1.3 Corporate Governance

Management should understand the broader implications of digital assets, whether an entity is accepting them as payment for goods and services, investing in them, or creating its own digital assets.

1.3.1 Financial and Regulatory Risk

The anonymity of digital asset transfers and holdings has fueled concerns about the potential to use these assets in illicit activities or to evade tax. Digital asset transactions could therefore become susceptible to regulatory action and, possibly, confiscation if the assets are deemed illegal as a result of past transactions. Many tax authorities, including those in the United States, are also reviewing digital asset activities more closely. In June 2024, the U.S. Department of the Treasury and the IRS jointly released the first U.S. tax regulations that specifically apply to digital assets. Any company that transacts with or holds digital assets should consider the impact of these regulations as well as how they apply to the company’s activities. Given the financial and regulatory risks associated with crypto assets, those charged with governance should consider whether the policies they have in place are adequate to prevent their entity from becoming involved with illegitimate use of such assets (e.g., money laundering) or transacting with inappropriate parties.

In the United States, the regulatory structure for crypto assets remains vague. Issues for which greater regulatory clarity is needed include the legal classification of many digital assets, custody guidelines for regulated entities, and a federal regulatory framework for stablecoins. Although a new policy approach may be taking shape, with increased regulatory activity that includes the rescinding of restrictive guidance, crypto assets still pose a substantial regulatory risk given the evolving nature of U.S. policy in this area. With respect to financial risk, many crypto assets are volatile and often speculative instruments. Stablecoins, if properly collateralized, are a notable exception.

1.3.2 Corporate Responsibility

The amount of energy required to process some digital asset transactions is significantly higher than it is for more traditional payment mechanisms. Accordingly, those charged with governance should consider whether accepting BTC or other digital assets as payment for the entity’s goods or services is consistent with its desired environmental footprint and energy consumption objectives.

1.3.3 Operating Risks

The risk characteristics of digital assets differ from those of other intangible assets. To use digital assets it owns, the holder needs to have a key. If that key is lost, the digital assets associated with it may be lost forever. Thus, an entity should ensure that its back-up and recovery processes prevent the loss of a key and the related assets. Further, to ensure that only authorized people have access to the key, the entity may need to establish special procedures, such as encrypting the key or splitting it into components (shards) for additional security.

Holders of digital assets may also encounter new challenges related to financial controls and auditability. For example, management may need to re-create the balances for each key from the entire public blockchain ledger to ensure that it has stated its holdings of digital assets correctly.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.