Cryptocurrency prices and market share continue to increase, but the accounting and reporting remain inconsistent and a headwind to wider adoption.
Even as the blockchain and cryptoasset sectors continue to increase, both in terms of retail awareness and institutional support, guidance related to reporting and valuation remains ambiguous. While conversations around the accounting and reporting for various cryptoassets might not make the headlines that price volatility does, it is critically important for the further maturation of crypto.
Accounting and valuation rules, for lack of a better phrase, set the ground rules for how individuals and institutions should value, handle, and report these different cryptoassets. Without consistent and market-oriented rules, continued development of this sector will face substantial headwinds.
Rules and reporting frameworks, again, might not drive headlines, but taking a bigger picture perspective illustrates just how important these concepts are. The substantial price increases that have occurred in 2020 are due, at least in some part, to the increased institutional acceptance and support of cryptoassets. These large institutions, acting on behalf of clients, retirement plans, or foundation endowments as financial fiduciaries, expect and will require rules that are practical and reflective of reality.
This is not to say that there are no rules or guidelines for how individuals and institutions should treat various cryptoassets. Despite the fact that accounting standard setting bodies such as the Financial Accounting Standards Board (FASB) have not issued new rules or guidance, there is a consensus that seems to have been reached. For lack of a better or more appropriate methodology a classification of cryptoassets as intangible assets seems to have been reached; this is a stopgap approach at best.
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Let’s take a look at a few of the issues and considerations that still need to be addressed with crypto accounting.
Generalizing as intangible is a stopgap. There are various opinions on this issue, but looking at it from a high level perspective, classifying all cryptoassets as intangible assets is not an ideal situation. It is true that cryptoassets are, in fact, intangible in nature, but that is where the similarities end. Cryptoassets do not have a finite economic life (like copyrights), nor are holders expecting a gradual degradation in value over time, so classifying them as a finite lived intangible asset does not work.
Conversely, testing these cryptoassets for impairment periodically might sound reasonable in theory, but in practice is unwieldy. First, cryptoassets often trade like equities or commodities, so the frequency of fair value testing becomes more akin to equity securities rather than intangible assets. Secondly, and more importantly, if an asset is indeed written down (impaired) that means it cannot be written back above its previous high.
In other words, if a cryptoasset is valued at $100 USD per unit, and is impaired to $80 per unit, it cannot be written back up above $100, even if the fair market value is above that level. It is hard to argue this is reflective of reality.
Classification by crypto type. Digging down one additional layer, something that is relatively obvious should be folded into the rule making conversation; crypto is an umbrella term. Just a cursory glance at the crypto space reveals decentralized cryptocurrencies, privately issued asset-backed-coins (stablecoins), coins and tokens issued as a result of asset tokenization, and the possibility of central bank digital currencies (CBDCs).
Every one of these cryptoasset categories has different implications in terms of how they are going to be used, and an array of reporting considerations that need to be taken into account. At this point there is no definitive answer for how to deal with the variety of options, but it is an issue that needs to be addressed.
For example, should a stablecoin that is – in effect – a bailment of the underlying fiat currency be treated and valued exactly the same as a decentralized cryptocurrency such as bitcoin?
Regulatory consistency is key. Another point connected to accounting, reporting, and valuation that needs to be part of any reporting conversation is the need for consistent guidelines and enforcement. Setting aside for a moment the political and economic incentives for certain nations or areas to take a leadership role in the blockchain and cryptoasset space, sector enthusiasts should advocate for a more comprehensive regulatory approach.
In the United States alone, it is entirely possible to obtain different answers to the same question connected to valuation or reporting guidelines depending on the specific regulator that is consulted. No matter what ultimately comes to be in terms of how cryptoassets are to be accounted for, the rules need to be understandable, enforceable and consistently applied on a wide ranging basis.
Crypto accounting rules and reporting might not make headlines like bitcoin price volatility, but are – and will continue to be – integral to a broader and more sustainable blockchain and cryptoasset sector.