Crypto notes a victory among professional accountants

In his regular column, JW Verret, a law professor, attorney, CPA and head of the Crypto Freedom Lab, covers cryptocurrency law and regulation with a focus on decentralized finance (DeFi) and financial privacy.

Institutional adoption is an exciting but frustrating topic in crypto. The true modern crypto inheritors of the 90s cypherpunk legacy have a vision for crypto as human empowerment through decentralization. That vision includes breaking down the intermediaries that demand rent and threaten human freedom and privacy. On the other hand, Crypto Twitter gets a lot when a major financial institution makes new moves into crypto.

Dogecoin (DOGE) mooned on hopes that Elon Musk would use Twitter to help the cryptocurrency’s adoption. The cognitive dissonance extends to the institutions themselves, as banks start crypto projects without considering how a crypto payment system built on the Bitcoin Lightning Network or an Ethereum layer 2 is meant to render that very bank obsolete.

Those broader philosophical questions aside, the US-based Financial Accounting Standards Board, or FASB, introduced a change in accounting standards in October that will help public companies keep digital assets on their balance sheets. For now, it’s good for both institutions and crypto.

The old method of accounting for crypto on corporate books was to account for it as software. It went on the balance sheet at historical cost and was then written down as a decline in value at each price drop (but not written up again when prices went up). This was a deterrent to public company holdings for all but the die-hard Michael Saylors of the world. It is difficult to hold an asset that can remain recorded on your books at the bottom price of the last bear market.

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The new rules take a more sensible approach and implement the same fair value accounting rules that apply to the company’s holdings of listed shares. Crypto covered by the rule will simply be valued at the listed price.

However, this should not be the end of accounting standards deliberations over crypto, and there are still many issues to consider. First, stablecoins backed by other assets are not included in the new accounting method.

Many public companies willing to accept crypto from customers do so to humor the customer and immediately convert that crypto to fiat dollars. That may not always be the case, and if companies start using crypto as a currency themselves, inclusion in some kind of new balance sheet quasi-issue or digital cash category would be appropriate.

Another thing to consider is the differences in asset-backed stablecoins. USD Coin (USDC) is basically just a cash equivalent and would easily fit into the standard cash equivalent category in generally accepted accounting principles, or GAAP. Tether (USDT) is a closer case and was historically backed by riskier certificates, although that is changing. Maker’s Dai (DAI) is a completely different form of stablecoin, partly backed by USDC and partly by other cryptocurrencies. Dai seems to need a new quasi-cash or quasi-currency category.

And what about cryptocurrencies like Bitcoin (BTC) or Ether (ETH) that a company has for the purpose of using it to pay for things, like cash, and not for investment purposes? Will Bitcoin used as a means of payment be accounted for in a new quasi-currency category, or will it remain in an investment category despite the use of partial payment? Although designed for payments, it is highly volatile, unlike stablecoins.

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Fair value methods will be relatively easy to apply to liquid, highly traded currencies like Bitcoin and Ether, which are the majority of what companies hold. But as companies begin to hold and use other types of cryptocurrencies, there will be a wealth of questions to consider.

For those digital assets that are not in actively traded markets, it will be a challenge to use classic financial valuation models for valuation. Existing financial valuation methods for assets such as shares in public companies cannot be fully transferred to cryptocurrencies due to the unique design of the asset class.

The FASB should be commended for its thoughtful adaptation of accounting principles to this new technology, an approach the Securities and Exchange Commission and other financial regulators can learn from. FASB hired crypto-native experts and adapted their rules to the reality of this new technology in a short period of time, ensuring that GAAP is going to make it in the crypto revolution.

Many questions remain in GAAP accounting for crypto. Crypto natives must continue to develop their own accounting methods as we decentralize finance. For now, encouraging institutional crypto holding is a useful change.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.