No products in the cart.
- Latest
- Trending
ADVERTISEMENT
Law professor, attorney, CPA, and head of the Crypto Freedom Lab, JW Verret’s regular columns cover cryptocurrency laws and regulations, with a focus on decentralized finance (DeFi) and financial privacy. increase.
Institutional adoption is an exciting and frustrating topic in cryptocurrencies. The true modern-day crypto heirs of the 90s cypherpunk legacy have a vision of crypto as human empowerment through decentralization. Its vision includes dismantling the intermediaries that charge rent and threaten human liberty and privacy. On the other hand, when a major financial institution makes a new move in virtual currency, Twitter of virtual currency becomes abuzz.
Dogecoin (DOGE) has nodded in hopes that Elon Musk will use Twitter to help with cryptocurrency adoption. Cognitive because banks start crypto projects without considering how crypto payment systems built on top of the Bitcoin Lightning Network and Ethereum Layer 2 are intended to make the banks themselves obsolete. The dissonance extends to the institutions themselves.
These broader philosophical issues aside, the US-based Financial Accounting Standards Board (FASB) in October enacted changes to accounting standards to help public companies keep digital assets on their balance sheets. Did. For now, it’s good for both institutions and cryptocurrencies.
The old way of accounting for crypto on a company’s books was to account for it as software. It was carried on the balance sheet at historical cost and written down as a loss of value each time the price fell (but not again when the price went up). This has been a deterrent to public company ownership for anyone but world diehard Michael Thaler. It’s hard to hold onto an asset that could remain on the books at a price that bottomed out during the last bear market.
Related: Set aside some money for surprise taxes before ETH falls further
The new rules take a more streamlined approach and implement the same fair value accounting rules that apply to publicly traded shares held by companies. Cryptocurrencies subject to the rules are simply valued at their listed price.
However, this should not be the end of the deliberations on accounting standards for cryptocurrencies, as there are still many issues to consider. One is that stablecoins backed by other assets are not included in the new accounting method.
Many publicly traded companies willing to accept cryptocurrencies from their customers do so to humor their customers and convert the cryptocurrencies into fiat currency instantly. This is not always the case, and when companies start using cryptocurrencies as their currency, it becomes appropriate to include them in some sort of new balance sheet quasi-case or digital cash category.
Another thing to consider is the difference between asset-backed stablecoins. USD Coin (USDC) is essentially just a cash equivalent and easily fits into the standard cash equivalent categories of Generally Accepted Accounting Principles (GAAP). Tether (USDT) is a closer case, historically backed by riskier commercial paper, but that’s changing.Maker’s Dai (DAI) is a very different form of stablecoin, It is partially backed by USDC and partially backed by other cryptocurrencies. Dai seems to need a new quasi-cash or quasi-money category.
Also, are cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) held by companies held for the purpose of using them for payments such as cash, not for investment purposes? Will bitcoin used as a means of payment be included in the new quasi-currency category or will it remain in the investment category despite partial payment use cases? Designed for payments, but unlike stablecoins, they are highly volatile.
Related: Biden is hiring 87,000 new IRS agents.
Fair valuation methods are relatively easy to apply to highly liquid, highly traded currencies such as Bitcoin and Ether held by most companies. However, as companies start holding and using other types of cryptocurrencies, there are many issues to consider.
For digital assets that are not actively traded markets, it is difficult to apply classical financial valuation models to their valuation. Existing financial valuation methods for assets such as stocks of publicly traded companies may not carry over completely 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. This is an approach that the Securities and Exchange Commission and other financial regulators could learn from. The FASB hired a crypto-native expert to quickly adapt their rules to this new technological reality, and in the crypto revolution he ensured GAAP success.
Many questions remain about GAAP accounting for cryptocurrencies. Once we decentralize finance, cryptonatives will have to continue to develop their own accounting methods. For now, it’s a change that will help encourage institutional holdings of cryptocurrencies.
JW Bellet Associate Professor at George Mason Law School. He is an accountant in cryptocurrency forensics and also practices securities law at Lawrence Law LLC. He is a member of the Advisory Committee of the Financial Accounting Standards Board and a former member of the SEC Investor Advisory Committee. He also heads the Crypto Freedom Lab, a think tank that fights for policy changes to protect the freedom and privacy of cryptocurrency developers and users.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.
