The Evolution of Crypto as an Asset Class Needs Better Accounting

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Last year bitcoin took a key step towards institutional acceptance as an array of publicly traded companies added it to their corporate treasuries. Alongside traditional financial instruments, and despite a significant price drop, companies such as Tesla, Block (formerly Square), and Coinbase still hold over $100 million worth of bitcoins today.

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

Under today’s accounting standards, bitcoin, which is considered an “intangible asset”, is disclosed in a markedly different manner than typical investments such as cash, stocks or bonds. Publicly listed companies are required to incur impairment charges on their bitcoin purchases whenever prices fall below the original cost. In other words, and especially for volatile assets like bitcoin and other cryptocurrencies, depreciation ends up hurting the bottom line of public earnings reports and forcing companies to keep those assets on their balance sheets at their lowest valuation since the point of purchase.

It can also present a significant logistical challenge for accounting teams to accurately track intraday price movements in order to properly record write-downs. As the crypto winter sets in, the bitcoin-heavy balance sheet of publicly traded Microstrategy weighed particularly heavily, as it had to report hundreds of millions of dollars in losses via impairment charges in recent quarters.

While companies have slowed or canceled their on-balance sheet bitcoin acquisitions, institutional adoption continues in other significant ways. Blackrock recently associates with Coinbase to enable crypto investing for institutional investors, and Fidelity plans to allow 401(k) investment in bitcoin later this year. If the digital asset class is really ready for maturity, however, it is time to improve accounting rules and regulatory transparency.

The transparency imposed by official institutional guidelines can help prevent meltdowns and undue damage to investors. After high profile crypto bankruptcies such as Celsius and Voyager, these principles are more critical than ever. Key institutions such as 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 released Staff Accounting Bulletin 121, which offered interpretations from SEC staff on cryptographic accounting safeguards. In these guidelines, SEC staff expressed opinions regarding “entities that have an obligation to protect crypto-assets held for users of their platform.” The guidelines require such entities to recognize a protection asset and liability and notes that crypto-assets should be recorded as a liability and a corresponding asset on their balance sheet at their fair value. The staff interpretation recommends that companies increase their balance sheets when they are responsible for safeguarding customer assets.

But shortly after the release of SAB 121, SEC Commissioner Hester Peirce raised several dissenting concerns. First she wondered “why now?” because cryptocurrency custodian bankruptcies and thefts have been happening for years. Second, she noted, “the SAB fails to recognize the Commission’s own role in creating the legal and regulatory risks that justify this accounting treatment. The Commission has refused, despite numerous requests for 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 lies at our doorstep.

Additionally, Peirce seeks coordination between the SEC and the FASB in setting formal accounting standards. In this regard, and after requests from companies and investors frustrated by impairment charges and lack of transparency, the FASB may soon share its own formal 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 depreciated cost – as well as better disclosure and transparency rules for holdings of crypto-assets by companies.

Given official accounting standards and guidelines from institutions such as the FASB, crypto is expected to evolve to meet the same standards as traditional asset classes. Similar to what traditional asset classes experienced in 2008, cryptocurrency has recently experienced its own high-profile Lehman-style bankruptcies. In the aftermath of the 2008 financial crisis, a speech by SEC Commissioner Kathleen Casey stressed the need for accounting standards to promote transparency.

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

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

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

Author Information

Aaron Jacob leads TaxBit’s efforts in building and scaling TaxBit’s ERP solution, the Core Accounting Suite, which streamlines and automates the financial reporting needs businesses and management teams face regarding digital assets.

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