8th September 2023 > > Accounting & economists.

tl;dr

A change in accounting rules will facilitate crypto adoption. A famous economist might sometimes wish he had kept his mouth shut.

Market Snap

Market Wrap

Risk assets heading into the weekend in a positive mood though I see no correction in long-term rates. 2s/10s remain inverted at 73bps but policymakers just do not care. If you wish to stick with the flawed concept that governments should decide short-term interest rates, focussing on real-world measures like M2 and inversion would lead to much better decision making. Targeting inflation based largely on global commodity prices whilst furiously virtue-signalling remains the only game in town for central bankers.

Curious Cryptos’ Commentary – Accounting for cryptos

You may not remember this in detail, but on 16th June 2021 the CCC examined the issue of accounting rules for a corporate holding BTC and other cryptos on its balance sheet. In summary, the rules are draconian, seemingly designed to deter holding cryptos at all (surely not – ed):

“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.”

Stung by this sharp criticism levelled by the CCC, an interagency team comprising FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency was put together to address this very issue (as reported by the CCC on 28th October 2021).

Finally we have some results of that work, and it is all good news for crypto adoption.

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The FASB (Financial Accounting Standards Board) has changed the accounting rules:

https://www.fasb.org/Page/ShowPdf?path=CRYPTO-BMHO-20230906.pdf&title=September%206,%202023%20FASB%20Board%20Meeting%20Handout

Cryptos can now be recognised at fair value, which is probably the market price with a minor adjustment downwards to take account of liquidity, or lack thereof. In practice, OTC trades of large size most likely trade at a premium to the market price, but we can never know for sure.

These new rules will be mandatory from 2025 but can be adopted immediately.

For corporates that hold cryptos – MicroStrategy, Tesla, Square, and others – this will lead to a one-off PnL uptick in the next round of quarterly reporting, with a more volatile balance sheet thereafter. This is an improvement on the previous situation.

BTC evangelist and MicroStrategy Chairman Michael Saylor points out:

"Fair value accounting is coming to #Bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of $BTC as a treasury asset."

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I once found an estimate of $10 TRILLION for the global size of Corporate Treasury, which seems very low to me, but it is all I have.

The current market cap of BTC is $0.5 TRILLION.

For every 1% of treasury funds going into BTC, that increases the market cap of BTC by 20% i.e. $5k per BTC, or a touch more.

We can argue whether 1% of treasury funds or 5% will go into BTC. We can argue about the total size of treasury funds.

What is clear is that with even the most conservative of assumptions, this seemingly arcane change to accounting rules has the potential to materially impact the price of BTC upwards.

Curious Cryptos’ Commentary – Paul Krugman

Krugman and I are never likely to see eye-to-eye on matters economic, though I concede that his standing is probably more respected than mine on those types of issues.

Here he is opining in 1998 about technology:

“The truth is that we live in an age not of extraordinary progress but of technological disappointment.”

And IT:

“As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.”

And the internet specifically:

“The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.”

…

His failure to grasp the value of networks, probably underpins his thinking on cryptos:

"Bitcoin plays into a fantasy of self-sufficient individualism, of protecting your family with your personal AR-15, treating your Covid with an anti-parasite drug or urine and managing your financial affairs with privately created money, untainted by institutions like governments or banks."

"Cryptocurrencies play almost no role in economic transactions other than speculation in crypto markets themselves. And if your answer is 'give it time,' you should bear in mind that bitcoin has been around since 2009, which makes it ancient by tech standards; Apple introduced the iPad in 2010."