On the Radar
Digital Assets
It has been over 16 years since Satoshi Nakamoto released Bitcoin: A Peer-to-Peer
Electronic Cash System and breathed life into a technology and financial
ecosystem that have not yet been fully defined. In January 2025, the price of
bitcoin (BTC) hit an all-time high of over $100,000. In those 16 years, tens of
thousands of digital assets have been created and countless innovations have driven
the evolution of the digital asset ecosystem to what we see today. The decentralized
ethos of this ecosystem has allowed for innovation at an unprecedented speed, since
anyone with a computer can design and launch the next game-changing technology.
While digital assets have proliferated over the past 16 years, we are just beginning
to see their integration with global financial services. Among other developments,
the first digital asset exchange-traded products have been launched in the United
States and digital assets are being used as treasury assets as well as in governance
and payment applications. That said, the industry continues experimenting with the
potential of decentralized finance (DeFi), the tokenization of real-world assets,
and the possibilities of Web3 in an on-chain world. While it remains to be seen
whether the future of the digital asset ecosystem lies in a purely decentralized,
permissionless world or a centralized one, the true power of the technology may be
that it can exist in both.
Accounting for the Unknown
The many different types of assets, products, and services being developed in the
digital asset ecosystem make it powerful and dynamic but also increase the
difficulty in defining and, hence, accounting for such transactions. One size
does not fit all in the decentralized world.
Before accounting for a digital asset, product, or service, it is important to
understand what it is and what it represents. For example, one should be
acquainted with the commonly used terminology/lingo in the digital asset
industry and what it refers to (e.g., HODL, stake, shard, mine, cryptocurrency).
Given the rapid increase in digital asset transactions, the accounting for such
transactions has become a frequent topic of discussion in the boardroom, on the
whiteboard, and even in the news. Below is a quick overview of some of the
accounting hot topics addressed in this publication, including recent
developments at the FASB and SEC.
FASB Guidance
The increased adoption of and interest in crypto assets like BTC have highlighted
challenges with applying existing accounting standards to this type of asset
class that did not exist when these standards were created.
The path or need for new accounting guidance was not always clear. For example,
in October 2020, the FASB voted unanimously against adding a project to its
technical agenda to address the accounting for digital asset holdings. In June
2021, however, the FASB issued an invitation to comment (ITC) to solicit feedback from
stakeholders on what the Board’s priorities should be for its next wave of
technical accounting projects — and out of 524 comment letters submitted, nearly
500 respondents requested changes to the accounting for digital assets. By
contrast, the Board received only 46 comment letters on its previous agenda
consultation in August 2016.
So, what happened at the end of 2020 and into 2021? Well, the price of BTC
soared. BTC trading volumes hit astronomical levels. Public companies began
investing in BTC, with some even investing their excess cash solely in BTC.
Given these developments, the general consensus was that the current accounting
and disclosure model was costly and complex for companies to apply, difficult
for practitioners to audit, nearly impossible for investors and financial
statement users to understand, and not reflective of the economics of a
company’s holdings in digital assets.
Under the existing accounting guidance, certain digital assets like BTC are
accounted for as indefinite-lived intangible assets — that is, they are recorded
at cost and subject to impairment testing. While the cost may reflect the fair
value of the BTC on day 1, an entity is required to continually monitor the fair
value, or price, of BTC and mark it down to the lowest intraday trading price
during the period. Subsequent recoveries or increases in price are not reflected
until the BTC is sold.
In May 2022, the FASB once again unanimously voted — this time in favor of adding
a project on accounting for digital assets. Several Board deliberations and one
exposure draft led to the FASB’s release of ASU
2023-08 in December 2023, which amends the accounting for
certain digital assets and requires the subsequent measurement of certain
digital assets at fair value. The resulting fair value model has helped clarify
certain aspects of the accounting guidance on digital assets but has left some
questions unanswered. Therefore, the new ASU has not entirely replaced the
existing accounting model and the previous guidance will still need to be
applied to certain assets.
There is potentially more to come from the FASB. In January 2025, the FASB
released an ITC that requests feedback from stakeholders on the Board’s
future standard-setting agenda, including digital assets. Comments on the ITC
are due by June 30, 2025.
SEC Guidance and Interpretations
The SEC has also provided its perspective on various crypto accounting matters in
the form of remarks made by the SEC staff, SEC comment letters and responses
that have been made public, staff accounting bulletins, and discussion at the
annual AICPA & CIMA Conference on Current SEC and PCAOB Developments. A
number of crypto-related topics have been addressed by the SEC, including crypto
lending, non-GAAP measures, application of the impairment guidance, and BTC
mining.
Most notably, in March 2022, the SEC issued SAB 121 to help registrants account for obligations to
safeguard crypto assets. Under SAB 121, an entity would have recorded a
safeguarding obligation at the fair value of the crypto assets being safeguarded
on behalf of others along with a corresponding safeguarding asset, factoring in
any potential loss events. This represented a significant change to the current
accounting practice because, before adopting SAB 121, an entity that had a
safeguarding obligation would have generally only recorded an asset and
liability with those activities if it had control, in the accounting sense, over
the digital assets. A flurry of congressional and political activity has been
associated with SAB 121 since its issuance, ultimately leading the SEC to
rescind SAB 121 by releasing SAB 122 on January 23, 2025.
The SEC has also provided its views on the accounting for crypto lending
transactions. For instance, the SEC has indicated that, in these situations, it
would not object to a company’s derecognition of the digital asset lent and
recognition of a crypto asset loan receivable that is recorded initially and
subsequently at the fair value of the digital assets lent and that factors in a
credit allowance in a manner consistent with an allowance for current expected
credit losses. Any difference in the carrying amount of the crypto asset lent
and its fair value would be recorded as other income.
With more and more public registrants engaging in digital asset transactions, the
SEC’s Division of Corporation Finance has also provided its perspective on
accounting for these transactions by issuing comment letters to such
registrants. Some of these SEC comment letters and filing reviews have led to
restatements.
Given the challenges in accounting for digital asset transactions, more
accounting and financial reporting guidance on this topic is likely to be
forthcoming. Stay tuned.
Connecting the Dots
On January 21, 2025, SEC Commissioner Mark Uyeda, who was then acting
chairman of the Commission, launched the Crypto Task Force. In its
press release on the development, the SEC stated
that the task force’s focus is to “draw clear regulatory lines, provide
realistic paths to registration, craft sensible disclosure frameworks,
and deploy enforcement resources judiciously.” SEC Commissioner Hester
Peirce, who leads the task force, released a statement on February 21, 2025, to solicit feedback
from the public on challenges associated with digital asset and
blockchain innovation. In addition, the discussion at various Crypto
Task Force roundtables has indicated that more on this topic is to come,
including defining security status, tokenization, custody, and
regulations for crypto asset trading.
For a comprehensive discussion of the
emerging issues and trends related to the accounting and
financial reporting for digital assets, see Deloitte’s
Roadmap Digital
Assets.
Contacts
|
|
Amy
Park
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 917 415
4242
|
For information about Deloitte’s
service offerings related to digital assets, please contact:
|
|
Reza van
Roosmalen
Audit & Assurance
Principal
Deloitte & Touche LLP
+1 212 436
2704
|