What Are Cryptocurrencies? And Why Should You Care?

The total market capitalisation of all cryptocurrencies combined is more than USD 430 billion as of April 2018. The crypto phenomenon has gained a huge number of diehard supporters as well as some very harsh critics. Irrespective of which side of the divide one’s own personal feelings may lie, cryptos have gained both a substantial presence in certain investment portfolios and become the darling of fintech start-ups.

One of the biggest hurdles cryptocurrencies face is that they are clearly not understood by most of their potential end-users.

However, these end customers are not the only ones that are unsure of their status. Even legislators, regulators, central banks and accounting bodies around the world are undecided about how to deal with certain aspects surrounding cryptocurrencies.

Is it a currency, an asset class or property?

The first major challenge is to classify cryptocurrencies correctly. On the one hand, they are designed to replace currencies but on the other, they are being traded and invested in like financial securities. The classification differs not only from one country to another but even from one government agency to another! The tax authorities might treat crypto profits differently when compared with central banks or banking regulators.

What is cryptocurrency according to the IFRS?

Cryptocurrencies would probably not qualify as cash since they are not issued by any government. They cannot be considered cash equivalent because they are too volatile to fit that role. Since holding a cryptocurrency does not legally give you the right to receive some value in return, they might not be considered a financial instrument either. So, at the end of the day, cryptocurrencies might only fit the definition of an intangible asset – something that has no physical presence but can be sold based on its perceived value. At least this is the view held by certain IFRS experts that PwC recently consulted.

In support of this view is the analysis of IFRS guidelines by the Australian Accounting Standards Board. The AASB concluded that digital currencies meet the definition of intangible assets as defined by IFRS’s IAS 38 – Intangible Assets.

However, there are some difficulties with even this view.  Intangible assets like brand name or patents are used to generate revenue for the firm. This might or might not be true for cryptocurrencies. In some cases, they are only held for investment purposes which means that they could potentially be treated as an alternative investment class. Digital currencies might also be used to make and accept payments which further complicates the issue of their classification.

Conclusion

The truth is the jury is still out on these digital currencies’ correct accounting classification as the cryptocurrency market is still evolving. In 2017 these currencies gained significant traction amongst large institution players and this has brought the debate about their classification to the fore. International accounting standard setters have still not reached a decisive conclusion yet.  So, in the meantime, the best bet is to treat each case independently based on its specific circumstances.

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