Why Crypto Accounting Should Be Addressed By The Financial Accounting Standards Board

Why Crypto Accounting Should Be Addressed By The Financial Accounting Standards Board

With the news that the Financial Accounting Standards Board (FASB) is asking for feedback on its future research agenda, there is no shortage of important areas to address.

That said, and not taking away from the other important topics, the case for the FASB to take up the question of developing crypto specific accounting standards is strong. Blockchain and cryptoassets have developed in creative and innovative ways, are a significant economic sector in and of themselves, and have done all of this while trying to contend with accounting standards that are out of date.

Accounting standards, be they U.S. focused (Generally Accepted Accounting Principles), or standards promulgated by the International Accounting Standards Board (IASB) were both developed and implemented for a manufacturing and goods based economy. Digital innovation has, rather obviously, completely transformed how value is created, and what types of organizations are well positioned to succeed.

None of this is new, however, so why should the FASB take up the issue of developing crypto-specific accounting standards, as opposed to the bevy of other issues that also need to be addressed? Let’s take a look at a few of those reasons below.

Crypto is material. A comment that has been made several times during previous conversations around crypto-specific accounting standards is that blockchain and cryptoassets are not a material item. From a strict interpretation of this concept, this is correct; cryptoassets on the financial statements of publicly traded organizations on U.S. exchanges do not appear to be material as of yet. This, however, misses the larger point.

With organizations including, but not limited to, PayPal, eBay, Mastercard, and Visa facilitating, authorizing, or otherwise engaging in cryptoasset transactions, the trend toward crypto payments becoming mainstream is clear. Additionally, recent updates and statements out of the Office of The Comptroller of the Currency (OCC) allowing OCC chartered institutions to process and engage in stablecoin transactions are a clear indicator of how integral crypto is becoming to the payments conversation.

In other words, an array of other regulators and private sector organizations are increasingly recognizing how important cryptoassets are for transactions and business operations; the FASB would be well advised to at least consider doing the same. Stated another way, with every crypto-denominated transaction, cryptoassets appear on the financial statements of more organizations.

Financial reporting will improve. A core aspect of high quality accounting information, for investors and regulators alike, is that this information is comparable, consistent, and relevant. Although the Association of International Certified Public Accountants (AICPA) has issued multiple whitepapers, practice aides, and other content related to cryptoasset accounting and auditing, the lack of authoritative crypto-specific accounting guidance remains an obstacle to consistent reporting of this data.

Setting aside the apparent consensus that cryptoassets should be treated as indefinite lived intangible assets – which does not reflect economics nor the use case of many cryptoassets – the array of choices used can make comparing organizations more difficult. Financial instruments can be complicated, that is a fact, but that is not a reason to not attempt to address the questions connected to cryptoasset accounting.

Discussed next, there is not an expectation that the FASB will be able to comprehensively address every potential question in a short-term manner, but even staking out a few key points and guidelines would both reduce market uncertainty and reduce the potential for errors, intentional or not.

Regulatory scope. As mentioned above there is no shortage of topics and potential agenda items for the FASB to get to work on, and every single one of these items will have proponents pushing to move them to the top of the agenda. Blockchain and cryptoassets are still a new asset class and ecosystem, so trying to definitively answer every question is not a reasonable expectation, and would end up doing more harm than good.

In that context, the FASB – in consultation with market participants of all sizes – would be well advised to chart out which possible areas are the highest priority. For example, some items that might be worth considering to start with are 1) establishment of different accounting treatment for different cryptoassets, 2) valuation techniques for both widely traded and thinly traded cryptoassets, and 3) how certain crypto activities (such as decentralized finance activities) should be recognized on the financial statements.

Even that short list of items represents relatively broad areas, but the only way to ultimately address these (and other) questions is to start framing out where to start.

Crypto-specific accounting standards are something that have been an ongoing conversation across the accounting and finance spectrum, including tax, audit, and reporting perspectives. That said, given how widespread and integrated all kinds of cryptoassets are becoming in the marketplace, it seems like an excellent time for the FASB to move these topics. The crypto market might not specifically ask for accounting standard setters to become involved, but investors, regulators, and organizations alike will benefit from better, and crypto-specific, accounting guidance.

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