The Cryptocurrency Conundrum

Montreal, Canada - 28 February 2018: Stacked cryptocurrency coins (Bitcoin, Ethereum, Litecoins)

This month, Bitcoin surged to an all-time high of more than $50,000, as interest in investing and supporting the currency continues to grow. Following Tesla’s US$1.5bn Bitcoin investment, along with Mastercard and PayPal Holdings announcing that they are looking at ways to support select cryptocurrencies directly on their networks later this year, interest has never been higher. However, as Bitcoin (and other cryptocurrencies) continue to grow in popularity, a glaring issue is emerging around the accounting treatment of these assets and how their value is reported in corporate accounts.

When it comes to cryptocurrency and its treatment under accounting standards there are ultimately two issues at play:

  • the first is whether cryptocurrency should be classified as an “intangible asset” given it essentially meets the classical definition of currency or a ‘cash equivalent’.
  • the second issue – which is relevant to cryptocurrencies (as long as they continued to be classified as intangible assets) and all the other intangible assets (such as data, confidential information, software, trade secrets, brand etc) – is the treatment of these assets under current accounting standards and the resulting impact this has on hiding significant value and risk within company accounts.

For years, accounting rule makers have rejected calls to update accounting standards to reflect the growing dominance of intangible and digital assets in driving company value. Now, with Bitcoin and other cryptocurrencies being classified as ‘intangible assets’ for accounting purposes, and with the scales firmly tipped towards value being driven by intangible assets, the calls for change are becoming louder and more urgent.

What’s a dollar really?

The fact that cryptocurrencies are currently treated as intangible assets under accounting standards represents a fundamental misunderstanding of both assets. For something to function as a currency, it should have three fundamental characteristics: it needs to be a store of value, a unit of account, and a medium of exchange. Cryptocurrencies clearly tick all three boxes. Cryptocurrencies are also clearly unlike intangible assets, as these assets typically provide a functional outcome and do not meet the three currency requirements at all.

Those in charge of the accounting rules seem to have made the overly simplistic assumption that owing to the intangible nature of cryptocurrency, it should be intangible asset. On this basis accounts containing currency recorded in digital form (which would cover the vast majority of all cash in the world) should be classified as an intangible asset too and only physical currency should be excluded from the definition of intangible assets. This is clearly a ridiculous proposition. The more logical and consistent approach is for accounting standards to recognise cryptocurrencies as what they are: cash or cash equivalents.

Not all assets are created – or treated – equally

With regards to the second issue, under current account standards, intangible assets are effectively ignored. They are either off balance sheet, are lost under the amorphous term “good will” or if they do make the balance sheet, they are recorded at cost.

There are major problems with all these approaches.  For example, when it comes to taking a cost approach, there is virtually no correlation between the cost of an intangible asset and its actual value.

Take for example a board room table – there is definite relationship between the inputs to the table (the metal, wood, and plastic) and its value – it will never be worth a billion dollars. However, this is not the same with intangible assets, some intangible assets can cost very little and become extremely valuable over time, while others can be extremely expensive yet turn out to be worth very little. For example: many large corporates spend tens of millions on R&D (the generation of intangible assets), yet create little (or no) value. On the other hand, many of the most important innovations come from small, underfunded, startups with a fraction of the R&D budget of their larger competitors.

As Steve Jobs famously said “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money.” In short there is no correlation between cost (the amount of money you spend on R&D) and the value of the intangible assets produced.

The straw that breaks the camel’s back?

When news broke of Tesla’s US$1.5bn investment in bitcoin, the spotlight was again cast on the accounting treatment of intangible assets and the urgent need for an overhaul of outdated accounted standards. Companies and investors urgently need a better way to account for the value of these critical assets in order to unlock further economic growth. There is hope that the Tesla scenario – along with mainstream payments companies such as Mastercard and Paypal opening their networks to cryptocurrency – might be the straw that breaks the camel’s back when it comes to something finally being done to change the archaic accounting rules that fail to recognise the value and importance of intangible assets in driving value.

With the balance sheet now being an unreliable source of guidance for the assessment of a company’s value (especially for tech and high-growth companies), now is the time for change.


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