18-9, Classification of Cryptocurrency Holdings (July 9, 2018)

Cryptocurrency should not be confused with electronic instances of cash (e.g., an online bank account with a consumer banking institution), which are linked to physical currency. An online bank account shows the amount of, for example, U.S. dollars held in a specified account. By contrast, cryptocurrency refers to a form of exchange that only exists digitally and is not linked to any physical currency. Entities should therefore exercise care when referring to cryptocurrency as “currency” since most governments do not currently consider it to meet the legal definition of a currency. In certain circumstances, cryptocurrencies may be considered securities by the Securities and Exchange Commission (SEC) and commodities by the Commodities Futures Trading Commission, as defined by those institutions. For taxation and other regulatory purposes, cryptocurrency can be considered and taxed as a property, prepaid good or service, or equity in the United States.

Other terms, such as “digital currency,” “virtual currency,” “tokens,” or “coins,” may be used to describe cryptocurrency. However, it is important to distinguish between cryptocurrency and tokens, which are often interchanged in media coverage. This Financial Reporting Alert focuses only on what the SEC considers cryptocurrencies and not tokens.

The best known example of a cryptocurrency is Bitcoin. However, today there are many types of cryptocurrency at different stages of maturity. The prices of cryptocurrencies as traded on exchanges or elsewhere are always represented in some other fiat currency (e.g., U.S. dollars, euros), although such prices are usually just the average of the buy/sell spread on the particular exchanges. In addition, prices for the same cryptocurrency often vary by small amounts on the various exchanges.

Cryptocurrencies have the following characteristics:

• They are created by “mining” (i.e., using computer power to solve complex cryptographic algorithms), often with a maximum number of coins that can exist (e.g., there can never be more than 21 million Bitcoins in existence).
• No single party (government or otherwise) regulates their use. Although values for a cryptocurrency may sometimes be quoted in a particular fiat currency, a coin in one country is indistinguishable from a coin in another.
• Their value is supported only by the laws of supply and demand.
• Their general purpose is to be used in exchange for goods or services (provided that both parties agree to such an exchange).

Cryptocurrencies can also be obtained by purchasing or receiving them on a peer-to-peer basis.

The ASC master glossary defines intangible assets as “[a]ssets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)” Cryptocurrencies are not financial assets because they are not cash, an ownership interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Since they lack physical substance, they are generally considered intangible assets.

ASC 350 requires entities to initially record intangible assets at cost (e.g., consideration transferred). As intangible assets, cryptocurrencies have indefinite lives and therefore must be tested for impairment at least annually and more frequently if events or changes in circumstances indicate that it is more likely than not that they are impaired. A decline below cost in a quoted price on an exchange may be an event indicating that it is more likely than not that a cryptocurrency is impaired.

Cryptocurrencies used as a medium of exchange or for speculative purposes are not “inventory,” which the ASC master glossary defines, in part, as “[t]he aggregate of those items of tangible personal property that [are held for sale] in the ordinary course of business.” Some cryptocurrencies may be held for sale in the ordinary course of business as part of a primary business model in a manner similar to how commodity inventories are held by brokers. We believe that in the absence of future standard setting by the FASB, it may be acceptable in certain circumstances for entities to account for cryptocurrencies as inventory if part of their primary business is to hold such cryptocurrencies in a manner similar to how brokers hold inventories. However, entities should carefully consider their facts and circumstances and consult with their accounting advisers before concluding that accounting for cryptocurrencies as inventory is appropriate.

Entities within the scope of ASC 9462 (i.e., investment companies) that hold cryptocurrencies as investments should account for them as they would any other investment that they measure initially and subsequently at fair value.