Cryptocurrencies have now officially made a debut on the balance sheet of a central bank; could this lead to an entirely new cryptoasset reporting framework?
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Recently it was discovered that Central Bank of the Bahamas had included its newly created cryptocurrency, known as the Sand Dollar, on its balance sheet during April 2020. Although the amount that was actually listed was only equivalent to $48,000, the implications of this inclusion are profound.
This revelation comes on top of the news of just how comprehensive blockchain projects are at the Federal Reserve Bank of Boston, where over 30 blockchains are in various phases of testing and evaluation for possible implementation.
Cryptocurrencies have moved quickly from the fringe to the mainstream conversation, taking the form of decentralized financing, stablecoins, and most recently, central bank digital currencies (CBDCs). Even as the ecosystem has rapidly accelerated, however, there is still ambiguity as to how exactly different types of cryptocurrencies should be treated from a reporting and disclosure perspective.
This ambiguity exists even as industry associations and regulators, including the Association of Internal Certified Professional Accountants (AICPA), the Financial Standards Board (FSB), the Bank for International Settlements (BIS), and the Public Company Accounting Oversight Board (PCAOB) have begun to issue thought leadership on the subject. Despite these recent publications, in addition to the numerous opinions issued by other securities and market regulators, there is not a definitive guide or framework for how cryptocurrencies should be valued and reported.
The Sand Dollar amount might have only been for the equivalent of $48,000, but with central banks across the globe moving quickly to develop and beta-test versions of central bank digital currencies, it is only a matter of time until the financial impact scales materially. Given that, it is worthwhile taking a look at a prevailing opinion for reporting as well as an alternative that might make sense for certain organizations.
Mark-to-market. Marking assets value to market, on the surface, seems to make logical sense as well as to be reflective of market realities. Marking assets to current fair market value already occurs for certain financial instruments, and in some cases entire asset classes, so this is not an abstract concept. This prevailing opinion by practitioners and firms, classifying cryptocurrencies as intangible assets, also incorporates this concept of adjusting value based on market changes.
That said, the price volatility (which does not have to be good or bad) associated with cryptocurrencies – and the alt-coin market specifically – tempers enthusiasm for this approach. Price swings might make for great headlines and commentary, but can cause headaches for merchants and individuals seeking to use cryptocurrencies as a medium of exchange. Coupled with the lack of price transparency for some thinly traded crypto, marking to market might not be as simple as it might appear.
Addressing the volatility issues is actually one of the primary selling points of stablecoins and CBDCs, and arguably has been a driving force behind the rapid growth and investment in these assets.
A new asset class. An alternative to what is basically trying to make a square peg fit into a round hole – classifying cryptocurrencies as intangibles and marking to market – would be to create an entirely new asset sector for the cryptocurrency space. Creating a new asset class might seem like an extreme reaction to the growth of cryptocurrencies, but upon closer examination it might make more sense than it initially appears.
Taking a look at cryptocurrencies, it is relatively clear that these financial instruments do not fit neatly into any existing accounting classification. Depending on the cryptocurrency that is examined, it may or may not have characteristics of equity securities, interest paying instruments (similar to preferred stock), interest bearing deposits, intangible assets, or something akin to airline miles or reward points. Put another way, the very innovative spirit that has catapulted the cryptocurrency space to its current prominence has also led to a relatively messy reporting conversation.
By creating a new asset categorization for cryptoassets, organizations and policymakers will both have an opportunity to start fresh and to actually create reporting and disclosure standards that make sense for blockchain and cryptocurrencies. For example, cryptocurrencies could be classified by use case, or be reported depending on trading volume and market capitalization. There might even be different reporting obligations depending on what cryptocurrency is being analyzed.
Think of the following for a moment. Generally speaking, the cryptocurrency space can be broken down into three areas, especially for non-expert users. There are cryptocurrencies such as bitcoin that are completely decentralized and untethered to underlying assets. In addition, there are stablecoins that are more centralized (issued by an organization) and are connected to some external asset. Finally, there is the growing field of CBDCs issued and governed by a nation state or central bank and (most likely) connected to the fiat currency of that nation.
Does it make sense for such radically different instruments to be categorized and treated the same?
That question should be top of mind for organizations, users, and regulators as these different iterations of cryptocurrency continue to develop, compete, and gain traction in the marketplace.