7.2 Policy Makers

This study may be relevant for policy makers in knowing the factors that need
attention if the banks in Zimbabwe are to fulfil their important role in economic
development.

1.7.3 Academics

Academics may benefit from the findings of this research as it may bring new
knowledge on digital currency adoption in entities, an aspect that is currently
shallowly published on. This study brings new insights into the digital currency
adoption by different entities in Zimbabwe

1.7.4 To the Student

The study develops the knowledge of the researcher in the area of study and also
act as a training ground for future academic and scientific researches. In addition,
the research will also allow the researcher to put to test the relevance of theory in the
world as well as provide an effective means of research training which will help to
advance the intellectual skills
1.7.5 To the University
The study contributes to the general body of academic knowledge at Great
Zimbabwe University. The outcome of the research is hoped to enable other fellow
students to borrow ideas from this research project and use them as research tools
on any related study.
1.8 Assumptions

The study was carried out on the following underlying assumptions which are

1.8.1 Banks and individuals in Zimbabwe do not rely on digital currency.

1.8.2 There are some factors which influence digital currency adoption by entities in
Zimbabwe

1.8.3 Organizations can use digital currency in Zimbabwe.

1.9 Delimitations

The study was delimited to digital currency in seven (7) banks in Zimbabwe which
includes the central bank i.e. RBZ, CBZ, ZB Bank, AFC formerly Agribank, Stanbic
Bank, NMB, Standard Chartered and the Zimbabwe stock Exchange (ZSE). The
study will be conducted in the Harare province of Zimbabwe. Since the study was
limited to Harare, the generalization of the results was limited to the same
populations in Zimbabwe’s ten provinces. The period of the study was from 2019-
2022.

1.10 Limitations

• Time Constraint

The researcher was a full time employee and this means that the researcher was not
be able to undertake an extensive and exhaustive research. However, the
researcher worked overnight and during public holidays for the study to be
successful.

• Financial constraint
The researcher was a self-sponsored student who relied on savings to progress his
studies and therefore there was a limitation on financial resources. Despite the
constraint, the researcher outsourced funds from friends and relatives and tried to
minimise and allocate the scarce resource according to the budget.

• Access to information

Due to geographical location of the researcher and work commitments, the

researcher found it difficult to have access to University library. However, the
researcher bought data bundles so that the research was exhaustive. Some
respondents were unwilling to share their personal views as they feared
victimisation, however confidentiality was guaranteed and information was submitted
anonymously. The researcher also assured the respondents that the information that
they provided was used for academic purposes only and in strict confidentiality

1.11 Definition of key terms

Accountability. Bovens (2019), claims that accountability can be referred to as a

relationship between an actor and a forum, in which the actor has an obligation to
explain and to justify his or her conduct, the forum can pose questions and pass
judgement, and the actor may face consequences. This definition has been adopted
for this study.

Accounting. Perry and Nolke (2018) define accounting as a system for measuring
economic activity. This definition has been adopted for this study.

Stakeholder. In this study the concept refers to “an individual or a group that has
one or more of the various kinds of stakes in the organization” as explained by
Carroll and Bucholtz, (2018).

Bitcoin. In this study the concept of bitcoin refers to a digital decentralized currency
that allows its users to make transactions directly, without the need of a trusted third
party (Böhme, Edelman, Christin and Moore 2015).

Cryptocurrency -A cryptocurrency is a digital or virtual currency that uses

cryptography for security. A cryptocurrency is difficult to counterfeit because of this
security feature. A defining feature of a cryptocurrency and arguably its most
endearing allure is its organic nature. It is not issued by any central authority
rendering it theoretically immune to government interference or manipulation
(Mazikana, 2018).

Digital currency – is a prepaid payment terminal to store monetary value, which

could be transferred by electronic devices with Internet access (BCBS, 1998).

1.12 Summary

This Chapter has highlighted the background to the study to which the research
study is based on, the objectives of the study and its significance. The ensuing
chapter will highlight the literature review in this area of study considering the
research done by other authors.