Ep. 118: Dr. Sean Stein Smith - Accounting for Cryptoassets
Dr. Sean Stein Smith, CMA, CPA, Assistant Professor at Lehman College (CUNY), joins Count Me In again to talk about accounting for cryptoassets. In previous episodes, Sean broke down different types of blockchain and what its implication is for accounting and finance professionals. For this episode, he focuses more specifically on his Forbes article, "Bitcoin is Hitting an All Time High", accounting standards for cryptoassets, and what organizations can do long-term with cryptoassets, among other ideas. Download and listen now!
Contact Dr. Sean Stein Smith: https://www.linkedin.com/in/dr-sean-stein-smith-dba-cpa-63307444/
Institute for Blockchain & Cryptoasset Research: https://www.ibcr.info/
Bitcoin Is Hitting All Time Highs – How Are Organizations Accounting For It?: https://www.forbes.com/sites/seansteinsmith/2021/02/17/bitcoin-is-hitting-all-time-highs--how-are-organizations-accounting-for-it/
FULL EPISODE TRANSCRIPT
Mitch: (00:00)
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong and this is episode 118 of our series. For today's episode, we welcome back Assistant Professor at Lehman College, Dr. Sean Stein Smith. Sean is also the founder of the Institute for Blockchain and Crypto Asset Research and is a forbes.com contributor in the area of crypto and blockchain. In previous episodes, Sean has joined us to talk about different types of blockchain and its uses. In the conversation you're about to hear now, he talks with Adam specifically about accounting for crypto assets. Let's head over and listen to their conversation now.
Adam: (00:51)
So Sean in your recent article for Forbes, you talk about how Bitcoin is hitting an all time high. What does this mean for an organization's accounting as not every organization is ready to move into cryptocurrency?
Sean: (01:02)
Yeah and so with the price of Bitcoin and all of the other altcoins, really at their all time highs or very close to them, all of this is having a huge impact on how companies are trying to adapt, navigate in trying to onboard Bitcoin and other crypto options as a form of doing payment. Right? Because it’s always important to always keep in mind that even though Bitcoin headline prices are obviously headline news, the original idea of Bitcoin and the whole blockchain crypto asset space, it was to develop basically a alternative way to conduct payments. And it hasn't really played out that way and a big part of that is that it's awfully hard for certain firms out there to actually take a Bitcoin and other crypto as a form of payment. And I mean, there are all kinds of IT issues on how the computer systems have to interoperate, but the real issue from sort of our angle here is that the current accounting treatment really makes no business sense from a tax point of view, from a gap point of view, from a IFRS point of view, there really is a issue and a headwind out there that I believe and in all of the anecdotal conversations that I have is honestly proving to be a big headwind that firms are having a hard time trying to figure out how to one, take in these agreements and then two, after they have them what to do with them.
Adam: (02:40)
So is it kind of like the Wild West out there since there are no crypto specific authoritative accounting standards?
Sean: (02:46)
Well, there are no crypto specific authoritative standards yet, either under gap or IFRS but there is this consensus that apparently has been reached, led by the top firms trying to sort of get something out there right. And I totally understand why they were trying to get some sort of consensus out there via the white papers conversations, all the rest to have something to answer external client questions with, but the current treatment of Bitcoin and other crypto as a indefinite lived intangible asset, which kind of sounds good on paper, right? Because Bitcoin and other crypto are intangible and they have no fixed economic life. But outside of that, it honestly makes no sense because it doesn't really reflect the economic realities on the ground. And I won't go into too too much depth here, but if I have an indefinite, intangible asset on the books like Goodwill, I have to do tests for possible impairment losses every time, a change in the business outlook really causes that to happen. Okay great, but if I have Bitcoin on the books, as we all know, Bitcoin and other crypto assets have a little bit of price volatility in there. And so if it drops by 20%, 10%, which it has done multiple times, I, as the firm holding these assets now on the books, I have to do the test for impairment, write down the asset books, the cost. Okay, so far so good. But on the other hand, if and when Bitcoin goes up by 10%, 20%, 200%, I can't do anything with that under the current rules. So it's not so much the Wild Wild West out there. It's almost artificially trying to fit a square peg into a round hole Adam, right because I can't mark up correctly the current market value of the assets that I hold, or in other words, under the current accounting, consensus that has been reached in the face of no crypto specific guidance, I'm basically forced to hold these assets on the books at an artificially lower level, no matter what happens outside in the marketplace.
Adam: (05:29)
Now you mentioned impairment in that last answer, how does that come into play with cryptocurrency? Could you go into a little more detail?
Sean: (05:36)
Sure. And so probably the most obvious case as to how it could come into play is if I received payment in Bitcoin at the end of 2020 or even early 2021, Bitcoin and the other altcoins out there were on an upswing, right. They had all increased in price quite a bit. During that back half of 2020, and into the first quarter of 2021, obviously there are some pullbacks and that's where the issue really does pop up. So there was one specific weekend early in the first quarter of 2021 where the price of Bitcoin dropped over 20%. And so if I, as a firm head chosen to take Bitcoin as a form of customer payment and then also chosen to hold those Bitcoin in a hot wallet, cold wallet, all the rest of us actually hold them at the firm. So I've been paid in crypto, got the back office and go to work, he was able to interoperate with my AR AP treasury all the rest. So now I'm holding Bitcoin on the books. Okay. Then if it drops by 20%, I think it was 24% over a four or five day period. I have to book that impairment loss. Because that's an obvious change in the asset itself, market conditions, business conditions that then triggers this whole test for impairment. And so if I am correctly trying to apply the current accounting consensus, again not tailored for crypto assets, I would go ahead and I would write down that asset. I would impair the asset on the balance sheet, lowering that asset value, and then also book the cost on the income statement as an expense in the current period. Okay. Fine. But, and then if the price of Bitcoin or other cryptocurrency recovers or goes up, what you did, I can't do anything, I cannot under the current accounting consensus for Bitcoin and other crypto as an indefinite lived intangible asset, I cannot mark up or I cannot revalue that asset. So an impairment loss is a permanent entry. And so even though the market price might have recovered or even exceeded my cost or the old basis that I had in this asset, I cannot accurately reflect that on the balance sheet.
Adam: (08:29)
So what if an organization wanted to hold cryptocurrency as like a long-term asset, does that kind of change their outlook on it?
Sean: (08:36)
Well, I would say that really there have been some very interesting headlines out there of firms like Tesla, Microstrategy, Square, have been buying up Bitcoin, and I would assume other cryptocurrencies to some extent, but they have all come out publicly supporting Bitcoin and its use and as a store of value, currency, economic empowerment, all the rest. And I would argue that really those firms and those positions are twofold. One, is to provide them with the liquidity, if they have customers, either individuals or institutions who want to transact in Bitcoin, right. To be able to give them that ability to actually do so. And then two, I would say that really there’s a thought out there that in order to make a return right, because there's the whole cost of capital conversation. And even though interest rates on debt are at all time lows, for the most part, there still is a cost of capital. If we are talking about trying to raise equity and the cost of holding cash on a corporate balance sheet, all of that still has a cost linked to it. And so really, there are two angles here Adam, one is that these institutions could be holding it for the duration, right. It could be holding it for the medium term, longer term to try to enable customers to easily transact with them in Bitcoin and potentially in other cryptocurrencies. Or it could be that they're basically trying to hedge against some of the wider economic forces out there. Right. Be it the quantitative easing here in the US, be it the bond buying programs, be it the economic aid packages being passed through right now, which while absolutely needed are going to ultimately have an impact on inflation, the value of the dollar and the overall cost of capital in terms of equity capital and debt capital at some point. So I would say that while every firm is obviously different, I would say that there is this idea that if you're buying up these large stakes in Bitcoin and possibly other cryptocurrencies, it's more of a, to your question, a play for the longer term. And to kind of sort of wrap up this point here, it's also, I believe, a potential way to try to encourage accounting policy makers be at the FASB, IASB or some other entity out there to try to bring this whole crypto accounting conversation off of the back burner and onto the front burner in terms of, okay fine so we have this new asset class, this new potentially asset category out there, and how do we have these assets and these different financial instruments be shown correctly and accurately on our financial statements? Right. Cause our conversation here today is focused on specific Bitcoin crypto holdings, but there's a whole other industry out there, Defi or open finance basically, and this whole idea of the decentralized crypto exchange, enabling folks to transact, finance, lend, gain access to capital markets in a decentralized manner. So all of that is a sort of long winded way of entering the fact that if there are companies out there that are truly buying crypto or are truly taking crypto as a form of payment, with an eye towards the future, I would say that really, they probably are not as concerned with the impact of this current accounting consensus right now, because on the one hand they are buying it for the longer term and two, I do believe and I am confident that all of this action and activity and debate is going to ultimately force entities and individuals at places like the FASB, IASB and other policymaking agencies to be more proactive in trying to get crypto accounting up to par.
Adam: (13:26)
Do you think that, or how long do you think it'll take for them to get on board?
Sean: (13:31)
I mean, that's an excellent question there. I know that, actually I was the co-author of I believe what was the last agenda request item to the FASB back in 2019, specifically on this issue. And I do know that in 2019 and 2020, FASB has come out and basically said, that it's not material enough yet for them to be bothered basically. And I mean basically, and I would say that all that outlook is still probably the prevailing one at different agencies, including the FASB, IASB, all the rest. I would say that the current moves, acquisitions, and corporate allocations of capital to Bitcoin and other crypto are invariably going to have some sort of influence and impact on, how do policy makers approach crypto and hopefully it's going to happen sooner rather than later.
Adam: (14:43)
It almost seems like we're moving toward like the open market system that you were talking about before, even like FASB or IFRS or anything or US gap will have their standards in place the open market will take on before that even touches it.
Sean: (14:59)
Well I mean, I think that all of us are currently living in a very interesting time, right? Where an entirely new asset class and an entirely new way of transacting business and an entirely new way of trying to finance entities is emerging right in front of us. And obviously these, policy makers, standard setters have to be careful in how they try to develop standards, right? And so I am acutely aware of the time and the effort that goes into these processes, but to your point, I do think that this is going to be a time where there are going to be certain actors into the private sector or certain States, Wyoming is often talked about as a sort of innovator out there trying to encourage, innovative policy-making, try to encourage innovative firms to come there to incorporate and to operate. So again, I do think it's going to be sort of a push and pull here between the private sector and different sorts of policy makers trying to get out in front of these issues. But I do have confidence in the fact that ultimately we are going to get crypto specific accounting guidance.
Closing: (16:31)
This has been Count Me In, IMA's podcast providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
Institute for Blockchain & Cryptoasset Research: https://www.ibcr.info/
Bitcoin Is Hitting All Time Highs – How Are Organizations Accounting For It?: https://www.forbes.com/sites/seansteinsmith/2021/02/17/bitcoin-is-hitting-all-time-highs--how-are-organizations-accounting-for-it/
FULL EPISODE TRANSCRIPT
Mitch: (00:00)
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong and this is episode 118 of our series. For today's episode, we welcome back Assistant Professor at Lehman College, Dr. Sean Stein Smith. Sean is also the founder of the Institute for Blockchain and Crypto Asset Research and is a forbes.com contributor in the area of crypto and blockchain. In previous episodes, Sean has joined us to talk about different types of blockchain and its uses. In the conversation you're about to hear now, he talks with Adam specifically about accounting for crypto assets. Let's head over and listen to their conversation now.
Adam: (00:51)
So Sean in your recent article for Forbes, you talk about how Bitcoin is hitting an all time high. What does this mean for an organization's accounting as not every organization is ready to move into cryptocurrency?
Sean: (01:02)
Yeah and so with the price of Bitcoin and all of the other altcoins, really at their all time highs or very close to them, all of this is having a huge impact on how companies are trying to adapt, navigate in trying to onboard Bitcoin and other crypto options as a form of doing payment. Right? Because it’s always important to always keep in mind that even though Bitcoin headline prices are obviously headline news, the original idea of Bitcoin and the whole blockchain crypto asset space, it was to develop basically a alternative way to conduct payments. And it hasn't really played out that way and a big part of that is that it's awfully hard for certain firms out there to actually take a Bitcoin and other crypto as a form of payment. And I mean, there are all kinds of IT issues on how the computer systems have to interoperate, but the real issue from sort of our angle here is that the current accounting treatment really makes no business sense from a tax point of view, from a gap point of view, from a IFRS point of view, there really is a issue and a headwind out there that I believe and in all of the anecdotal conversations that I have is honestly proving to be a big headwind that firms are having a hard time trying to figure out how to one, take in these agreements and then two, after they have them what to do with them.
Adam: (02:40)
So is it kind of like the Wild West out there since there are no crypto specific authoritative accounting standards?
Sean: (02:46)
Well, there are no crypto specific authoritative standards yet, either under gap or IFRS but there is this consensus that apparently has been reached, led by the top firms trying to sort of get something out there right. And I totally understand why they were trying to get some sort of consensus out there via the white papers conversations, all the rest to have something to answer external client questions with, but the current treatment of Bitcoin and other crypto as a indefinite lived intangible asset, which kind of sounds good on paper, right? Because Bitcoin and other crypto are intangible and they have no fixed economic life. But outside of that, it honestly makes no sense because it doesn't really reflect the economic realities on the ground. And I won't go into too too much depth here, but if I have an indefinite, intangible asset on the books like Goodwill, I have to do tests for possible impairment losses every time, a change in the business outlook really causes that to happen. Okay great, but if I have Bitcoin on the books, as we all know, Bitcoin and other crypto assets have a little bit of price volatility in there. And so if it drops by 20%, 10%, which it has done multiple times, I, as the firm holding these assets now on the books, I have to do the test for impairment, write down the asset books, the cost. Okay, so far so good. But on the other hand, if and when Bitcoin goes up by 10%, 20%, 200%, I can't do anything with that under the current rules. So it's not so much the Wild Wild West out there. It's almost artificially trying to fit a square peg into a round hole Adam, right because I can't mark up correctly the current market value of the assets that I hold, or in other words, under the current accounting, consensus that has been reached in the face of no crypto specific guidance, I'm basically forced to hold these assets on the books at an artificially lower level, no matter what happens outside in the marketplace.
Adam: (05:29)
Now you mentioned impairment in that last answer, how does that come into play with cryptocurrency? Could you go into a little more detail?
Sean: (05:36)
Sure. And so probably the most obvious case as to how it could come into play is if I received payment in Bitcoin at the end of 2020 or even early 2021, Bitcoin and the other altcoins out there were on an upswing, right. They had all increased in price quite a bit. During that back half of 2020, and into the first quarter of 2021, obviously there are some pullbacks and that's where the issue really does pop up. So there was one specific weekend early in the first quarter of 2021 where the price of Bitcoin dropped over 20%. And so if I, as a firm head chosen to take Bitcoin as a form of customer payment and then also chosen to hold those Bitcoin in a hot wallet, cold wallet, all the rest of us actually hold them at the firm. So I've been paid in crypto, got the back office and go to work, he was able to interoperate with my AR AP treasury all the rest. So now I'm holding Bitcoin on the books. Okay. Then if it drops by 20%, I think it was 24% over a four or five day period. I have to book that impairment loss. Because that's an obvious change in the asset itself, market conditions, business conditions that then triggers this whole test for impairment. And so if I am correctly trying to apply the current accounting consensus, again not tailored for crypto assets, I would go ahead and I would write down that asset. I would impair the asset on the balance sheet, lowering that asset value, and then also book the cost on the income statement as an expense in the current period. Okay. Fine. But, and then if the price of Bitcoin or other cryptocurrency recovers or goes up, what you did, I can't do anything, I cannot under the current accounting consensus for Bitcoin and other crypto as an indefinite lived intangible asset, I cannot mark up or I cannot revalue that asset. So an impairment loss is a permanent entry. And so even though the market price might have recovered or even exceeded my cost or the old basis that I had in this asset, I cannot accurately reflect that on the balance sheet.
Adam: (08:29)
So what if an organization wanted to hold cryptocurrency as like a long-term asset, does that kind of change their outlook on it?
Sean: (08:36)
Well, I would say that really there have been some very interesting headlines out there of firms like Tesla, Microstrategy, Square, have been buying up Bitcoin, and I would assume other cryptocurrencies to some extent, but they have all come out publicly supporting Bitcoin and its use and as a store of value, currency, economic empowerment, all the rest. And I would argue that really those firms and those positions are twofold. One, is to provide them with the liquidity, if they have customers, either individuals or institutions who want to transact in Bitcoin, right. To be able to give them that ability to actually do so. And then two, I would say that really there’s a thought out there that in order to make a return right, because there's the whole cost of capital conversation. And even though interest rates on debt are at all time lows, for the most part, there still is a cost of capital. If we are talking about trying to raise equity and the cost of holding cash on a corporate balance sheet, all of that still has a cost linked to it. And so really, there are two angles here Adam, one is that these institutions could be holding it for the duration, right. It could be holding it for the medium term, longer term to try to enable customers to easily transact with them in Bitcoin and potentially in other cryptocurrencies. Or it could be that they're basically trying to hedge against some of the wider economic forces out there. Right. Be it the quantitative easing here in the US, be it the bond buying programs, be it the economic aid packages being passed through right now, which while absolutely needed are going to ultimately have an impact on inflation, the value of the dollar and the overall cost of capital in terms of equity capital and debt capital at some point. So I would say that while every firm is obviously different, I would say that there is this idea that if you're buying up these large stakes in Bitcoin and possibly other cryptocurrencies, it's more of a, to your question, a play for the longer term. And to kind of sort of wrap up this point here, it's also, I believe, a potential way to try to encourage accounting policy makers be at the FASB, IASB or some other entity out there to try to bring this whole crypto accounting conversation off of the back burner and onto the front burner in terms of, okay fine so we have this new asset class, this new potentially asset category out there, and how do we have these assets and these different financial instruments be shown correctly and accurately on our financial statements? Right. Cause our conversation here today is focused on specific Bitcoin crypto holdings, but there's a whole other industry out there, Defi or open finance basically, and this whole idea of the decentralized crypto exchange, enabling folks to transact, finance, lend, gain access to capital markets in a decentralized manner. So all of that is a sort of long winded way of entering the fact that if there are companies out there that are truly buying crypto or are truly taking crypto as a form of payment, with an eye towards the future, I would say that really, they probably are not as concerned with the impact of this current accounting consensus right now, because on the one hand they are buying it for the longer term and two, I do believe and I am confident that all of this action and activity and debate is going to ultimately force entities and individuals at places like the FASB, IASB and other policymaking agencies to be more proactive in trying to get crypto accounting up to par.
Adam: (13:26)
Do you think that, or how long do you think it'll take for them to get on board?
Sean: (13:31)
I mean, that's an excellent question there. I know that, actually I was the co-author of I believe what was the last agenda request item to the FASB back in 2019, specifically on this issue. And I do know that in 2019 and 2020, FASB has come out and basically said, that it's not material enough yet for them to be bothered basically. And I mean basically, and I would say that all that outlook is still probably the prevailing one at different agencies, including the FASB, IASB, all the rest. I would say that the current moves, acquisitions, and corporate allocations of capital to Bitcoin and other crypto are invariably going to have some sort of influence and impact on, how do policy makers approach crypto and hopefully it's going to happen sooner rather than later.
Adam: (14:43)
It almost seems like we're moving toward like the open market system that you were talking about before, even like FASB or IFRS or anything or US gap will have their standards in place the open market will take on before that even touches it.
Sean: (14:59)
Well I mean, I think that all of us are currently living in a very interesting time, right? Where an entirely new asset class and an entirely new way of transacting business and an entirely new way of trying to finance entities is emerging right in front of us. And obviously these, policy makers, standard setters have to be careful in how they try to develop standards, right? And so I am acutely aware of the time and the effort that goes into these processes, but to your point, I do think that this is going to be a time where there are going to be certain actors into the private sector or certain States, Wyoming is often talked about as a sort of innovator out there trying to encourage, innovative policy-making, try to encourage innovative firms to come there to incorporate and to operate. So again, I do think it's going to be sort of a push and pull here between the private sector and different sorts of policy makers trying to get out in front of these issues. But I do have confidence in the fact that ultimately we are going to get crypto specific accounting guidance.
Closing: (16:31)
This has been Count Me In, IMA's podcast providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
