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28th October 2021 > > Accounting for cryptos.

tl;dr

The current accounting method for cryptos held on balance sheets is up for review and improvement.


Market Snap







Market Wrap

Looks like that bid at $60k got filled … no sign of liquidation risk so far from the leveraged kiddies despite that uptick in perpetual futures funding rates.


UST 10 year has taken a big move tighter.


Occasional Series – The Budget

Taxes on flights go down. Taxes on alcohol go down. Taxes on petrol and diesel go down.


Taxes on income go up.


This combination surely encourages people to fly more, drink more, drive more, and work less.


Why this merry go-round?


An appropriately designed consumption tax is not only the most progressive possible outcome but is easy to understand, very simple to implement, impossible for individuals and companies to legally wriggle out of, and hands more power and control to the working population, at the detriment of the political elite.


Oh, and legions of tax lawyers and tax advisors, and most of HMRC, will be forced to retrain, possibly as HGV drivers.


Winners all round.


Occasional Series - Political hypocrisy and the environment

We already know that Alok Sharma, Chairman of COP26 on behalf of the Tories, Allegra Stratton, Boris Johnson’s climate spokeswoman and Dr Gail Bradbrook, one of the founders of that other Marxist organisation, Extinction Rebellion, all drive diesel cars.


Liam Norton, a spokesman and key organiser for Insulate Britain, recently declared on live TV that he had not actually got around to insulating his own house.


Not one person in the Conservative Cabinet who have collectively signed off on the move to ban new gas boilers from 3pm next Tuesday have installed the favoured alternative, a heat pump.


If one accepts that there is an urgent need to address mankind’s use of carbon fuels, I suspect that leading by example might help the process of transition.


Curious Cryptos’ Commentary – Accounting treatment for BTC on the balance sheet

We last discussed this subject on 16th June 2021 when the CCC noted:


“MSTR (MicroStrategy) have put together a handy explanation for the accounting treatment of BTC:


“However, we believe that cryptocurrencies would generally meet the definition of an indefinite-lived intangible asset because they do not convey specific rights in the same way as financial instruments. Indefinite-lived intangible assets are not amortized, but are required to be recognized and measured at their historical cost; impairment is recognized when their carrying amount exceeds fair value. The subsequent reversal of previously recognized impairment losses is prohibited”.


What does this mean in practice?


If, at any quarterly reporting date, the mark-to-market value of BTC held on the balance sheet is less than the purchase price, the company must take that hit as a loss and declare it in the PnL.


If, at any quarterly reporting date, the mark-to-market value increases, that benefit CANNOT be recognised in the PnL until such time as the BTC is sold.”



A few companies – notably, Tesla, MicroStrategy, and Square amongst others – now own BTC as part of their Treasury assets and reserves.


Adoption of cryptos by Corporate Treasury departments was always going to be a slow burn, and not just because of the lack of knowledge and experience by senior individuals.


There are clearly many custodial issues, which to be fair are being addressed and overcome. The killer app here would be a physical, spot based BTC exchange traded fund (ETF), but I suspect we are still some way off that.


There is also the issue that Treasury departments do not foster an innovative approach to managing short-term and long-term liquidity issues. There is a tendency to do whatever everyone else does. The flip side to this problem, is that as we see ever increasing adoption of BTC into the mainstream, then at some point a critical mass will inevitably be reached, and suddenly all Corporate Treasury departments will feel obliged to own at least some BTC.


But the immoveable stumbling block to reaching that critical mass is the accounting treatment outlined above.


There are very few Corporate Treasurers who will accept that putting cryptos on the balance can only ever lead to impairment.


Immoveable until now it seems.


Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams, a bigwig in the world of financial regulators, has commented on the work being done by an interagency team drawn from FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (OCC).


The primary objective of this team is to put in place appropriate rules and regulations around the issue of banks owning cryptos and banks providing custodial services to their clients.


Jelena has stated that as part of this process, the rules regarding the accounting treatment of cryptos on corporate balance sheets will be reviewed and amended.


If the rules become more attractive from an accounting perspective, this might just be the trigger for the wholesale adoption of cryptos by Corporate Treasury.


I found some stats that claim that Corporate Treasury globally sits on $10 TRILLION of assets.


Personally, that seems a very low number to me, but let’s go with it.


If we assume that 5% will go into cryptos over the course of the next few years, that adds $0.5 TRILLION to the crypto market cap.


But I hazard a guess that most of that cash will go solely to BTC. The BTC market cap is currently $1.1 TRILLION.


If I am right, this implies that adoption of BTC by Corporate Treasury will increase the price of BTC by 45% or $27k per BTC.


And this is going to happen soon enough.

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