Crypto’s development as an asset class needs better accounting

Last year, bitcoin passed an important milestone towards institutional acceptance when a number of publicly traded companies added it to their corporate taxes. 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 bitcoin today.

But after last year’s initial hype, the company’s balance sheet clamor for bitcoin has slowed to a crawl, likely in part because of complex accounting rules. For observers and investors in public companies that hold bitcoin, disclosure rules are also vague and hinder transparency. Tesla recently left a mystery in its wake when it sold 75% of its initial $1.5 billion stake in bitcoin, leaving questions about its original cost basis and disposition unanswered. To be fair, such transparency is in no way required under current accounting rules.

Under today’s 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 firms are required to incur write-down charges on their bitcoin purchases when prices fall below their original cost basis. In other words, and especially for volatile assets like bitcoin and other cryptocurrencies, depreciation ends up hurting the bottom line of public income reports and requires companies to hold those 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 price movements throughout the day in order to properly record impairment. As the crypto winter has set in, the bitcoin-heavy balance sheet of the listed microstrategy has weighed particularly heavily, as it has had to report hundreds of millions of dollars in losses via write-downs in recent quarters.

While companies have slowed or reversed their bitcoin balance sheet acquisitions, institutional adoption continues in other meaningful ways. Blackrock recently teamed up with Coinbase to enable crypto investing for institutional investors, and Fidelity plans to enable 401(k) investing in bitcoin later this year. If the digital asset class is truly ripe for decay, however, it is time for better accounting rules and regulatory transparency.

Transparency enforced by official institutional guidance can help prevent meltdowns and undue harm to investors. In the wake of high-profile crypto bankruptcies like Celsius and Voyager, these principles are as critical as ever. Key institutions such as the Financial Accounting Standards Board and the Securities and Exchange Commission are poised to fill the digital accounting gap for public and private firms.

Last March, the SEC released Staff Accounting Bulletin 121, which offered SEC staff interpretations on crypto accounting safeguards. In this guidance, the SEC staff expressed views related to “entities that have obligations to protect cryptoassets held for their platform users.” The guidance requires these entities to recognize a hedging asset and liability, noting “that crypto-assets should be recorded as a liability and corresponding asset on the balance sheet at fair value.” The staff interpretation recommends that businesses break up their balance sheets when they are responsible for safeguarding customers’ assets.

But soon after SAB 121 was issued, SEC Commissioner Hester Peirce raised several dissenting concerns. At first she wondered “why now?” as bankruptcies and thefts from cryptocurrency custodians have been occurring for years. Second, she noted, “the SAB does not recognize the Commission’s own role in creating the legal and regulatory risks that justify this accounting treatment. The Commission has refused, despite many requests over many years, to provide regulatory guidance on how our rules apply to cryptoassets, so some of the responsibility for the lack of legal and regulatory clarity lies squarely outside the door.

Furthermore, Peirce seeks coordination between the SEC and FASB in setting official accounting standards. In that regard, and after requests from companies and investors frustrated by impairment charges and a lack of transparency, the FASB may soon share its own official guidance. Ideally, the new FASB rules will lead to clearer accounting results that are more in line with economic realities – such as holding digital assets on the balance sheet at fair value rather than reduced cost – along with better disclosure and transparency rules for holdings of crypto assets . of companies.

Given official accounting standards and guidance from institutions like the FASB, crypto 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 Lehman-like bankruptcies. In the wake of the 2008 financial crisis, a speech by SEC Commissioner Kathleen Casey addressed the need for accounting standards to promote transparency.

After the traditional mark-to-market accounting standard came under duress as asset prices fell and liquidity declined, the FASB and other institutions quickly coordinated to offer definitive guidelines for fair value accounting in illiquid markets, as well as improved disclosure transparency. Crypto needs similar standards – and fast. The FASB is coordinating with other relevant agencies to provide formal guidance for the foreseeable future, and that will be critical to cryptocurrency’s maturation 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 opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its 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 that businesses and management teams face regarding digital assets.

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