Crypto-specific accounting is coming – what FASB announcements mean for investors

Crypto accounting, and the lack of authoritative crypto-specific accounting guidance, has long been a problem for the crypto industry, and accounting professionals looking to offer advice to internal colleagues or external clients. After years of lobbying and requests, the Financial Accounting Standards Board (FASB) has begun to integrate crypto-accounting research and development of technical guidance into plans going forward.

A quick summary of the FASB’s moves is that in December 2021, the FASB announced that it would add a digital asset project to its research agenda, and in May 2022, this project was added to its technical agenda. These moves were seen as an indication that accounting standard setters were finally moving to create standards specific to this fast-moving industry. During August and September 2022, these optimistic feelings were tempered somewhat, when it was announced that non-fungible tokens (NFTs) and certain stablecoins would be excluded from this crypto accounting guidance.

However, the headline that has moved the markets the most was the October 2022 announcement that the FASB would approve certain crypto-assets to be accounted for at fair market value, versus the cost model (minus impairment) that had currently been adopted as the standard by market participants. Let’s take a look at what some of the implications of this pending change could be on the crypto space, and the pace of crypto adoption by both individuals and institutions.

Regulations are catching up. Whether it’s the launch of a new industry office by the Securities and Exchange Commission to focus exclusively on crypto-related disclosures and reporting, the Internal Revenue Service updating and expanding information requirements for taxpayers, or the Commodity and Futures Trading Commission commenting more publicly on the potential. regulatory role, the trend is clear. US regulators, after years of requests and lobbying from a wide range of actors, are acting to – finally – provide some more transparency and clarity for crypto investors and developers.

However, rulemaking is a double-edged sword, and the same market players who have been lobbying for more clarity and more rules should keep an eye on how these conversations develop. Crypto remains a volatile asset class that is rife with scams and unethical actors that generate headlines on an almost daily basis. Given that, policymakers may take a stricter approach than some market participants prefer.

Industry supporters and market players should continue to engage with legislators; having productive conversations to establish sensible and objective guidelines is always a wise use of management time.

Institutional adoption will (continue to) increase. If there’s one thing organizations, regardless of industry or geographical headquarters, don’t like, it’s uncertainty. Crypto has been defined by many factors, but one that has arguably led the conversation has been the uncertainty that continually accompanies every twist and turn in the sector. As the FASB continues to prioritize crypto-accounting issues on its research and technical agenda, this increasing clarity and comparability will aid adoption in a number of ways.

Specifically, now that businesses can have confidence that more crypto-specific accounting rules are coming, it will be easier to 1) assess the potential risks when integrating crypto into current operations, 2) have discussions with industry-specific regulators and insurance companies to mitigate them. risks, and 3) better disclose the risks, opportunities and other considerations to the investment market.

With some of the biggest asset managers in the world already launching crypto trading services, further developing blockchain services and generally becoming more interested in the sector, the sentiment had apparently already changed to a more positive one. Greater clarity and security around crypto will only reinforce and increase institutional interest.

Non-speculative applications will increase. One of the most common claims against the crypto space is that a large percentage of tokens, coins or other innovations lack financial fundamentals and business use cases. 2022 has not been kind to optimistic investors in the space, with the ongoing crypto winter and evaporation of non-fungible token (NFT) values ​​seemingly proving the naysayers right. Given this evidence, investors and (more importantly) regulators are understandably primarily focused on price volatility, speculation and unethical activities in the space.

However, one of the most important points of the crypto winter is the same declines in prices that have attracted negative attention and scrutiny from regulators and investors alike. Blockchain-based record-keeping applications, smart contracts that help blockchains (and firms using blockchains) to interoperate, as well as expanded use cases of tokenization beyond speculative trading, continue to evolve.

However, in order to invest financial and intellectual capital to develop such products and services, institutions and developers require more certainty and comparability about how this sector will be treated.

Accounting standards and headlines don’t usually make headlines, but the latest moves by the FASB should be celebrated and encouraged by crypto users, developers and investors alike.