With the increasing acceptance of crypto, the need for its accounting has become evident. In this article, we’ll refer to crypto as a digital asset as we discuss a framework with which it can be accounted for. Digital assets are typically powered by blockchain technology. All transactions with these assets are verified on a ledger that is maintained by a decentralized network of participants. The following are the main types of crypto: they represent ownership of a physical or a unique digital asset. Non-fungible: they may entitle a holder to an underlying service or good from the party that issues the asset (utility tokens), or serve only as an exchange medium (crypto assets such as Bitcoin). Fungible: They don’t provide the holder with any special rights or privileges, and they aren’t backed with any other asset. The benefit of owning a crypto asset can be realized only when there is a buyer ready to pay for the asset with another asset, good, or service. The main difference between crypto assets that are used as an exchange medium and other digital assets is that the former don’t have intrinsic value. Other digital assets can give their holders some utility. They can give to some products and services, rights (voting rights, rights to participate in profit distribution, etc.), rights to payouts in fiat currencies, or even equity rights. Accounting for Digital Assets: The Holder’s Perspective The accounting for an asset will be performed based on: The asset’s nature. The type of investor. The way the asset is held. Also, for such digital assets as stablecoins and NFTs, special consideration will be taken. Accounting Based on the Holding Type Assets may be held directly in a wallet or via an intermediary. If an entity stores assets in a wallet, and has the keys to this wallet, the ownership analysis is straightforward. If an entity holds assets in third-party storage (an exchange, a custodial service), it makes the ownership determination more challenging. In such a case, details such as whether the entity can access all the holdings, how it can be done, how the stored assets can be managed, etc., are determined by the agreement between the entity and the third party, and the legislation valid in that specific jurisdiction. It’s also confirmed who can claim the crypto stored by the third party if this third party goes bankrupt, who bears the risks for the asset loss, and whether the owner can withdraw the crypto immediately and in any amount. That’s why entities should not only carefully choose the third parties to store their crypto assets, but also consider all the details of a legal agreement with them and the legal environment in which they operate. How Are Crypto Assets Measured? Crypto assets are intangible assets because they lack physical substance and aren’t cash, cash equivalents, inventory, or financial instruments. That’s why they are measured at cost. They don’t have any limit on their useful life, that's why they are not subject to amortization. But these assets are tested for impairment annually, or if there are circumstances that increase the probability that the asset can become impaired. That’s why the asset holders recognize only decreases in the asset value when they hold the asset. The increases in the asset value are recognized only when the asset is sold. Source. A significant decline in the asset value on various exchanges is an indicator of possible impairment. Usually, entities evaluate an asset unit for impairment (e.g., one Bitcoin, one Bitcoin portfolio), and once the asset is recognized as impaired, its status cannot be changed during the reporting period even if its price recovers. Crypto Received as Payment for Goods and Services If an entity received crypto as a payment for goods or services, there will be a contract. In the contract, the amount of crypto and the amount or volume of goods and services will be provided. When the contract is signed, the . amounts cannot be changed even if the value of crypto or goods or services has changed Accounting for Assets Received from Hard Forks and in AirDrops When a hard fork occurs, another blockchain appears. Investors who have crypto assets on the old blockchain also receive assets on the new blockchain. In airdrops, selected wallets receive coins for free. This is done to promote the project and grow awareness among users. However, an entity recognizes intangible assets only when it’s purchased. That’s why accounting assets received for free can be very challenging, especially if one considers that such assets are either very cheap or don’t have any value at all. That’s why it’s important that the entity assesses these assets and discloses its accounting policy. Derecognition of Crypto Assets Entities may sell their crypto assets for fiat and other crypto assets or may use them to purchase goods or services. If the entity’s business is selling crypto assets to a customer, such a sale is in the scope of . Then, income received from the sale is revenue, and the costs spent to transfer the assets are calculated as costs for goods sold. ASC 606 But if selling crypto assets is not the entity’s business, such transactions are in the scope of . Then, gain and loss are calculated for each asset separately. ASC 610-20 In crypto-to-crypto transfers, transfers between two similar businesses in exchange for another type of a crypto asset or transfers to facilitate the provision of services to a customer are in the scope of . For example, if one exchange sells Ethereum for Bitcoin to another exchange with the aim to help another exchange to sell Ethereum to a customer, the cost of assets and the expenses are calculated cumulatively. ASC 606 Accounting for Investment Companies Investment companies can invest in a crypto asset with the aim of benefiting from its appreciation. Therefore, in accordance with , such crypto assets are considered as other investments and are measured as fair value through earnings. ASC 946-325 The value of a crypto asset is determined based on: The asset value on the main market. The accessibility of the main market for the entity (investment company). Whether there are indicators that the asset value is being manipulated. If it’s determined that the market isn’t manipulated, then the asset value is determined by multiplying its value by the number of coins held by the entity. Accounting for Brokers and Dealers Entities may perform actions similar to those that brokers and dealers perform in the securities sector: Facilitate buying and selling crypto assets on behalf of customers. Providing market liquidity by standing ready to buy crypto assets from or sell them to customers (market makers). Providing the services of a digital wallet to enable customers to store their funds. These entities can either hold assets in their accounts or hold assets in their wallets on behalf of their customers. In the first case, both inventory and liabilities are measured at their fair value. Upon other aspects, such as how a broker can prove the ownership of a specific asset, no agreement among regulators is achieved. Miners Miners validate transactions and add new blocks to the blockchain. In return, they receive transaction fees and a block reward. Transaction fees are paid from the wallet of a transactor to the wallet of a miner. That’s why they are in the scope of and are accounted for cumulatively. In the case of block rewards, there is one party only - a miner. However, there’s no regulation that addresses this matter. That’s why for now, assets received as block rewards also are in the scope of ASC 606. ASC 606 Mining Pools Some miners join their computing power to solve computational puzzles more efficiently and form mining pools. Mining pool arrangements can be very complex. That’s why accounting guidance will be applied for each pool separately with the consideration of all agreement details. If a pool operator directs the pool’s infrastructure and accesses all the economic benefits, it can be considered as a lease under . But if pool participants can direct their computing infrastructure, it’s not a lease. ASC 842 In the second case, the arrangement between the pool operator and a pool participant may be in the scope of ASC 606. If the pool participant resolves hashes directly on the network, he receives block rewards and fees directly to his wallet. In such a case, the accounting is in the scope of ASC 606. If the pool participant provides its computational power to the pool operator, he receives a revenue paid by the operator. Then, these payments are the scope of accounting. Accounting for Staked Assets When users stake their assets, these assets cannot be sold or moved to another wallet. Users receive rewards for the staked amount and/or transaction fees if they are selected to validate a transaction. These rewards or fees - whatever is paid to the users, are used for accounting. Stablecoins Stablecoins are a type of digital asset that is pegged to a reference asset. A reference asset can be a fiat currency, a physical item (gold), etc. There are different stablecoins and depending on the type, different accounting standards may be applied. To understand how a stablecoin shall be accounted for, one needs to know: The stablecoin’s legal form (equity, interest, etc.). The stablecoin’s purpose. What rights and obligations do the stablecoin holders have. How the coin is collateralized or pegged and how the peg is maintained. How and how often the holders can redeem the stablecoin and whether there are any fees paid for the redemption? Because there are many conditions to consider, there is no single framework on how to account for stablecoins. Depending on a stablecoin, it can be accounted as ownership in an entity ( or ), an intangible asset ( ), or a financial asset ( ,or ). ASC 321 ASC 323 ASC 350 ASC 310 ASC 320 Non-fungible Tokens Non-fungible tokens (NFTs) represent ownership of a digital or physical asset. To determine how NFTs shall be accounted for, one needs to consider the following: What rights does the entity receive when purchasing an NFT? If it’s a right to an underlying digital or physical asset, the entity may account for the NFT value as equal to the underlying asset value. Whether an entity licenses its IP to a party that mints and sells NFTs, the party may acquire an equity stake or enter into a profit-share relationship with the party. Whether an entity mints its own NFTs, the minting costs are considered for the NFTs accounting. Whether an entity owns a marketplace where NFTs are bought and sold, it shall be considered whether the entity is a principal or an agent with respect to NFT minting and selling. If the entity enters into a contract with a customer and provides services as a part of its business activities, the accounting is subject to ASC 606. But if this is not the case, the appropriate guidance shall be still identified. Bottom Line Entities should make sure they select and apply the correct accounting guidelines. To do so, they should determine the nature of a digital asset when a third party holds it, the value of the digital asset, a unit for accounting, the cost basis, the measurements of how gains and losses are recognized, and many other factors. Entities are also responsible for full transparency and disclosures.

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