How Should Accountants Prepare for the Rise of Cryptocurrency?

This previously niche digital space that had all the hallmarks of tipping the entire financial and privacy market on its head is now understood to be less of a rapid, violent shift to financial and application freedom, and more of one part of a growing tidal wave of change across multiple sectors.

To many, cryptocurrency is a novelty, albeit a very expensive one in some quarters. It is completely untethered from day to day commerce for 98% of the world, it has not been registered as a fiat currency, and fluctuates so often and to double-digit percentages it staggers financial markets, traders and businesses, and savages investments. It is also incredibly unsustainable for the environment.

But it is changing the world. Crypto and the Blockchain are, by their own volition, quite revolutionary: they offer a decentralised method of trade, ownership, privacy, and asset management that redefines how we own things. This form of asset ownership has, to some, finally come of age.

So, how should accountants prepare for the rise of cryptocurrency? 

More than 100 million people around the world are now using cryptocurrencies, with the most intriguing shift being in older crypto owners, “…Financial advisory group deVere found 70% of its clients aged over 55 had already invested in digital currencies, or were planning to do so, in 2021”. These numbers are only going to rise as crypto stabilises, amid national and international cooperation as financial institutions try to adapt.

There has been a lot of hand wringing over how to handle cryptocurrencies by the global accountancy industry. There are over 4000 of them but with no standardised, global accountancy rules. Consider Ethereum – its stated goal is to create a globally accessible series of decentralised (financial product) applications.

Is cryptocurrency equivalent to money?

  • Crypto assets are digital tokens which provide personal access to the asset, and cryptocurrency is a medium of exchange, which is recorded on a distributed ledger
  • Other tokens provide other services, and these tokens provide rights of use. Because cryptocurrency cannot readily be exchanged for any good or service, it is not considered money.

Is cryptocurrency a financial asset/instrument?

  • Cryptocurrency does not meet the definition of a financial instrument because it is not registered as cash, an equity interest, or a contract to receive or deliver cash. It is also not a debt security or equity security because it does not represent an ownership interest in an entity.

Is cryptocurrency a intangible asset?

  • Yes, “as it is capable of being separated from the holder and sold or transferred individually”. The critical part of its definition as an intangible asset is putting crypto assets through regular impairment testing. However, the volatile nature of cryptocurrency can mean impairment judgements do not fairly reflect the asset cost, and fixed, diminished crypto assets can seriously impact your ability to do further business. Crypto assets can, in some regards, also be considered part of an inventory.

So, what do accountants need to be aware of?

If assets are registered as intangible, the revaluation method can be applied via fair value measurement, which then defines an active market for the currency. If it has an active market (i.e., Bitcoin) it should be considered as an asset, but this requires determining the most advantageous market for said assets.

Further to this, accountants need to assess whether the currency’s useful life is definite or indefinite. Current thinking is that it is an indefinite, intangible asset. This should guide your best practice.

Cryptocurrency is, however, highly volatile, the market is not standardised, and there is no working norm in accounting to handle cryptocurrency.

Will there be a whole new set of accounting practices and standards to meet the rising tide of crypto use, despite its fluctuations and decentralised nature? Only time will tell.

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From Graduate to CFO – How to Build a Career in Finance & Accounting, Gen Z and the future of accountancy, What Are the Big Accounting & Finance Challenges to Come?, Which Is the UK Accounting Qualification for You – ACA, CIMA or ACCA?

10-06-2021

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