Accounting Treatment of Crypto Assets: Challenges and Developments

Abstract

The rapid proliferation and increasing adoption of crypto assets have introduced profound complexities into traditional financial accounting frameworks. This comprehensive report meticulously examines the multifaceted accounting treatment of these novel digital assets, encompassing the broad categories of cryptocurrencies, stablecoins, and non-fungible tokens (NFTs). It delves into the intricate challenges posed by their unique characteristics, such as inherent volatility, the complexities of decentralized operations, and the nascent stage of regulatory development. By meticulously exploring the current global regulatory landscape, dissecting recent legislative advancements, and scrutinizing the evolving accounting standards from prominent bodies like the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), this report aims to provide a nuanced, in-depth understanding of the financial reporting implications of crypto assets. Furthermore, it outlines critical considerations for robust risk management and internal controls, concluding with insights into potential future trajectories for this dynamic domain.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The advent of crypto assets, underpinned by the revolutionary blockchain technology, marks a pivotal shift in the global financial ecosystem. From their genesis with Bitcoin in 2009, these digital innovations have rapidly matured, transcending niche status to attract significant institutional investment, foster novel business models, and integrate into various facets of the economy. Unlike traditional financial instruments, crypto assets operate on decentralized, cryptographic networks, eliminating the need for conventional intermediaries and enabling peer-to-peer transactions with unprecedented transparency and immutability. This paradigm shift, however, simultaneously presents a formidable array of challenges for accounting professionals and standard-setters alike. The distinct characteristics of crypto assets—including their extreme price volatility, the novel concept of digital scarcity, inherent liquidity considerations, and a perpetually evolving regulatory environment—create significant ambiguities concerning their appropriate classification, valuation, recognition, measurement, and comprehensive disclosure within financial statements.

Historically, accounting standards have been developed to address tangible assets, financial instruments with clear contractual rights, and identifiable intangible assets. Crypto assets often defy neat categorization within these established paradigms, leading to diverse and often inconsistent accounting practices across different jurisdictions and entities. This lack of uniformity impairs comparability, obscures transparency, and complicates the ability of stakeholders—investors, creditors, regulators, and auditors—to accurately assess the financial position, performance, and cash flows of entities engaged with crypto assets. The urgency for clear, harmonized, and globally accepted accounting guidance has thus become paramount.

This report systematically dissects the current state of accounting for crypto assets. It commences by elucidating the fundamental characteristics of the primary categories of crypto assets, providing a foundational understanding. Subsequently, it delves into the core accounting challenges, scrutinizing issues related to classification, valuation, recognition, measurement, and disclosure. A significant portion is dedicated to mapping the intricate and rapidly evolving regulatory landscapes in key jurisdictions such as the United States and the European Union, alongside pivotal international initiatives. The report then meticulously examines the ongoing efforts of global and national accounting standard-setting bodies to address these complexities, highlighting the current state of guidance under International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). Crucially, it extends to a detailed discussion of the imperative for robust risk management and internal controls within organizations handling crypto assets. Finally, the report offers a forward-looking perspective on the future trajectory of crypto asset accounting, anticipating further developments and potential convergence of practices. By providing this holistic analysis, the report aims to contribute to a deeper understanding of this critical and dynamic area of financial reporting.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Characteristics of Crypto Assets

Crypto assets represent a diverse class of digital values, each possessing distinct features and functionalities. Their underlying technology, primarily blockchain, ensures immutability, transparency, and decentralization, differentiating them significantly from conventional financial instruments. Understanding these inherent characteristics is fundamental to comprehending the accounting challenges they present.

2.1 Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that leverage advanced cryptographic techniques to secure transactions, control the creation of new units, and verify the transfer of assets. Their foundational innovation lies in decentralized ledger technology, most famously blockchain, which maintains a distributed, immutable record of all transactions. Bitcoin, launched by an anonymous entity or group known as Satoshi Nakamoto in 2009, pioneered this concept, establishing a template for subsequent cryptocurrencies. The core principles enabling their operation include:

• Decentralization: Unlike traditional fiat currencies issued by central banks, cryptocurrencies operate on peer-to-peer networks without central authority. This distributed nature eliminates single points of failure, reduces censorship risk, and fosters network resilience. For accounting, this decentralization implies a shift from relying on bank statements to verifying transactions directly on the blockchain.
• Cryptography: Advanced cryptographic hashes and digital signatures secure transactions and control coin creation, ensuring the integrity and authenticity of the ledger. This security feature is crucial for preventing fraud and double-spending.
• Consensus Mechanisms: Networks achieve agreement on the validity of transactions through various consensus mechanisms. Proof-of-Work (PoW), used by Bitcoin and historically Ethereum, requires ‘miners’ to expend computational power to solve complex puzzles. Proof-of-Stake (PoS), now adopted by Ethereum, involves ‘validators’ staking their coins as collateral to verify transactions. The choice of mechanism impacts energy consumption, network speed, and potentially the economic incentives for participants, which can have indirect accounting implications for entities involved in mining or staking activities (e.g., revenue recognition for rewards).
• Scarcity and Supply Control: Many cryptocurrencies, like Bitcoin, have a predetermined, finite supply (e.g., 21 million Bitcoins), mimicking the scarcity of commodities like gold. This programmed scarcity, combined with predictable issuance schedules, can contribute to their perceived value and inflationary/deflationary dynamics.
• Pseudonymity: While transactions are publicly recorded on the blockchain, the identities of participants are typically masked by alphanumeric wallet addresses, providing a degree of pseudonymity rather than full anonymity. This can complicate Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance efforts.

Beyond foundational cryptocurrencies like Bitcoin and Ethereum (which also serves as a platform for smart contracts and other tokens), the cryptocurrency ecosystem has expanded to include various types:

• Layer 1 Blockchains: Base protocols like Bitcoin, Ethereum, Solana, and Cardano that process and finalize transactions on their own blockchain.
• Layer 2 Solutions: Protocols built on top of Layer 1 blockchains (e.g., Polygon on Ethereum) to improve scalability and transaction speed, often impacting transaction fees.
• Privacy Coins: Cryptocurrencies like Monero and Zcash, designed with enhanced privacy features that obscure transaction details, posing additional challenges for regulatory oversight and auditing.
• Utility Tokens: Tokens designed to grant access to a specific product or service within an ecosystem (e.g., Filecoin for decentralized storage), raising questions about whether they represent revenue pre-payment, intangible assets, or other classifications.
• Governance Tokens: Tokens that grant holders voting rights in the governance of a decentralized protocol, often with complex accounting considerations regarding their value and purpose.

The extreme price volatility of cryptocurrencies, driven by factors such as market sentiment, regulatory announcements, technological developments, macroeconomic trends, and speculative trading, is a primary accounting challenge. This volatility necessitates frequent revaluation and poses significant impairment risks for entities holding them.

2.2 Stablecoins

Stablecoins are a distinct category of cryptocurrencies engineered to minimize price volatility, aiming to maintain a stable value relative to a specific asset or a basket of assets, commonly a fiat currency like the U.S. dollar. They seek to marry the efficiency and borderless nature of digital assets with the price stability characteristic of traditional currencies, making them suitable for transactions, remittances, and as a stable store of value in the volatile crypto market. The primary types of stablecoins include:

• Fiat-Collateralized Stablecoins: These are the most prevalent type, backed by a reserve of fiat currency (e.g., USD, EUR) or cash equivalents held in traditional financial institutions. Each stablecoin issued is theoretically redeemable for a fixed amount of the underlying fiat currency (e.g., 1 USDT = 1 USD). Examples include Tether (USDT) and USD Coin (USDC). The stability of these stablecoins critically depends on the transparency and verifiable existence of their underlying reserves. Accounting challenges arise from verifying these reserves, which often require independent attestations or audits, and ensuring compliance with regulatory requirements regarding liquidity and segregation of assets. Scrutiny has increased around the composition and sufficiency of these reserves, following concerns raised by regulators regarding operational and liquidity risks.

• Crypto-Collateralized Stablecoins: These stablecoins are backed by a reserve of other cryptocurrencies, often over-collateralized to mitigate the impact of price fluctuations in the underlying crypto assets. For instance, MakerDAO’s DAI is backed by a mix of cryptocurrencies like Ethereum (ETH) and other tokens. If the value of the collateral falls below a predefined threshold, the collateral may be automatically liquidated to maintain the stablecoin’s peg. While offering greater decentralization, these stablecoins introduce additional layers of risk associated with the volatility of the collateralized assets and the effectiveness of their liquidation mechanisms.

• Algorithmic Stablecoins: These stablecoins do not rely on traditional collateral but instead use algorithms and smart contracts to dynamically adjust their supply in response to demand, thereby maintaining a stable value. This often involves a dual-token model, where a stablecoin is paired with a volatile ‘seigniorage’ token. When the stablecoin’s price rises above its peg, the algorithm mints new stablecoins, increasing supply and pushing the price down. Conversely, when the price falls below the peg, the algorithm burns stablecoins or incentivizes the purchase of the stablecoin using the volatile token, reducing supply and pushing the price up. The spectacular collapse of TerraUSD (UST) in May 2022 highlighted the inherent fragility and systemic risks associated with algorithmic stablecoins, particularly during periods of extreme market stress or large-scale redemptions. The accounting for such complex tokenomic structures, including the issuance and burning mechanisms, presents unique recognition and measurement challenges.

Stablecoins are increasingly utilized in Decentralized Finance (DeFi) protocols, for cross-border payments, and as trading pairs on exchanges, making their robust accounting treatment and regulatory oversight critical for financial stability.

2.3 Non-Fungible Tokens (NFTs)

Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership or proof of authenticity of a specific item or piece of content, which can be digital (e.g., art, music, videos, virtual land) or represent a claim on a physical asset. Unlike cryptocurrencies, which are fungible (each unit is interchangeable with another, like a dollar bill), NFTs are inherently non-fungible, meaning each NFT has unique identifiable characteristics and cannot be exchanged on a one-to-one basis. This uniqueness is recorded on a blockchain, typically Ethereum, utilizing specific token standards such as ERC-721 or ERC-1155.

Key aspects of NFTs include:

• Uniqueness and Scarcity: Each NFT is distinct and cryptographically verifiable, establishing digital scarcity for digital assets that were previously infinitely reproducible. This enables true digital ownership.
• Verifiable Ownership and Provenance: The blockchain record provides an immutable and transparent history of ownership, from creation to all subsequent transfers. This provenance is valuable for verifying authenticity and tracing ownership, particularly for digital art and collectibles.
• Use Cases: Beyond digital art (e.g., CryptoPunks, Bored Ape Yacht Club), NFTs have diverse applications:
  • Gaming: Representing in-game items, characters, or virtual land, enabling true ownership and secondary markets.
  • Music: For royalty distribution, fan engagement, or fractional ownership of songs.
  • Ticketing: Digital tickets that can verify attendance or grant access.
  • Intellectual Property and Licensing: Managing rights and royalties for digital content creators.
  • Real Estate: Representing fractional ownership of physical or virtual properties.
  • Digital Identity: Serving as verifiable credentials or digital passports.
• Smart Contract Functionality: NFTs often incorporate smart contracts that can embed rules, such as creator royalties on secondary sales, enabling artists to earn a percentage each time their work is resold.

The accounting for NFTs is particularly challenging due to:

• Subjective Valuation: The value of NFTs is often highly subjective, driven by market demand, artistic merit, community sentiment, and speculative interest. Active, liquid markets for comparable NFTs are frequently absent, making fair value measurement complex and reliant on Level 2 or Level 3 inputs (e.g., comparable sales, expert appraisals, or even income-generating potential for utility NFTs). Impairment considerations are significant due to rapid shifts in market perception.
• Classification: Whether an NFT is classified as an intangible asset, inventory, or a collectible item depends heavily on the entity’s intent for holding it (e.g., held for investment, for sale in the ordinary course of business, or for internal use).
• Revenue Recognition: For creators, recognizing revenue from primary sales and subsequent royalties from secondary sales requires careful consideration of transfer of control and collectibility.

The NFT market is characterized by significant price volatility and speculative behavior, necessitating robust accounting policies and disclosures to accurately reflect their economic substance and associated risks.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Accounting Challenges

The unique characteristics of crypto assets challenge the application of existing accounting standards, which were not conceived with decentralized, digitally native assets in mind. This has led to considerable diversity in practice, hindering financial statement comparability and transparency.

3.1 Classification

One of the foundational challenges is determining the appropriate classification of crypto assets within the financial statements. This initial decision profoundly influences subsequent recognition, measurement, and disclosure. Accounting standards typically classify assets based on their nature and the entity’s intent for holding them. The primary contenders for classification include:

• Intangible Assets (IAS 38 / ASC 350): Many entities, particularly those holding cryptocurrencies like Bitcoin for investment purposes (not for sale in the ordinary course of business), classify them as intangible assets. This classification stems from their characteristics: they are non-monetary, lack physical substance, and are identifiable (due to their existence on a blockchain). However, they are not typically held for use in the production or supply of goods or services, as is common for other intangible assets like patents or software. Under the cost model, intangible assets are recorded at cost and subsequently carried at cost less accumulated amortization and impairment losses. The ‘impairment-only’ model under US GAAP (ASC 350) means upward revaluations are not permitted, only downward adjustments for impairment. This creates an asymmetric accounting outcome where significant upward movements in value are not recognized until realization, while decreases are immediately recognized, potentially misrepresenting the economic reality of highly volatile assets. IFRS allows for a revaluation model, but only if an active market exists, which is often difficult to prove for crypto assets with consistent pricing.

• Inventory (IAS 2 / ASC 330): Entities holding crypto assets for sale in the ordinary course of business, such as cryptocurrency exchanges, crypto miners (who hold mined coins for sale), or companies primarily engaged in trading, may classify them as inventory. Under this classification, crypto assets are measured at the lower of cost and net realizable value (NRV). Cost flow assumptions (e.g., FIFO, weighted-average) become relevant. This approach might be suitable for businesses like mining operations where the intent is to produce and sell cryptocurrencies as a commodity. However, for speculative holdings, this classification may not fully capture the economic substance.

• Financial Instruments (IFRS 9 / ASC 320): While some argue for classification as financial instruments, general-purpose cryptocurrencies like Bitcoin do not typically meet the definition of a financial asset under IFRS 9 or ASC 320. A financial asset is defined as cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset. Cryptocurrencies like Bitcoin do not grant the holder a contractual right against another entity to receive cash or another financial asset. However, certain crypto assets, such as some stablecoins (if they represent a contractual right to redeem fiat currency) or crypto derivatives (e.g., futures, options), might qualify as financial instruments. This distinction is critical because financial instruments are often measured at fair value through profit or loss (FVPL) or other comprehensive income (FVOCI), which could provide more relevant information for highly liquid crypto assets.

• Property, Plant, and Equipment (IAS 16 / ASC 360): This classification is generally not applicable to the crypto assets themselves, but rather to the hardware used in crypto mining operations (e.g., specialized computers, servers), which are tangible assets used in the production process.

The diverse interpretations and the absence of specific, overarching guidance have led to a patchwork of accounting treatments, making it challenging to compare the financial performance and positions of different entities within the crypto ecosystem.

3.2 Valuation

Valuing crypto assets presents one of the most formidable challenges due to their extreme price volatility, decentralized nature, and the nascent stage of market maturity for certain asset classes (e.g., NFTs). Traditional valuation methodologies often struggle to accommodate these unique characteristics.

• Fair Value vs. Cost: The debate centers on whether crypto assets should be measured at fair value or at cost. For assets classified as intangible assets under the cost model (common under US GAAP), subsequent measurement is at cost less impairment. This means unrealized gains are not recognized, while unrealized losses (impairments) are. This ‘impairment-only’ approach can significantly distort reported financial performance, as a crypto asset could experience a substantial price increase after an impairment, yet its carrying value would remain impaired unless sold.

  Fair value measurement, on the other hand, provides more timely information about the asset’s current market value. However, applying fair value accounting (as allowed for financial instruments or under the revaluation model for intangibles under IFRS) requires robust valuation techniques and observable market data.

• Valuation Approaches and Inputs:

  • Level 1 Inputs: Quoted prices in active markets for identical assets are considered the most reliable inputs for fair value measurement. For major cryptocurrencies like Bitcoin or Ethereum, multiple active exchanges exist. However, identifying the ‘principal market’ (the market with the greatest volume and level of activity for the asset) or ‘most advantageous market’ (the market that maximizes the amount received or minimizes the amount paid) can be complex due to fragmentation across numerous global exchanges. Furthermore, exchange outages, liquidity issues, and flash crashes can temporarily distort prices.
  • Level 2 Inputs: For crypto assets traded in less active markets or stablecoins with underlying reserves, valuation might rely on observable inputs other than quoted prices, such as quoted prices for similar assets, interest rates, or credit spreads. For stablecoins, verifying the fair value of their underlying collateral (often fiat currency or highly liquid securities) is crucial.
  • Level 3 Inputs: For highly illiquid crypto assets, custom tokens, or most NFTs, valuation often relies on unobservable inputs, requiring significant judgment and potentially sophisticated models (e.g., discounted cash flow for income-generating NFTs, comparable sales for unique NFTs with limited transaction history, or cost approach). The subjectivity involved increases the risk of misstatement and necessitates extensive disclosure of assumptions.

• Impairment Testing: Regardless of classification, impairment testing is a critical aspect. For intangible assets, impairment reviews are typically performed annually or when impairment indicators exist. The highly volatile nature of crypto assets often triggers frequent impairment assessments. The inability to reverse impairment losses under US GAAP (ASC 350) remains a contentious point.

3.3 Recognition and Measurement

The determination of when to recognize crypto assets on the balance sheet and how to measure them initially and subsequently is intertwined with their classification and valuation. Specific transaction types further complicate these issues:

• Initial Recognition: Crypto assets are generally recognized when the entity obtains control over the asset, typically upon receipt in its digital wallet and successful verification on the blockchain. The initial measurement is usually at cost, which includes the fair value of the consideration given to acquire the asset and directly attributable costs.

• Subsequent Measurement: As discussed under valuation, subsequent measurement varies significantly based on classification:

  • If classified as intangible assets (cost model): Carried at cost less accumulated impairment losses. No upward revaluation for gains.
  • If classified as inventory: Measured at the lower of cost and net realizable value.
  • If classified as financial instruments (e.g., derivatives, some stablecoins): Measured at fair value through profit or loss (FVPL) or fair value through other comprehensive income (FVOCI), providing more current value information.

• Specific Transaction Accounting:

  • Mining Revenue: Revenue from crypto mining is recognized when the miner successfully validates a block and receives the associated block reward and transaction fees. The revenue is measured at the fair value of the cryptocurrency received at the time of receipt. Costs associated with mining (electricity, hardware depreciation) are expensed.
  • Staking Rewards: Staking involves locking up cryptocurrencies to support a blockchain network (PoS) and earning rewards. The recognition of staking rewards depends on the specific protocol and certainty of receipt. They are typically recognized as revenue at fair value when the entity gains control over the rewards.
  • DeFi Lending and Borrowing: Participating in decentralized finance protocols involves lending or borrowing crypto assets, often earning interest or paying borrowing fees. Accounting for these activities requires careful consideration of whether the arrangement creates a financial asset/liability, the recognition of interest income/expense, and the potential for smart contract risk.
  • Airdrops: Free distributions of new tokens to existing token holders (airdrop) raise questions about recognition. They are generally recognized as income at their fair value at the time of receipt, assuming they have economic substance.
  • Forks and Airdrops: Blockchain forks can create new crypto assets. Entities typically recognize the new crypto assets when they gain control over them, measuring them at fair value if a reliable measure is available, and recognizing a gain.

3.4 Disclosure

Effective and comprehensive disclosure is paramount for users of financial statements to understand the nature, amount, and risks associated with an entity’s crypto asset holdings and activities. The current lack of standardized disclosure requirements has resulted in significant inconsistencies and often insufficient transparency.

Key areas requiring robust disclosure include:

• Nature and Classification: Clear descriptions of the types of crypto assets held (e.g., Bitcoin, Ethereum, specific NFTs, stablecoins), their purpose (e.g., for investment, trading, operational use), and the accounting policy adopted for their classification (e.g., intangible asset, inventory).
• Valuation Methodologies and Key Assumptions: Detailed explanations of the valuation techniques used (e.g., Level 1, 2, or 3 inputs), including significant judgments and unobservable inputs. For Level 3 inputs, a reconciliation of changes in fair value is often necessary.
• Carrying Amounts and Movements: A reconciliation of the opening and closing balances of crypto assets, showing additions, disposals, impairment losses, and any fair value changes recognized.
• Risk Exposures: Comprehensive disclosure of market risk (price volatility), liquidity risk (ability to convert to cash), operational risk (security breaches, custody failures), cybersecurity risk, and evolving regulatory risk. This should include sensitivity analyses to illustrate the impact of price changes.
• Custody Arrangements: Information about how crypto assets are held (e.g., self-custody with multi-sig wallets, third-party custodians, hot vs. cold storage) and the associated risks. For third-party custodians, details about their regulatory status, insurance, and audit reports (e.g., SOC reports) are relevant.
• Significant Transactions: Disclosure of significant mining, staking, DeFi, or other crypto-related activities, including revenue recognition policies.
• Commitments and Contingencies: Any material commitments related to crypto asset purchases or sales, and contingencies related to litigation or regulatory actions.

Without comprehensive and consistent disclosures, stakeholders face significant challenges in assessing an entity’s true financial position, performance, and the inherent risks embedded in its crypto asset exposures. This opacity undermines investor confidence and market integrity.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Regulatory Landscape

The regulatory landscape for crypto assets is fragmented, rapidly evolving, and jurisdiction-specific. Governments and financial authorities worldwide are grappling with how to integrate these novel digital assets into existing legal and financial frameworks, balancing innovation with consumer protection, financial stability, and anti-money laundering (AML) / counter-terrorism financing (CFT) concerns.

4.1 United States

In the United States, the regulatory approach to crypto assets has largely been characterized by a multi-agency, ‘regulation by enforcement’ strategy, leading to a degree of uncertainty and calls for clearer legislative action. Several key federal agencies assert jurisdiction:

• Securities and Exchange Commission (SEC): The SEC primarily focuses on classifying crypto assets as securities, particularly through the application of the ‘Howey Test’ (derived from SEC v. W.J. Howey Co.). If a crypto asset is deemed an ‘investment contract,’ it falls under SEC purview and is subject to securities laws (e.g., registration, disclosure requirements). The SEC has actively pursued enforcement actions against issuers of unregistered initial coin offerings (ICOs) and various crypto platforms. This classification directly impacts accounting, as securities typically follow specific financial instrument accounting standards (e.g., fair value measurement).

• Commodity Futures Trading Commission (CFTC): The CFTC views certain cryptocurrencies, notably Bitcoin and Ethereum, as commodities. This allows the CFTC to regulate futures and derivatives contracts based on these cryptocurrencies. The CFTC’s jurisdiction focuses on preventing fraud and manipulation in these markets.

• Internal Revenue Service (IRS): The IRS classifies virtual currency as property for tax purposes, meaning general tax principles applicable to property transactions apply. This impacts how gains and losses from crypto transactions are calculated and reported (e.g., capital gains tax, ordinary income for mining/staking rewards). The accounting treatment significantly influences the tax basis and realization events.

• Financial Crimes Enforcement Network (FinCEN): FinCEN, part of the U.S. Department of the Treasury, applies Bank Secrecy Act (BSA) rules to businesses dealing with crypto assets. Entities engaged in money transmission (e.g., exchanges, certain custodians) are required to register as Money Services Businesses (MSBs) and comply with AML/CFT obligations, including KYC, suspicious activity reporting (SARs), and record-keeping.

• Office of the Comptroller of the Currency (OCC): The OCC, which charters and supervises national banks and federal savings associations, has provided guidance on how banks can engage with crypto assets, including providing crypto custody services, stablecoin issuance, and distributed ledger technology usage within banking operations. This signals a growing acceptance and integration of crypto within traditional finance, requiring accounting clarity for banking institutions.

Legislative efforts aim to provide more comprehensive clarity. The Financial Innovation and Technology for the 21st Century Act (FIT21), passed by the House in May 2024, seeks to establish a clear regulatory framework by delineating responsibilities between the CFTC and SEC for digital assets. It proposes that certain digital assets be treated as commodities if they are sufficiently decentralized, moving away from a blanket ‘security’ classification and offering a pathway for non-security digital assets. This would significantly impact classification and valuation approaches for many crypto assets. Additionally, the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), passed in June 2025, specifically targets stablecoins, proposing a robust regulatory framework that includes requirements for reserve backing, regular attestations, and licensing for stablecoin issuers. This legislation aims to enhance consumer protection and financial stability by ensuring stablecoin reserves are liquid, transparent, and securely held, directly influencing the accounting and audit requirements for stablecoin issuers and holders.

4.2 European Union

The European Union has taken a leading role in developing a comprehensive, harmonized regulatory framework for crypto assets, aiming to foster innovation while mitigating risks. The landmark Markets in Crypto-Assets (MiCA) regulation, which became fully applicable in December 2024, is a pivotal development. MiCA is the first major comprehensive regulatory framework for crypto assets in the world, covering:

• Scope: MiCA applies to crypto assets that are not already covered by existing financial services legislation (e.g., MiFID II for financial instruments). It categorizes crypto assets into three main types:

  • E-money tokens (EMTs): Stablecoins primarily referencing a single fiat currency.
  • Asset-referenced tokens (ARTs): Stablecoins referencing multiple fiat currencies, commodities, or other crypto assets.
  • Other crypto assets: All other crypto assets not falling into the above categories or existing financial regulations.

• Authorization and Supervision: MiCA establishes stringent authorization requirements for Crypto-Asset Service Providers (CASPs), which include exchanges, custodians, advisors, and brokers. CASPs must be authorized by national competent authorities and comply with governance, operational resilience, and capital requirements. This brings a level of institutionalization and oversight that directly impacts internal controls and accounting for service providers.

• Issuance Rules: The regulation sets out rules for the issuance of crypto assets, requiring whitepapers that contain mandatory information (e.g., technical specifications, risks, rights and obligations of holders), similar to prospectus requirements for securities. For EMTs and ARTs, specific requirements apply, including robust reserve management, independent audits of reserves, and prudential requirements for issuers.

• Consumer Protection and Market Integrity: MiCA includes provisions on market abuse (e.g., insider trading, market manipulation), consumer disclosure requirements, and robust complaints handling procedures. It aims to ensure that consumers are adequately informed about the risks associated with crypto assets.

• Operational Resilience: CASPs must have robust IT systems, security protocols, and business continuity plans in place to manage operational risks. This mandates significant investments in internal controls and IT infrastructure, which have accounting implications.

MiCA’s comprehensive nature provides much-needed regulatory clarity within the EU, promoting a more consistent approach to risk management, internal controls, and ultimately, the accounting and auditing of crypto assets for entities operating within its jurisdiction. It serves as a potential blueprint for other regulatory bodies globally.

4.3 International Initiatives

Recognizing the cross-border nature of crypto assets, several international bodies are working to develop harmonized standards and foster cooperation among jurisdictions:

• Organisation for Economic Co-operation and Development (OECD) – Crypto-Asset Reporting Framework (CARF): The OECD developed CARF in 2022 to standardize the reporting of crypto asset transactions for tax purposes. It aims to close information gaps for tax authorities and prevent tax evasion facilitated by crypto assets. CARF requires Crypto-Asset Service Providers (CASPs) to collect and report information on crypto asset transactions (including exchanges between crypto assets and fiat currencies, and transfers of crypto assets) to tax authorities. This framework then facilitates the automatic exchange of this information between participating jurisdictions. For accounting purposes, compliance with CARF necessitates robust transaction tracking, record-keeping, and reconciliation systems, as the data collected for tax reporting will often overlap with financial accounting needs.

• Financial Stability Board (FSB): The FSB, an international body that monitors and makes recommendations about the global financial system, has been actively working on developing high-level recommendations for the regulation and supervision of crypto-asset activities. Its focus is on mitigating risks to financial stability, particularly from unbacked crypto assets and stablecoins. The FSB’s recommendations typically emphasize the principle of ‘same activity, same risk, same regulation,’ suggesting that crypto activities should be subject to the same regulatory outcomes as traditional financial activities.

• Basel Committee on Banking Supervision (BCBS): The BCBS, the primary global standard-setter for the prudential regulation of banks, has issued guidance on the prudential treatment of banks’ crypto asset exposures. This includes specific capital requirements for different types of crypto assets, aiming to ensure banks maintain adequate capital buffers against the inherent risks (e.g., market risk, operational risk). This directly influences how banks account for and report their crypto asset holdings, particularly in terms of risk-weighted assets and capital adequacy ratios.

• International Organization of Securities Commissions (IOSCO): IOSCO, the global body of securities regulators, has also been involved in assessing the regulatory implications of crypto assets for securities markets. It has published recommendations regarding crypto asset trading platforms and digital assets, focusing on investor protection, market integrity, and transparency.

These international initiatives underscore a growing global consensus on the need for coordinated regulatory responses to crypto assets, which will inevitably drive convergence in accounting practices and disclosure requirements.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Accounting Standards and Guidance

The absence of specific, comprehensive accounting standards for crypto assets under both IFRS and US GAAP has been a significant hurdle. Standard-setting bodies have adopted a cautious approach, often observing market developments and seeking stakeholder input before committing to definitive guidance.

5.1 International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) has acknowledged the complexities of accounting for crypto assets but has yet to issue a dedicated IFRS standard. Instead, entities applying IFRS are required to apply existing standards by analogy, leading to diverse interpretations and inconsistent practices. The primary standards considered are:

• IAS 38, Intangible Assets: This is the most frequently applied standard for cryptocurrencies like Bitcoin held for investment purposes (i.e., not for sale in the ordinary course of business). Under IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance. While cryptocurrencies fit this definition, the subsequent measurement under IAS 38 can be problematic. Entities can choose between the cost model (cost less accumulated amortization and impairment) or the revaluation model (fair value at the date of revaluation less subsequent accumulated amortization and impairment). The revaluation model can only be used if there is an active market, and revaluations must be made with sufficient regularity. While major cryptocurrencies might have active markets, the high volatility makes frequent and reliable revaluations challenging. Crucially, any revaluation increase is recognized in Other Comprehensive Income (OCI) and accumulated in equity under a revaluation surplus, while revaluation decreases are recognized in profit or loss (or against revaluation surplus if applicable). This asymmetry and complexity often lead entities to default to the cost model.

• IAS 2, Inventories: If crypto assets are held for sale in the ordinary course of business (e.g., by crypto miners, exchanges, or trading firms), they would fall under IAS 2. Inventories are measured at the lower of cost and net realizable value (NRV). This approach may lead to more frequent write-downs but does not permit upward revaluations beyond historical cost.

• IFRS 9, Financial Instruments: As previously noted, general-purpose cryptocurrencies do not typically meet the definition of a financial instrument under IFRS 9 because they do not represent a contractual right to receive cash or another financial asset. However, certain crypto assets, such as some stablecoins (depending on their specific terms) or crypto derivatives, might qualify and would then be accounted for at amortized cost or fair value (FVPL or FVOCI).

In 2021, the IASB issued a discussion paper, Accounting for Crypto-Assets, seeking feedback on the applicability of existing IFRS standards and the need for new guidance. The feedback highlighted the considerable diversity in practice and the inherent difficulty in fitting crypto assets into existing categories without significant conceptual strain. As of early 2024, the IASB has not yet issued new specific standards but continues to monitor the developments. Major accounting firms (e.g., PwC, Deloitte, EY, KPMG) have published their non-authoritative interpretations, generally converging on the ‘intangible asset’ treatment for investment holdings, emphasizing the impairment-only model’s limitations.

5.2 U.S. Generally Accepted Accounting Principles (GAAP)

Under U.S. GAAP, the Financial Accounting Standards Board (FASB) has similarly approached crypto assets with caution, leading to a period where preparers relied heavily on analogy to existing standards, resulting in significant inconsistencies and calls for clarity. For much of the past decade, the dominant accounting treatment for non-broker-dealer entities holding crypto assets for investment purposes was analogous to:

• ASC 350, Intangibles – Goodwill and Other: This classification treats crypto assets as indefinite-lived intangible assets. Under ASC 350, these assets are initially recorded at cost and subsequently carried at cost less any accumulated impairment losses. Crucially, ASC 350 employs an ‘impairment-only’ model. This means that if the fair value of the crypto asset declines below its carrying amount, an impairment loss must be recognized in the income statement. However, if the fair value subsequently recovers and even surpasses the previous carrying amount, the reversal of that impairment loss is not permitted. This asymmetric accounting treatment has been a significant point of contention, as it fails to reflect the economic reality of highly volatile assets that often experience rapid price swings upwards and downwards. Companies holding large amounts of Bitcoin, such as MicroStrategy and Tesla, have highlighted this challenge in their financial disclosures, showing significant impairment charges even when the market value of their holdings had recovered by period-end.

• ASC 330, Inventory: For entities whose primary business involves buying and selling crypto assets (e.g., exchanges) or producing them for sale (e.g., miners), ASC 330 may be applied by analogy. Under this standard, inventory is measured at the lower of cost and net realizable value (NRV), with write-downs to NRV being recognized in earnings. This is generally more appropriate for trading entities.

• ASC 940, Financial Services – Brokers and Dealers: Broker-dealers holding crypto assets for trading purposes or for customers may apply specific guidance under ASC 940, which often permits fair value measurement for assets held for trading.

The widespread dissatisfaction with the ‘impairment-only’ model, particularly for entities holding crypto assets for investment or treasury purposes, led the FASB to add a project on ‘Accounting for and Disclosure of Crypto Assets’ to its technical agenda in 2021. After extensive deliberations, stakeholder outreach, and considering feedback from various industry participants and professional bodies (including the American Institute of Certified Public Accountants (AICPA)’s Digital Assets Working Group, which provides non-authoritative guidance), the FASB issued a final Accounting Standards Update (ASU) in late 2023 (effective for fiscal years beginning after December 15, 2024, with early adoption permitted). This ASU mandates that entities should measure crypto assets at fair value, with changes in fair value recognized in net income in each reporting period. This represents a significant shift from the previous impairment-only model and is widely seen as a positive step towards providing more relevant and decision-useful information to investors. The new standard also includes enhanced disclosure requirements, such as a reconciliation of crypto asset activity and disclosures about significant holdings.

This move by FASB brings U.S. GAAP closer to the fair value measurement practices that are generally preferred for financial instruments and some other assets under IFRS, potentially paving the way for greater global convergence in crypto asset accounting.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Risk Management and Internal Controls

The unique characteristics of crypto assets introduce a distinct set of risks that necessitate robust and specialized risk management and internal control frameworks. Traditional financial controls, while foundational, often require significant adaptation to address the decentralized, digital, and often permissionless nature of blockchain technology.

6.1 Valuation Risks

As previously discussed, the extreme price volatility of crypto assets poses significant valuation risks. Robust controls are essential to ensure that crypto assets are valued accurately and consistently.

• Independent Pricing Sources: Implement policies requiring the use of multiple, independent, and reputable pricing sources (e.g., data aggregators, crypto exchanges) to corroborate market prices, especially for liquid assets. For less liquid assets, consider third-party valuation specialists.
• Fair Value Hierarchy Adherence: Meticulously classify crypto assets within the fair value hierarchy (Level 1, 2, or 3) and apply appropriate valuation methodologies. For Level 3 inputs, ensure that assumptions are well-documented, reasonable, and periodically reviewed.
• Frequent Revaluation and Impairment Testing: Given volatility, establish processes for frequent revaluation (e.g., daily for highly traded assets, monthly/quarterly for others) and rigorous impairment testing. Under the new FASB fair value model, this becomes a continuous process of recognizing gains and losses.
• Back-testing and Model Validation: If internal valuation models are used for illiquid assets, implement regular back-testing against actual transaction prices and independent model validation to ensure accuracy and reliability.

6.2 Existence and Custody Risks

The digital nature of crypto assets means they lack physical form, making verification of ownership and existence challenging. Custody of private keys, which confer ownership, is paramount.

• Secure Custody Solutions: Implement state-of-the-art secure custody solutions. This includes:
  • Cold Storage (Offline): Storing private keys offline (e.g., hardware wallets, paper wallets) to protect against online hacks. This is crucial for significant holdings.
  • Hot Storage (Online): Minimal amounts of crypto held online for operational liquidity, protected by multi-factor authentication, whitelisting, and strict access controls.
  • Multi-Signature (Multi-Sig) Wallets: Requiring multiple private keys to authorize a transaction, distributing control and reducing single points of failure.
  • Third-Party Custodians: If using external custodians, conduct extensive due diligence on their security protocols, insurance coverage, regulatory compliance, and obtain regular SOC (System and Organization Controls) reports (e.g., SOC 1, SOC 2) to assess their internal controls over safeguarding assets. Ensure contractual clarity on ownership and responsibilities.
• Private Key Management: Implement rigorous policies and procedures for the generation, storage, backup, and recovery of private keys. This includes segregation of duties for key generation and access, robust encryption, and physical security measures.
• On-Chain Verification: Establish processes for verifying the existence and quantity of crypto assets on the relevant blockchain using block explorers. Reconcile on-chain balances with internal records frequently.
• Segregation of Duties: Ensure clear segregation of duties between those who initiate transactions, those who authorize them, and those who maintain custody of private keys or manage wallets. No single individual should have complete control over crypto assets.

6.3 Authorization Risks

Unauthorized transactions, whether internal or external, pose significant financial risks.

• Multi-Party Authorization: Implement multi-signature requirements for all significant transactions, requiring approval from multiple authorized individuals.
• Transaction Limits: Set daily or per-transaction limits for outflows, requiring higher-level approvals for transactions exceeding these thresholds.
• Whitelisting: Restrict outgoing transactions to pre-approved, whitelisted wallet addresses to prevent funds from being sent to unauthorized destinations.
• Smart Contract Audits: For entities engaging with DeFi or other smart contract-based protocols, conduct independent security audits of the smart contracts to identify and mitigate vulnerabilities before deployment.
• Role-Based Access Control: Implement strict role-based access control (RBAC) to crypto systems and wallets, granting access only on a ‘need-to-know’ and ‘least privilege’ basis.

6.4 Accounting Processes and Systems

Traditional accounting systems may not be adequately equipped to handle the unique nature and volume of crypto asset transactions, necessitating specialized systems and processes.

• Integration with Blockchain Data: Develop or acquire systems capable of integrating directly with blockchain data to automatically track and reconcile transactions, including transaction IDs, timestamps, and fees. This minimizes manual intervention and reduces errors.
• Specialized Ledger Systems: Consider specialized crypto accounting software that can handle various transaction types (e.g., trades, mining rewards, staking income, DeFi interactions) and provide robust audit trails. The concept of ‘triple-entry accounting’ (where blockchain acts as a third immutable ledger) offers enhanced transparency.
• Automated Reconciliation: Implement automated reconciliation processes between internal accounting records, blockchain data, and third-party custodian statements to identify discrepancies promptly.
• Tax Accounting Integration: Ensure accounting processes seamlessly integrate with tax reporting requirements, particularly for capital gains/losses, income from staking/mining, and for compliance with reporting frameworks like CARF.
• Audit Trail: Maintain comprehensive, immutable audit trails for all crypto asset transactions, including initiation, authorization, execution, and verification.

6.5 Knowledge and Understanding

The complexity of crypto assets demands a high level of expertise across the organization, from governance to operational levels.

• Specialized Training: Provide regular and comprehensive training for finance, accounting, IT, legal, and risk management personnel on blockchain technology, crypto asset characteristics, regulatory developments, and security best practices.
• Recruitment of Specialists: Consider hiring or engaging external specialists with expertise in crypto accounting, blockchain forensics, and cybersecurity to advise on policy development, system implementation, and control effectiveness.
• Board and Senior Management Oversight: Ensure that the board of directors and senior management possess sufficient understanding of crypto asset risks and opportunities to provide effective oversight and strategic direction.
• Policy and Procedure Documentation: Develop clear, comprehensive, and up-to-date policies and procedures for all aspects of crypto asset management, from acquisition and custody to valuation and disposal.

6.6 Cybersecurity Risks

Crypto assets are prime targets for cyberattacks due to their high value and digital nature. Robust cybersecurity is non-negotiable.

• Advanced Threat Detection: Implement sophisticated cybersecurity measures, including intrusion detection systems, firewalls, endpoint protection, and security information and event management (SIEM) systems.
• Regular Security Audits: Conduct frequent internal and external security audits and penetration testing to identify and remediate vulnerabilities.
• Employee Awareness Training: Regularly train employees on phishing, social engineering, and other common cyber threats.
• Incident Response Plan: Develop and regularly test a comprehensive incident response plan for crypto-related security breaches, including communication protocols, recovery procedures, and forensic analysis capabilities.

Robust risk management and internal controls are not merely compliance requirements but strategic imperatives for entities engaging with crypto assets. They build trust, protect assets, and ensure the reliability and integrity of financial reporting in this nascent and dynamic industry.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Future Outlook

The accounting treatment of crypto assets is poised for significant evolution, driven by continued technological innovation, increasing institutional adoption, and a global push for regulatory clarity and harmonization. Several key trends and developments are likely to shape the future landscape.

7.1 Convergence of Accounting Standards

The recent decision by the FASB to mandate fair value accounting for crypto assets under US GAAP is a pivotal step towards greater convergence with international practices and the conceptual framework of financial reporting, which generally favors timely and relevant fair value information for financial assets. While the IASB has not yet issued specific standards, the FASB’s move could exert pressure for similar developments under IFRS, potentially reducing the divergence in accounting practices between major reporting frameworks. This convergence would greatly enhance the comparability and understandability of financial statements across different jurisdictions and reduce the burden on multinational entities.

7.2 Technological Advancements and Their Accounting Implications

The rapid pace of innovation within the crypto and blockchain space will continue to present new accounting challenges.

• Decentralized Finance (DeFi): The growth of DeFi protocols, offering lending, borrowing, and trading without traditional intermediaries, introduces complex accounting considerations for interest income/expense, collateral management, liquidity pool accounting, and the potential for smart contract risks. Future guidance may need to specifically address the accounting for yield farming, liquidity mining, and flash loans.
• Tokenization of Real-World Assets (RWAs): The ability to tokenize traditional assets (e.g., real estate, commodities, securities) on blockchain could revolutionize securitization and asset management. Accounting for tokenized RWAs will necessitate clear guidance on the underlying asset’s nature, ownership transfer, custody, and valuation, potentially blurring the lines between traditional and digital asset accounting.
• Web3 and the Metaverse: As the concept of Web3 (a decentralized internet) and immersive metaverse environments evolve, digital economies within these spaces will grow. Accounting for virtual land, in-game assets, and digital identities will become increasingly relevant, requiring classification and valuation approaches for unique digital properties.
• Zero-Knowledge Proofs (ZKPs) and Privacy-Enhancing Technologies: While offering enhanced privacy, these technologies could complicate auditability and regulatory oversight. Accounting and audit frameworks will need to adapt to verify transactions without necessarily revealing underlying sensitive data, potentially leveraging cryptographic proofs.

7.3 Evolving Audit Procedures and Tools

Auditors are increasingly developing specialized expertise and tools to audit crypto assets. This includes:

• Blockchain Analytics Tools: Use of forensic blockchain analytics to verify ownership, trace transactions, and assess the integrity of on-chain data.
• Smart Contract Audits: The growing need for auditors to understand and potentially assess the security and functionality of smart contracts that underpin many crypto assets and DeFi protocols.
• Attestation Engagements: Increased demand for independent attestations, particularly for stablecoin reserves, to provide assurance on the existence and valuation of underlying assets.
• Data Integration: Development of audit software capable of integrating directly with blockchain nodes or APIs to streamline data collection and verification.

7.4 Sustainability Reporting and ESG Considerations

The environmental impact of certain crypto assets, particularly those relying on energy-intensive Proof-of-Work consensus mechanisms, is drawing increasing scrutiny. Future sustainability reporting frameworks (e.g., ESG disclosures) may require entities holding or engaged in mining such crypto assets to disclose their carbon footprint and energy consumption. This will create new demands for data collection and reporting within the accounting function.

7.5 Central Bank Digital Currencies (CBDCs)

The exploration and potential issuance of Central Bank Digital Currencies (CBDCs) by national central banks could significantly alter the financial landscape. CBDCs, as digital forms of fiat currency, would likely have clearer accounting treatment given their direct linkage to sovereign currencies. Their introduction could reduce the demand for private stablecoins and provide a more stable and regulated digital payment rail, simplifying accounting for digital cash holdings.

7.6 Increased Institutional Adoption

As more traditional financial institutions (banks, asset managers, corporations) enter the crypto space, the pressure for definitive and globally harmonized accounting standards will intensify. This adoption will drive greater clarity, liquidity, and maturity in the crypto asset markets, making fair value measurement more robust and potentially easing some of the current accounting complexities.

In conclusion, the future of crypto asset accounting is one of dynamic adaptation. While significant progress has been made, ongoing collaboration among standard-setters, regulators, industry participants, and auditors will be essential to develop comprehensive, consistent, and technology-agnostic accounting frameworks that accurately reflect the economic realities of this rapidly evolving asset class.

Many thanks to our sponsor Panxora who helped us prepare this research report.

8. Conclusion

The emergence of crypto assets has undeniably reshaped the financial landscape, presenting both unprecedented opportunities and intricate challenges for the discipline of financial accounting. This report has meticulously explored the multifaceted nature of cryptocurrencies, stablecoins, and non-fungible tokens, highlighting their unique characteristics – decentralization, volatility, and digital scarcity – which fundamentally differentiate them from traditional assets and strain the applicability of existing accounting standards.

The core accounting challenges identified, including the ambiguous classification of crypto assets (as intangible assets, inventory, or, in limited cases, financial instruments), the inherent difficulties in their reliable valuation amidst extreme market volatility, and the complexities of their recognition and subsequent measurement for various transaction types, underscore the urgent need for definitive guidance. Furthermore, the inconsistencies in disclosure practices, stemming from a lack of prescribed requirements, have historically impeded transparency and comparability, thereby hindering stakeholders’ ability to make informed decisions.

Significant strides have been observed in addressing these complexities. Regulatory bodies across major jurisdictions, notably in the United States with proposed legislation like the FIT21 and GENIUS Act, and the European Union with its pioneering MiCA regulation, are actively establishing frameworks to govern crypto activities, aiming to provide much-needed clarity and consumer protection. Concurrently, international initiatives, such as the OECD’s CARF, are fostering global cooperation to address tax reporting and information exchange. From an accounting standards perspective, the FASB’s recent decision under US GAAP to mandate fair value measurement for crypto assets, with gains and losses recognized in net income, represents a pivotal advancement. This move significantly enhances the relevance of reported information for investors and signals a potential trajectory for greater convergence with international practices.

However, the journey towards fully mature and harmonized accounting practices for crypto assets is far from complete. The IASB continues to deliberate on comprehensive IFRS guidance, and the continuous evolution of blockchain technology and crypto-native applications (e.g., DeFi, tokenized RWAs) will consistently introduce novel accounting questions. The imperative for robust risk management and internal controls—encompassing secure custody solutions, sophisticated valuation methodologies, stringent authorization protocols, specialized accounting systems, and a deep organizational understanding of crypto asset intricacies—remains paramount to safeguard assets and ensure the integrity of financial reporting.

Ultimately, the ability of financial reporting to accurately reflect the economic realities of crypto asset transactions is vital for maintaining investor confidence, supporting market integrity, and facilitating responsible innovation. This necessitates ongoing, proactive collaboration among accounting standard-setters, regulators, auditors, and industry participants globally. By working in concert, these stakeholders can ensure that accounting frameworks remain adaptive, comprehensive, and relevant, providing the reliable information essential for navigating the dynamic future of digital assets.