8.2 Crypto Asset Lending
8.2.1 Background
Nonauthoritative AICPA Guidance
AICPA Practice Aid, Accounting for and Auditing of
Digital Assets
Crypto Asset Lending
Question 25:
Assume a lender lends 100 units of a
crypto asset (Crypto Asset ABC) for a term of six months
to a borrower. The borrower will pay a fee in total of
six units of Crypto Asset ABC for borrowing Crypto Asset
ABC during the six-month loan period, paying one unit of
Crypto Asset ABC each month in arrears during the term
(this is typically referred to as an interest
payment in the agreement). At the end of six
months, the borrower is required to deliver 100 units of
Crypto Asset ABC back to the lender. For purposes of the
Q&A, assume that:
-
Crypto Asset ABC is an intangible asset under FASB ASC 350.
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The ownership of loaned Crypto Asset ABC is transferred to the borrower upon the transfer, and the borrower has the right to transfer, encumber, or pledge the crypto asset in any way it chooses.
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The borrower is not required to post collateral to the lender in the arrangement.
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The borrower has identified its functional currency as the U.S. dollar under FASB ASC 830, Foreign Currency Matters.
How should the lender account for the loan?
Response 25:
This response is based, in part, on comments made by the
SEC staff at the AICPA & CIMA Conference on Current
SEC and PCAOB Developments (conference) in Washington,
D.C. in December 2022 and SEC staff discussions with the
AICPA Digital Assets Accounting Working Group regarding
the SEC staff view on the accounting for crypto asset
lending arrangements.
U.S. GAAP does not provide explicit guidance specific to
the lending of crypto assets and accordingly we
understand the SEC staff considered all relevant
guidance in U.S. GAAP but did not base its accounting
conclusions solely on a single FASB ASC Topic. . . .
The SEC staff would not object to the application of this
model being applied as the adoption of a new accounting
principle under FASB ASC 250, Accounting Changes and
Error Corrections. Therefore, such change in accounting
principle would be reflected on a retrospective basis
for all periods presented unless impracticable to do so.
. . .
We understand the SEC staff would not
object to similar conclusions under IFRS, including
application of the principles in IFRS 9, Financial
Instruments regarding the allowance for credit
losses.
Entities considering applying alternative models should
consider consulting with their professional adviser or
the SEC staff.
Unlike traditional lending, crypto asset lending transactions involve crypto
assets and are executed over blockchain networks, which provide inherent
benefits such as transparency, security, and speed as a result of the
decentralized nature of blockchain technology. Crypto asset lending also faces
risks and challenges, such as regulatory uncertainty, market volatility, and
security risks.
There is currently no explicit guidance in the Codification that directly
addresses the accounting for crypto asset lending. However, as discussed below,
the SEC staff has publicly expressed certain views and the AICPA Practice Aid (issued by the AICPA’s
DAWG) provides nonauthoritative guidance consistent with the SEC staff’s views
on this topic, specifically in Questions 25 and 26.
At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments,
the SEC staff addressed the accounting for crypto asset lending. The staff
described a scenario in which a lending entity loans a fixed quantity of crypto
assets to a borrower for a specific period. While the loan is outstanding, the
borrower has the right to use the crypto assets at its sole discretion (e.g., to
sell or to pledge the crypto assets to a third party). At the end of the loan
term, the borrower is required to return the same type and quantity of crypto
assets to the lending entity. The lending entity earns a fee as compensation,
which may be expressed as a percentage of the crypto assets lent. In certain
arrangements, the lending entity might also require the borrower to pledge
collateral to the lending entity.
The SEC staff noted that it (1) has observed different
approaches in the application of U.S. GAAP or IFRS Accounting Standards to
crypto lending transactions and (2) believes that some of the approaches do not
faithfully represent the underlying economics of the transactions or serve the
needs of investors. Further, the staff described an accounting treatment related
to the scenario described above to which it would not object. Such accounting
would involve the derecognition of the crypto asset lent (see Section 8.2.2), the
recognition of a crypto asset loan receivable (see Section 8.2.3), and certain related disclosures (see Section 8.2.4).
The SEC staff has indicated that it would not object to an entity’s application
of the guidance in the updated Question 25 as the adoption of a new accounting
principle under ASC 250. In such circumstances, the entity would be required to
account for the change in accounting principle retrospectively for all periods
presented.
Connecting the Dots
In a significant change from the superseded Q&A, entities applying
the model in the updated version of Question 25 derecognize crypto
assets held and measure a crypto asset loan receivable at the fair value
of crypto assets loaned, taking into account credit risk. Accordingly,
the financial statements of entities applying the updated Q&A’s
guidance could materially change. Public entities, as well as private
entities seeking to register with the SEC, are subject to the SEC’s
requirements, as reflected in the updated Question 25. Other private
companies should consider whether they would achieve better financial
reporting results under the guidance in the updated Q&A and should
consult with their accounting advisers if they wish to continue applying
the guidance in the superseded Q&A.
Questions have arisen regarding whether the SEC staff’s views on crypto asset
lending apply only to crypto assets accounted for as intangible assets or
whether they are also relevant to crypto assets accounted for as financial
assets, such as certain stablecoins. Because the SEC staff’s comments on crypto
asset lending do not apply specifically to either crypto assets accounted for as
intangible assets or those accounted for as financial assets, we believe that
entities should consider the principles outlined in these comments and evaluate
their applicability to lending of crypto assets accounted for as financial
assets. Entities are advised to consult their accounting advisers to ensure
appropriate treatment and compliance with relevant accounting standards.
The SEC staff has expressed similar views on the accounting for crypto asset
lending under IFRS Accounting Standards. Therefore, an entity filing financial
statements with the SEC or planning to go public in the United States should be
mindful of the staff’s views discussed in this chapter (see Section 4.1.2-5 of A5 of Deloitte’s iGAAP publication for further discussion of accounting
considerations related to crypto asset lending under IFRS Accounting
Standards).
Connecting the Dots
While the SEC’s interpretations expressed in Question 25 of the AICPA
Practice Aid are mandatory only for public companies, private companies
may want to consider also adopting these interpretations since the SEC
believed that other applications did not faithfully represent the
economics of the transactions and do not serve the needs of users of the
financial statements.
8.2.2 Derecognition of Crypto Asset Lent
Nonauthoritative AICPA Guidance
AICPA Practice Aid, Accounting for and Auditing of
Digital Assets
Crypto Asset Lending
Response 25: . . .
We understand that the SEC staff believes it would be
appropriate, in this specific fact pattern, to conclude
that the lender transferred control of the crypto asset
such that the asset should be derecognized by the
lender. While this fact pattern did not require the
borrower to post collateral, the posting of collateral
would not impact the derecognition conclusion.
In assessing whether the crypto assets lent should be
derecognized in this fact pattern, various indicators of
control and elements of asset derecognition would be
considered, including, but not limited to, the following:
-
The lender has transferred the present rights to the economic benefits associated with the crypto asset for a different right to receive crypto assets in the future;
-
The lender cannot sell, pledge, loan, or otherwise use the lent crypto assets while the loan is outstanding, as those rights have been transferred to the borrower;
-
Inherent in the realization of the economic benefits associated with the crypto asset loan receivable is exposure to credit risk of the borrower; and
-
The borrower of the crypto assets can deploy those assets at its discretion for the duration of the lending arrangement and bears the risk of loss or theft of those assets, and otherwise has the ability to direct the use of the assets transferred.
An entity that lends a crypto asset should evaluate whether it has lost control
of the crypto asset lent. In the scenario addressed by Question 25 (see
Section 8.2.1), the SEC staff believes
that it would be appropriate for the lender to derecognize the crypto asset when
it is lent to the borrower because control of the asset has been transferred to
the borrower.
8.2.3 Accounting for Crypto Asset Loan Receivables
Nonauthoritative AICPA Guidance
AICPA Practice Aid, Accounting for and Auditing of
Digital Assets
Crypto Asset Lending
Response 25: . . .
Upon derecognition of the lent crypto asset, we
understand the SEC staff would not object to a
conclusion that the lender would recognize an asset that
is reflective of its right to receive the crypto assets
from the borrower at the end of the loan period (herein
referred to as a crypto asset loan receivable).
The crypto asset loan receivable would be measured at the
fair value of the lent crypto assets both initially and
at subsequent reporting dates, assuming the lender is
not otherwise required to apply specialized industry
measurement guidance for the loan, such as that required
by investment companies. Any difference between the
carrying amount of the derecognized crypto assets and
the initial measurement of the crypto asset loan
receivable would be presented in the income statement as
other gains and losses and not as revenue. Further,
because the crypto asset loan receivable exposes the
lender to the credit risk of the borrower, the lender
should recognize an allowance for expected credit losses
that incorporates forecasts reflecting the lender’s
expectation of credit losses related to the crypto asset
loan receivable utilizing the principles in FASB ASC
326, Financial Instruments — Credit Losses.
As detailed in the AICPA’s response above, the SEC would not object if, upon
derecognition of the crypto asset lent, the lender recognizes an asset that
reflects the lender’s right to receive the asset back from the borrower (i.e., a
crypto asset loan receivable). The lender would also measure the crypto asset
loan receivable at fair value and continue to remeasure it on the basis of the
fair value of the loaned crypto assets as of each subsequent reporting date.
When a crypto asset is lent out, the transaction does not represent a sale of
goods or services. Instead, it is more akin to a financing transaction in which
the lender is providing a loan and receiving a receivable in return. The initial
measurement of the crypto asset loan receivable is at fair value, and subsequent
remeasurements reflect changes in the value of the crypto asset loan receivable
rather than revenue generated from the entity’s core business activities.
Furthermore, since the lender is exposed to the borrower’s credit risk through
the crypto asset loan receivable, the lender should establish an allowance for
expected credit losses in accordance with the principles outlined in ASC 326.
While establishing an allowance in such situations is not directly within the
scope of ASC 326, the SEC has indicated that doing so would be consistent with
the model in ASC 326 for current expected credit losses. For more information
about the guidance in ASC 326, see Deloitte’s Roadmap Current Expected Credit Losses.
We believe that, although not specifically addressed in the SEC staff’s view, the
following financial statement presentations would be appropriate:
-
Balance sheet — The crypto asset loan receivable (net of the allowance for credit losses) should be reported separately from the lender’s recognized intangible crypto assets.
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Income statement — Income derived from loan fees, while not interest on a loan, may be analogized to interest on a loan or fee income on a receivable and accounted for and presented accordingly in the income statement.
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Statement of cash flows — The exchange of the crypto asset lent for the crypto asset loan receivable should be disclosed as a noncash activity (see Chapter 5 of Deloitte’s Roadmap Statement of Cash Flows). Any gain on the exchange should be presented as a reconciling item in the reconciliation of net income to net cash flows from operating activities (see Section 3.1 of Deloitte’s Roadmap Statement of Cash Flows).
8.2.4 Disclosures
Nonauthoritative AICPA Guidance
AICPA Practice Aid, Accounting for and Auditing of
Digital Assets
Crypto Asset Lending
Response 25: . . .
While not an all-inclusive list, as other disclosures may
be applicable based on the facts and circumstances, the
lender’s financial statements should include disclosures
regarding the terms, risks, and nature of the
arrangements, including how management monitors its
exposure to credit risk from these arrangements. If
collateral is required, disclosures should include, but
are not limited to, the type and amount of collateral
held for crypto asset loans; the terms of the collateral
(including any requirement to pledge additional
collateral during the term of the loan); and how
management monitors its ability to liquidate the
collateral and recover the crypto assets in case of
borrower default.
The financial statements should include relevant
disclosures using the principles of FASB ASC 326
regarding factors used to develop expected credit loss
at inception and on an ongoing basis including, but not
limited to, quantitative and qualitative information
about the credit risk characteristics of the borrowers
and lending arrangements; changes in the allowance for
expected credit losses, including, current period
provisions and write-offs, and recoveries of previous
write-offs; and crypto loans past due and how such
status is determined.
Disclosures should also address, if applicable,
vulnerability from concentrations disclosures using the
principle of FASB ASC 275, Risks and
Uncertainties, related party disclosures under
FASB ASC 850, Related Party Disclosures, and fair
value measurement disclosures required by FASB ASC 820,
Fair Value Measurement.
As described above, disclosures of an entity involved in crypto asset lending
should include the following information (not all-inclusive):
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The terms, risks, and nature of the arrangement.
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Any collateral obtained, including its type, amount, and terms. At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff indicated that it would expect entities to disclose the following: (1) A description of the type and amount of collateral posted by the borrower, (2) any requirement for the borrower to pledge additional collateral during the term of the loan, (3) how the lending entity monitors its ability to liquidate the collateral in the case of the borrower’s default, and (4) changes in the collateral’s fair value during the term of the loan.
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The factors the entity uses to determine expected credit losses under ASC 326 both at inception and on an ongoing basis. Such disclosures would include qualitative and quantitative information about the credit risk characteristics, movements in the allowance (e.g., current-period provisions, write-offs, and recoveries), and past-due crypto loans and the determination of past-due status (see Section 8.2 of Deloitte’s Roadmap Current Expected Credit Losses). At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff noted that it would expect disclosure of information that would give investors insight into how the lending entity monitors and manages its exposure to credit risk. Further, the staff indicated that the disclosure requirements in ASC 326 provide a meaningful starting point for considering which disclosures would be important for investors.
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The entity’s vulnerability to concentrations under ASC 275.
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Related-party information under ASC 850, if applicable.
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Information about fair value measurements in accordance with ASC 820-10-50 (see Chapter 11 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option)).
8.2.5 Example
The example below illustrates the accounting for crypto asset lending.
Example 8-1
Entity C is a private company that provides various
services, including conducting an exchange that allows
customers to buy and sell digital assets that are not
securities (i.e., BTC and ETH).
On August 12, 20X0, C enters into a master loan agreement
with Entity X. In accordance with the agreement, C may
seek to initiate a transaction in which X lends BTC, BTC
cash, ETH, ETH classic, litecoin, or any digital asset C
and X agree on. The digital asset will be delivered by C
to X upon termination of the loan. Entity C submits a
lending request to X specifying the type and amount of
the digital asset as well as the loan’s effective date
and maturity date. Once X agrees to make a loan, it
transmits the specified amount of the digital asset to
C’s digital asset address.
On November 13, 20X0 (the loan’s effective date), C
borrows 5,000 BTC and the carrying value of one BTC is
$10,000 (the “X loan”). The loan’s maturity date is
February 12, 20X1 (when the loan becomes due and
repayable in full in the same form of digital assets
lent [i.e., BTC]).
Entity C agrees to pay X a financing fee on each loan.
The loan fee for the X loan is 4.5 percent per annum, to
be paid in BTC. The fee for the term of the X loan is 56
BTC [(5,000 BTC × 4.5%) × (91/365)]. The fee accrues
from the date on which the loaned assets are transferred
to C to the date on which they are repaid in their
entirety to X. The financing fee is calculated daily and
paid monthly and is payable in the same loaned assets
that were borrowed (i.e., BTC).
Entity X estimates an allowance for expected credit
losses of $1 million and $800,000 on November 13, 20X0,
and December 31, 20X0, respectively.
The fair value of one BTC on November 13, 20X0, and
December 31, 20X0, is $12,000 and $15,000,
respectively.
At inception (i.e., on November 13,
20X0), X records the journal entries below since it
transfers control of the digital asset in such a way
that it should derecognize the asset (as is consistent
with the response to Question 25 of the AICPA Practice
Aid). Moreover, the digital asset loan receivable should
be measured at the fair value of the lent crypto assets
both initially and on subsequent reporting dates. The
response to Question 25 also mentions that any
difference between the carrying amount of the
derecognized crypto assets and the initial measurement
of the crypto asset loan receivable would be presented
in the income statement as other gains and losses and
not as revenue. Note, however, that after the adoption
of ASU 2023-08, crypto assets within the scope of ASC
350-60 are remeasured to fair value on a recurring basis
in such a way that the initial measurement of the crypto
asset loan receivable might be expected to equal the
carrying amount of the derecognized BTC asset less any
expected credit losses provided that the interest or fee
on the crypto loan receivable is commensurate with
adequate compensation for the crypto asset lending
arrangement.
Journal Entries: November 13, 20X0
(Note that the journal entries below apply to entities
that have not yet adopted ASU 2023-08.)
Journal Entries: November 13, 20X0
As of the quarterly reporting date (i.e., December 31,
20X0), X determines that because the crypto asset loan
receivable exposes the lender to the credit risk of the
borrower, the lender should recognize an allowance for
expected credit losses that incorporates forecasts
reflecting the lender’s expectation of credit losses
related to the crypto asset loan receivable in
accordance with the principles in ASC 326. The journal
entries below reflect the activity during the year ended
December 31, 20X0.
Journal Entries: December 31, 20X0