Bitcoin ETFs Can Help Improve Crypto Accounting
The launch of the very first bitcoin exchange-traded fund (ETF) in the United States grabbed the headlines and is indicative of the increasingly mainstream nature of crypto from a legal and regulatory perspective. While this is certainly great news for the industry and should be recognized for the legitimation it brings, it also has the potential to help solve another lingering problem for crypto advocates; crypto accounting.
Accounting might not always make the hottest or most exciting headlines, but it is absolutely essential for individuals and institutions looking to fully integrate crypto into day-to-day transactions. The lack of crypto-specific accounting and reporting rules is not only an obstacle to wider use of crypto, but also does not reflect the economic reality of cryptoassets. The launch of tradable and investable bitcoin and crypto products that virtually anyone can invest in is a dramatic step in the right direction, but the current accounting treatment will remain a significant hurdle for now.
Let’s take a look at the current treatment, the issues it raises, and other options that – indirectly – launching a bitcoin ETF opens up for the market.
The problem. The current consensus on how to account for and report cryptoassets is to treat them as if they were the equivalent of intangible assets with indefinite useful lives. On the surface, this sounds like a perfectly reasonable approach; cryptoassets are intangible in nature, and even the tokenization of physical assets always results in the creation of intangible tokens. Where the problem arises, however, is that by classifying and treating crypto as such, it means that these assets must also be tested for impairment on a recurring basis.
Without delving into too much accounting detail, testing for impairment is a multi-step process that should be performed either 1) on an annual basis, and / or 2) when a change in economic conditions requires more frequent testing. Given the volatility of bitcoin and other crypto assets – which have been trending upward recently but hasn’t always been linear – this could cause organizations to have to demarcate different crypto holdings. These losses, even if no external transactions take place at these lower price levels, will appear on both the balance sheet and the income statement of these organizations.
The real problem, however, is that these losses are permanent and can never be reversed, even if the prices of these assets recover afterwards. In other words, the reality of asset valuations may not appear in financial statements prepared in accordance with generally accepted accounting principles (GAAP). As organizations from different economic sectors transact in bitcoin, keep some of it on their balance sheets, or hold it on behalf of clients, it is quickly becoming a common consideration in the market.
A potential solution. Launching a bitcoin ETF may, at first glance, not seem like a potential solution to the above issues raised regarding accounting, depreciation and reporting of cryptoassets. A closer look, however, reveals several key takeaways that market participants should notice and incorporate in the future.
First of all, the launch of a bitcoin ETF marks the approval of this idea – quite obviously – by the Securities and Exchange Commission (SEC). Aside from the ongoing talk about whether cryptos are securities at the moment, there is another angle to this story. In other words, the fact that in addition to the Internal Revenue Service (IRS), the SEC actively engages with the industry opens the door to a re-examination of the crypto consideration issues, as policymakers politicians clearly care about space and understand it better. .
Second, and building on this greater acceptance and understanding, market participants have the opportunity to attempt and shift the regulatory debate. As a growing number of organizations buy, sell, own, and otherwise use crypto as a central part of their operations, it makes sense that regulatory conversations – and, hopefully, accountants – evolve and mature.
It is too early to say with any authority how the conversation around crypto-accounting will evolve, because depending on the specific crypto asset in question, the accounting treatment could logically vary widely. Treating and classifying crypto as derivatives, commodities, cash equivalents, or stocks may make sense depending on the facts and circumstances of the situation. With this context and the complications that accompany such a multifaceted sector and space, it would be rash to attempt to solve all the accounting and reporting problems at the same time.
One place to start this process, however, is to integrate cryptoassets into existing accounting and reporting frameworks and allow organizations to hold these financial instruments at their fair market value (current market price). Volatility will never go away from the crypto industry, or any other space, but allowing these changes to show up in a transparent, comparable, and consistent manner is essential. After all, the whole point of accounting and reporting rules is to communicate information and data relating to the performance of the organization or asset, and it is time for crypto-accounting to catch up with market realities.