Cryptocurrencies are Reaching New Heights, so are Accounting Issues

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Cryptocurrencies are Reaching New Heights, so are Accounting Issues

Is bitcoin buzz an event-driven motif? Are the arguments about bitcoin’s merit worth the hype? Or just another way to restrict the progress of parallel payment systems?

Curiosity prevails, yet it did not blur out the possibilities of bitcoin to outrun the market. As more companies are shifting their preferences towards crypto investments, growth is inevitable. Today the crypto market is drastically underscored by Tesla’s US$1.5 Bn investment, which has ushered in some radical change of events. Despite the big-fat success in holding up with the bitcoin hype, it also evokes a point of contention for usage legality.

Considering cryptocurrency embarks debatable consequences, the challenges of winning the existing accounting consensus are loud and clear. These 20th-century criteria are not armed to deal with the 21st-century crypto economy and do not echo financial reality.
Particularly with bitcoin hitting record highs, the challenges with the existing accounting consensus are loud and clear. With Bitcoin on house, terms like the concept of trustless, digital scarcity are far beyond the technical accounting dictionaries. The advent of distributed ledger technology has brought new criteria and possibilities beyond traditional accounting comprehension. To be frank, the 21st-century crypto-economy does not echo financial reality.

The Crypto-incoherency

Non-fungible Tokens (NFTs) or crypto-collectibles are created with a mark of proportionality and produced in limited quantities. NFTs are the building block of the blockchain-powered digital economy, it has its fair use cases in industries across. Industries, such as gaming, digital identity, licensing, certificates, even fine arts have accepted the crypto existence. This new form of currency that allows fractional ownership over items was surely the world’s first encounter with the possibilities beyond.

The American Institute of Certified Public Accountants (AICPA) did step up to welcome an alternative currency to walk the challenge. The board has recently circulated up-to-date non-authoritative guidance concerning digital assets. This is a ‘yes’ to crypto acceptance, yet the accounting guidelines continue to become complex and raise several unaddressed queries regarding the ethical burden over its use over bitcoin bidding and exchanges. A lot of adjustments are required to simplify the nuances around the cryptocurrency jargons for accounting ease.

The crisis elements of crypto-accounting

If we keep the common accounting problems at bay, others like accounting standards, valuation, changing book value – the emergence of non-fungible tokens (NFT) and decentralized finance (Defi) continues to cast new doubts on crypto usage. This does not even speak about the slews of problems that have to be understood and tackled by market players as they bank on smart contracts.

Let us look upon some of the problems that will continually show up as cryptocurrency tokenization (in whichever form) is on the rise.

Traceability

First, there are limited ways to authenticate and connect the ownership of physical assets with that of cryptocurrencies. As these digital assets are regulated by blockchain, anyone can re-trace electronic transactions. It even allows asset-backed crypto exchanges in the external markets, where they are put up for trades.

If the primary asset switches hands or corporate ownership or goes into default, the current accounting regulations lack the law to impose penalties. This asks for changes in the valuation of cryptocurrencies.

The real-world intangible assets create royalties or other annuity-like remunerations, these assets switch ownership may lose upon the legal protection for the asset. It’s suggestive of the fact, to have control over the token’s value to investors to cash out the physical asset.

Collateral Issues

If cryptocurrencies are being leveraged as collateral for other enterprise operations, or are serving as the fundamental asset for Defi projects, this can permanently hinder the ability of the companies to function.

Even though the market valuation has picked up – and this is well-known throughout market players – under this present consensus, these price hikes cannot be reported on the Generally Accepted Accounting Principles (GAAP) finances.

If companies are simply purchasing and holding crypto assets as a longer-term stake on crypto turning into a reserve asset, this will have a lesser effect, but still diminishes the functionality of crypto in this use case.

However, if companies are looking to use cryptocurrency as a central aspect of operations, this permanent abatement of the asset value of these cryptocurrencies can impede – or even block totally – some of those operations.

Taxable Events

Accounting is done for the tax objectives. You must maintain your books as a corporate entity and register your tax return by the end of each financial year to remain compliant. This is where things become tricky – not every crypto trade is taxed the same.
Firstly, a crucial thing to consider is that in most jurisdictions, cryptocurrencies are not considered currencies but in line with digital property. In the case of property tax implemented here is the capital gains tax, which is generally calculated as per the difference between the buying price and the selling price.

As such, various operations such as mining cryptocurrencies, payments to vendors, staking, and trading have to be separately accounted for, keeping in mind the basic expense.

Impairment

Assets that come under indefinite-life intangibles have to periodically undergo an impairment analysis, where the company assesses the asset to figure out if the reported value on the financial records is overestimated compared to the marketplace. Without taking a deeper dive into the details of this process, if there are business terms or other outside influences that trigger the management to believe that the asset value has declined, an impairment must be taken.

This leads to short-term impacts, through the cutback of asset value and related expenses on the income statement has a longer-term repercussion. Once an impairment has been instituted – under the GAAP – there is no possibility to regain that lost value. This means that if crypto holdings witness a drop in cost, this reduced value will be persistent and unable to be countered.

As demonstrated time and again, cryptocurrencies periodically go up and down in price by double-figure percentages; these cost fluctuations have to be considered.

Final Thoughts

All of these problems remain unaddressed with no crypto-centric reliable accounting guidance at this moment, and that is not inevitably bad news. Shaking out the truly creative and feasible ideas from potentially foamy bubbles is an essential aspect of the price determination and free-market procedure.

Having said that, it should be kept in mind that these accounting problems, while not as high-level for many market players, will be increasingly crucial as these areas evolve and expand.

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