Something interesting is going on in the global accounting world, which deserves attention of the crypto community.

International Financial Reporting Standards Interpretation Committee (IFRIC) have been considering what type of asset cryptocurrencies are. IFRIC published a consultation back in March, received over 20 responses from different professional organizations and recently issued the Staff Paper, which addresses the received comments and proposes the final wording for their decision.

You can read all the comments and interpretations using the links provided above – if you are interested in economics of cryptocurrencies it will be worth of your time. I would TL&DR this highlighting the following:

Definition of cryptocurrency:

For the purposes of its discussion, the Committee considered a subset of cryptoassets with all the following characteristics that this agenda decision refers to as a ‘cryptocurrency’:

a) A digital or virtual currency recorded on a distributed ledger and uses cryptography for security.

b) Not issued by a jurisdictional authority or other party.

c) Does not give rise to a contract between the holder and another party.

This is carefully worded and clearly excludes utility and security tokens from the definition of the cryptocurrency.

What kind of asset cryptocurrencies are?

The Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 to holdings of cryptocurrencies.

Put simply cryptocurrencies could be treated in two ways depending on whether holding entity intends to re-sell them or not:

  • when they are intended to be sold, crypto should be treated as an inventory item (like stock in a store), and
  • when they are not intended to be sold, crypto should be recognized as an intangible asset (like computer software).

So cryptocurrencies are not recognized as money or any other type of financial assets. Here is why:

The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash (see below). Nor is it an equity instrument of another entity.

‘currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.

Some cryptocurrencies can be used in exchange for particular good or services. However, the Committee noted that it is not aware of any cryptocurrency that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Consequently, the Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.

In a nutshell, in order to be considered cash, cryptocurrencies should be used as medium of exchange and a unit of account. Since they do not have these characteristics, cryptocurrencies cannot be recognized as cash .

Some of the respondents noted that cryptocurrencies are already used as medium of exchange. For instance Brazil SEC pointed out that:

.. it must be taken into consideration that, in some transactions, cryptocurrencies are in fact a medium of exchange (e.g. used in exchange for goods or services) and may be used as the monetary unit when pricing goods or services.

However, the majority of respondents broadly agree with the Committee that:

  • cryptocurrencies should act as medium of exchange to be treated as cash,
  • they are not used as such yet, and
  • this conclusion may need to be reassessed in the future, once cryptocurrencies are broadly accepted.

It is worth to stress, that Store of Value is not even mentioned by either the Committee or the Professional bodies responding to the consultation. Despite being so frequently uttered in the crypto world, this concept has absolutely no gravity in the professional circles.

Conclusion: Cryptocurrencies are seen as a speculative innovative class of assets that should be currently accounted as inventory bought for re-sale (i.e. presented like stock in warehouse with profits recognized only when it is sold). However, when they will become actively used as medium of exchange, cryptocurrencies could be recognized as cash and treated like foreign currencies (i.e. presented like cash holdings and revalued according to the prevailing exchange rate).

Adoption, adoption and adoption. That’s all we need.



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