In early September 2023, the US Financial Accounting Standards Board (FASB) finally issued a… consent The generally accepted accounting practice of market accounting to apply to companies and companies that own crypto-digital assets.
Previously, companies like Microstrategy and Tesla needed to present crypto-digital assets as intangible assets such as goodwill and intellectual property (IP). If the value of these intangible assets decreased, they had to declare a loss. However, if the value of intangible assets increased, these companies were not allowed to report gains in asset values.
Microstrategy’s Michael Saylor, perhaps the most prominent Bitcoin bull who has amassed a lot of Bitcoin for his company, pushed the Financial Accounting Standards Board (FASB) to make the move. Every time the spot price of Bitcoin fell during the reporting season, Microstrategy had to announce a loss. However, when the spot price rose during the reporting season, they were unable to announce a rise in the asset price. Saylor felt it was unfair that the negative downside appeared on the balance sheet, but not the positive side.
The new Financial Accounting Standards Board (FASB) rule places cryptocurrencies in a separate digital asset class, where a gain or loss will be declared based on the acquisition price, in a market-appropriate manner. Although the rule will officially go into effect in 2025, companies that choose to adopt it early may do so.
This change in accounting rules has serious consequences for the adoption of Bitcoin and cryptocurrencies in the world of corporate treasury. Previously, management and CEOs felt that acquiring digital assets would penalize their quarterly performance. With this change, corporate finance managers can determine the appropriate portfolio allocation based on the upside potential (alpha) and volatility (beta) of digital assets.
The FASB announcement appears to be timely with the SEC’s impending approval of a Bitcoin (or even Ethereum) ETF, and the world of digital assets will no longer be the market that began with cryptocurrency traders and enterprising individuals. An instant Bitcoin ETF will provide the company owner with the protection provided by the law provided by the Securities and Exchange Commission. Prior to any approval, the SEC required all proponents to ensure that the entity selling the ETFs (such as Blackrock or Fidelity) would be separate from the custodian (such as Coinbase) and the trading controller (such as Chicago Mercantile or NASDAQ).
More recently, grayscale had won D.C. Court of Appeals v. Securities and Exchange Commission decision. The three-judge court said that since the SEC had approved a futures ETF, there was no reason why it could not approve a spot ETF that in most cases was tied to the futures price anyway.
Once corporations, family offices, sovereign wealth funds, hedge funds and other institutional clients embrace Bitcoin and cryptocurrencies, high price volatility may disappear because these entities are not susceptible to sudden selling. Also, their order segments will not be in the tens or hundreds of dollars that retail investors do, but in the millions and billions.
The volatility of Bitcoin and other cryptocurrencies is actually dependent on who buys and sells these assets. Currently, most market holders are retail traders and speculators. With the emergence of institutional buyers, volatility is expected to subside somewhat as these large players are not moving in and out of the market so quickly.
Once the spot Bitcoin ETF gives these institutions the protections that the SEC provides to investors, coupled with this accounting change, the market value and use of these digital assets could grow significantly over the next few years.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific condition.
Zain Jaafar He is the CEO of Zain Ventures which focuses on investments in Web3 and real estate.
This article was published by the Cointelegraph Innovation Circle, a vetted organization of top executives and experts in the blockchain technology industry who are building the future through the power of communications, collaboration, and thought leadership. The opinions expressed do not necessarily reflect the views of Cointelegraph.