Chapter 3 — Initial Recognition and Measurement

3.3 Digital Representations

In many blockchain-enabled transactions, tokens are used to facilitate traditional asset transfers. Some examples of such tokens may include:

Dollar tokens that facilitate real-time cash transfers.
Tokens representing financial collateral used to conduct repos1 and reverse repos.
Tokens representing environmental credits used to facilitate spot and forward sales.2
Tokens representing whole or fractionalized shares of real estate used to facilitate sales of ownership interests in real property.

Such transactions are often conducted on a private blockchain between the blockchain developer and its customer (e.g., a bank that offers dollar token transfers to its customers). These transactions often can be “canceled and corrected.” As required by the blockchain technology employed, the tokens typically do not have value off platform. In such circumstances, the tokens may be considered digital representations of the assets that are ultimately subject to the transaction. The determination that these tokens are representations of other assets, and not assets in and of themselves, is often made by management in coordination with qualified legal counsel.

Connecting the Dots

In public blockchains in which a transaction cannot be canceled and corrected, an individual potentially could fraudulently obtain the token and abscond with the real asset represented by the token. Accordingly, while these digital representation transactions are typically a recordkeeping mechanism, the lack of a “cancel and correct” capability may be an indication that the token has stand-alone value and therefore should be accounted for as such.

While not authoritative GAAP, paragraphs E16 and E17 of FASB Concepts Statement 8, Chapter 4, may be helpful in the analysis of whether tokens such as those discussed above are assets. These paragraphs state, in part:

E16. An asset is a present right of an entity to an economic benefit.

E17. An asset has the following two essential characteristics:

It is a present right.
The right is to an economic benefit.

The combination of those two characteristics allows an entity to obtain the economic benefit and control others’ access to the benefit. A present right of an entity to an economic benefit entitles the entity to the economic benefit and the ability to restrict others’ access to the benefit to which the entity is entitled.

Paragraph E31 of FASB Concepts Statement 8, Chapter 4, further outlines the concept of a right to an economic benefit, stating that an “asset of an entity might be represented by rights to a particular property (such as the right to possess, use, and enjoy a parcel of land) or by rights to some or all the economic beneﬁts derived from the property.”

With respect to the characteristics described in paragraph E17 of FASB Concepts Statement 8, Chapter 4, tokens such as those described above often represent a tool used to effectuate a transfer on a blockchain (and are necessitated by the blockchain technology itself) and are digital representations of other assets. Digital representations are effectively electronic title documents — akin to a paper certificate of title that represents ownership of another asset such as a vehicle or real estate — but are not assets in and of themselves. Accordingly, by definition, such tokens cannot be intangible assets. When accounting for these assets, a company therefore would account for the underlying asset rather than for the token itself as a separate asset.

Example 3-2

Assume that Company A launches B Token on a blockchain-based payment platform. The primary business purpose for the B Token payment platform is to (1) provide A’s customer (Customer C) with a closed system for real-time intrabank commercial payment transactions and (2) facilitate deposit gathering to fund balance sheet growth. The B Token payment platform is not intended to be a trading platform for digital assets or tokens. In addition, B Token is not a stablecoin.

Using the B Token payment platform, C can tokenize a regulated and insured cash deposit (subject to FDIC limits) held in a banking system. To mint B Token, C initiates a transfer of dollars from C’s cash deposit account to A’s omnibus account and C’s wallet is funded with B Token (the “funding” is effectively a record-keeping exercise). Subsequently, B Token can only be redeemed on the closed network for a deposit held in an omnibus account (B Token has no legal tender status and no utility or monetary value outside of the B Token payment platform), and the redemption process is only possible by moving cash into a deposit account held by C.

Company A concludes that B Token exists to facilitate a pending cash transfer; however, before and after the transfer, the cash represented by B Token resides in the omnibus account and the amount does not change (only the identity of the holder of the right to the cash changes). From a business, legal, and regulatory perspective, B Token represents cash at all times and is a representation of the cash (the asset). Therefore, management determines that B Token is not a discrete asset as defined in FASB Concepts Statement 8.

Similarly, C would treat B Token as cash (until it is transferred to a third party). Such treatment is consistent with the account information that A provides to C as well as with FDIC treatment of the cash while in token form. Customer C determines that B Token is not a separate asset under GAAP; rather, it represents an ownership right to the underlying cash.

Footnotes

Repo transactions are those in which one party sells securities to a counterparty as part of an agreement to repurchase them at an agreed-upon price at a later date. These transactions effectively represent a short-term loan that is secured by collateral. By using a token to represent a security, entities can more efficiently trade, sell, and automate transactions for the underlying asset.

Tokenized forward contracts allow for early funding of climate projects that are still in development by permitting entities to hedge their emissions and manage their exposure to price fluctuations.

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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.