The evolution of cryptocurrencies as an asset class needs better accounting

Last year, bitcoin passed a key milestone toward institutional acceptance when a number of publicly traded companies added it to their corporate treasuries. Alongside traditional financial instruments, and despite a significant reduction in prices, companies like Tesla, Block (formerly Square), and Coinbase still hold more than $100 million worth of bitcoin today.

But after the initial hype last year, the clamor from corporate balance sheets for bitcoin has slowed, likely due in part to complex accounting rules. For observers and investors in public companies that own bitcoin, the disclosure rules are also vague and deter transparency. Tesla recently left a mystery in its wake as it sold 75% of its initial $1.5 billion stake in bitcoin, leaving unanswered questions about its initial cost basis and the disposition of it. To be fair, such transparency is in no way required by current accounting standards.

Under current accounting standards, bitcoin, which is considered an “intangible asset,” is disclosed in a markedly different way than typical investments such as cash, stocks, or bonds. Publicly traded companies are required to incur impairment charges on their bitcoin purchases whenever prices drop below the initial cost basis. In other words, and especially for volatile assets like bitcoin and other cryptocurrencies, deterioration ends up hurting the bottom line of public earnings reports and requires companies to hold these assets on their balance sheets at their lowest valuation since the point of purchase.

It can also be a significant logistical challenge for accounting teams to accurately track intraday price movements to properly record deficiencies. As the crypto winter kicked in, the bitcoin-heavy balance sheet for publicly traded Microstrategy has weighed especially heavily, as it has had to report hundreds of millions of dollars worth of losses through impairment charges in recent quarters. .

While companies have slowed or reversed their bitcoin balance sheet acquisitions, institutional adoption continues in other significant ways. Blackrock recently partnered with Coinbase to enable crypto investment for institutional investors, and Fidelity plans to enable 401(k) investment in bitcoin later this year. However, if the digital asset class is truly ready for maturity, it is high time for better accounting rules and regulatory transparency.

The transparency imposed by official institutional guidance can help prevent collapses and undue damage to investors. In the wake of high-profile crypto bankruptcies like Celsius and Voyager, these principles are more critical than ever. Key institutions like the Financial Accounting Standards Board and the Securities and Exchange Commission are poised to fill the digital asset accounting void for public and private companies.

Last March, the SEC issued Staff Accounting Bulletin 121, which offered SEC staff interpretations of crypto accounting safeguards. In this guidance, the SEC staff expressed views related to “entities that have an obligation to safeguard crypto assets held for users of their platform.” The guidance requires these entities to recognize a hedging asset and liability and notes that “crypto assets should be recorded as a liability and the corresponding asset on their balance sheet at fair value.” The staff interpretation recommends that companies increase their balance sheet when they are responsible for safeguarding client assets.

But shortly after SAB 121 was issued, SEC Commissioner Hester Peirce raised several dissenting concerns. At first, she wondered “why now?” as bankruptcies and crypto custodian thefts have been going on for years. Second, she pointed out, “the SAB does not recognize the role of the Commission itself in creating the legal and regulatory risks that justify this accounting treatment. The Commission has refused, despite many pleas over many years, to provide regulatory guidance on how our rules apply to crypto assets, so some of the blame for the lack of legal and regulatory clarity is on our doorstep.”

Additionally, Peirce seeks coordination between the SEC and the FASB in setting official accounting standards. In that sense, and after requests from companies and investors frustrated by charges of impairment and lack of transparency, the FASB may soon share its own official guidance. Ideally, the new FASB rules will lead to clearer accounting outcomes that are more aligned with economic realities, for example holding digital assets on the balance sheet at fair value rather than impaired cost, along with better disclosure and transparency rules for crypto asset holdings. by corporations.

Given official accounting standards and guidance from institutions like the FASB, cryptocurrencies should evolve to meet the same standards as traditional asset classes. Similar to what traditional asset classes experienced in 2008, cryptocurrency recently experienced its own high-profile bankruptcies similar to Lehman. In the aftermath of the 2008 financial crisis, a speech by SEC Commissioner Kathleen Casey focused on the need for accounting standards to promote transparency.

After the traditional mark-to-market accounting standard was affected by falling asset prices and declining liquidity, the FASB and other institutions quickly coordinated to provide definitive guidance for fair value accounting in illiquid markets, in addition to greater transparency in disclosure. Crypto needs similar standards, and fast. The FASB is coordinating with other relevant agencies to offer formal guidance for the foreseeable future, and that will be critical to the maturation of cryptocurrencies as a new asset class.

After a chaotic crypto winter, regulatory clarity, transparency, and better accounting will allow spring to finally emerge again.

This article does not necessarily reflect the views of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their owners.

Author Information

aaron jacob leads TaxBit’s efforts to build and scale TaxBit’s ERP solution, Core Accounting Suite, which streamlines and automates the financial reporting needs facing businesses and management teams regarding digital assets.

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