Institutional acceptance in the crypto world is a fascinating but frustrating subject. The true modern-day crypto descendants of the cypherpunk movement of the 1990s see crypto as a means of decentralized human empowerment. To realize this vision, intermediaries that charge rent and endanger people’s freedom and privacy must be destroyed. On the other hand, when a significant financial institution makes fresh forays into cryptocurrency, Crypto Twitter goes wild.
Elon Musk’s promise to promote the cryptocurrency on Twitter caused Dogecoin to soar. The institutions themselves suffer from cognitive dissonance, as banks launch cryptocurrency projects without considering how a cryptocurrency payment system based on the Ethereum layer two or the Bitcoin Lightning Network is intended to render that particular bank obsolete.
The Financial Accounting Standards Board, or FASB, of the United States implemented a transition to accounting standards in October to assist publicly traded companies in holding digital assets on their balance sheet. That benefits institutions and cryptocurrency right now.
The previous method of recording cryptocurrency on a company’s books was to classify it as software. Every time the price fell, a value impairment was recorded, which was then added to the balance sheet at its historical cost (but not written up again when prices went up). This made investing in public companies unattractive to everyone but the world’s most devoted Michael Saylors.
It’s challenging to hold onto an asset that could continue to be recorded on a company’s books at the bear market’s bottom price.
The new rules enforce the same fair value accounting principles used for company holdings of publicly traded stock, which is a more reasonable approach. For cryptocurrencies covered by the law, the market price will be used as the valuation.
There are still a lot of issues to think about, and this should be a different end of the standard accounting discussion regarding crypto. For starters, the new accounting method excludes stablecoins backed by other assets.
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Many publicly traded companies that accept client cryptocurrency payments do so in good fun and immediately exchange the cryptocurrency for fiat money. That might only sometimes be the case. If businesses start using cryptocurrency as their form of payment, it would be appropriate to include it in a new balance sheet quasi-case or digital cash category.
The variations among asset-backed stablecoins are something else to take into account. The US Dollar Coin is a cash equivalent and would easily fall under the GAAP’s standard cash equivalent category. The case of Tether is more straightforward, though historically, it was backed by riskier commercial paper. Maker’s Dai is a unique stablecoin that is supported in part by USDC and in part by other cryptocurrencies. Dai appears to require a brand-new quasi-cash or quasi-currency category.
What about cryptocurrencies held by a business for cash-based transactions only, such as Bitcoin or Ether, rather than for investment purposes? Will Bitcoin’s use as a payment method be included in a new quasi-currency category, or will it continue to be included in an investment category despite its partial payment use case? Unlike stablecoins, it is highly volatile despite being intended for payments.
Applying appropriate valuation techniques will be relatively simple for liquid, actively traded currencies like Bitcoin and Ether, which comprise most of what businesses hold. However, there will be many questions to think about as companies begin to have and use other kinds of cryptocurrencies.
Applying traditional financial valuation models to digital assets not traded on active markets will take a lot of work. Due to the distinct nature of the asset class, existing economic valuation techniques for assets like stock in publicly traded companies may only partially apply to cryptocurrencies.
The Securities and Exchange Commission and other financial regulators could learn from the FASB’s methodical adaptation of accounting principles to this new technology. The FASB ensured that GAAP would survive the crypto revolution by hiring crypto-native experts and quickly adapting their regulations to the realities of this new technology.
The GAAP treatment of cryptocurrency still raises many issues. Once finance is decentralized, crypto natives must keep creating their accounting techniques. Promoting institutional cryptocurrency holding is a good chance for the time being.