The globalization of the world has created the need for a global currency, and cryptocurrencies have emerged as an answer. Like in the beginning of the Internet, cryptocurrencies started with no regulation in 2009 and open access to anybody in the world with a connection. Its rapid growth has created a convenient alternative for both companies and individuals, especially because blockchain technology allows for immediate transfers and does not require an intermediary.
On the other side, cryptocurrencies have faced several challenges as it has been volatile, and if the account is hacked or the funds are diverted, there is no government authority to report it. Multiple micro and macro investors trying to make a fortune overnight, have also lost massive funds. Besides these issues, transactions continue, and even if it doesn’t appeal to everyone, one cannot ignore its commercial opportunities and financial implications.
Many business to business (B2B) organizations will be able to stay away from crypto for some time, as this type of business relationship uses more traditional methods of payment, and manages larger amounts in their transactions, leaving little room for unnecessary risks. On the other hand, business to consumer (B2C) organizations can be under pressure if competition is already accepting this type of payment.
For example, early adopters such as PayPal and Microsoft started accepting bitcoin for their transactions in 2014. Nowadays many car dealerships accept cryptocurrencies on the purchase of vehicles, such Tesla, BMW and Audi. Others, such Amazon, do not allow direct payment with bitcoin, but gift cards could be bought with cryptocurrencies. As soon as more providers accept it and gain market share over their competitors, it’s more likely that others will accept some type of cryptocurrency as a method of payment.
As many changes occurred in the business environment, finance had to quickly adapt to the new order. This has not been the case for cryptocurrencies, where the Financial Accounting Standard Board (FASB) has not made official statements with relation to its treatment in the financial statements according to GAAP (Generally Accepted Accounting Principal). The IFRS (International Financial Reporting Standards) has been ahead of GAAP but ultimately both methodologies tend to agree is not considered a liquid asset. This has discouraged the utilization of cryptocurrencies.
One of the major reasons cryptocurrencies are not considered cash or cash equivalent is because they are not issued by a governmental authority. It is not classified as securities or inventory either, but as an indefinite-lived intangible asset under GAAP and IFRS.
Why cryptocurrencies are considered an indefinite-lived intangible asset?
It might sound as something of interest only for hard-core accountants, but the fact that cryptocurrencies are an intangible asset has major impacts that affect the owners’ or shareholders’ value directly:
- Intangible assets cannot recognize unrealizable gains until sold in the market. If the cryptocurrency gains value in the market, but are not sold, the potential gain will remain unrecognizable in the books.
- Intangible assets are subject of annual impairment assessment. If necessary, the assessment could be done on a quarterly basis, which is the case of cryptocurrency due to its constant fluctuations. Losses should be recognized and cannot be reversed.
- The impairment losses are recognized on the Profit & Loss Statements, reducing the EPS (Earnings per Share) in public companies. For private companies, it is clearly a risk that owners take. Not-for-profit organizations often manage significant amounts on investments, but as they are closely monitored by their Board of Directors, it is more unlikely they will take this type of risk.
- Impairment losses on financial statements are not deductible for tax purposes, as they are not directly related with the purchase or sales of goods and/or services.
As such, even if an organization is accepting payments through cryptocurrencies, the recommendation is to convert it quickly to traditional instruments and avoid the potential swings in the market. It is not advisable to purchase cryptocurrencies directly for speculation purposes, such as Tesla did recently.
Tesla’s Big Bet
Tesla acquired $1.5 B in bitcoin in February 2021, and partially sold its position generating Q1 earnings of $272 million, surpassing expectations. The purchase by Tesla was significant enough in the market to boost the price by itself. In Q3 2021, Tesla recognized an impairment loss of $51 million. Other quarters have not required an impairment adjustment, but still creates a potential loss position for the shareholders. At this point, Tesla continues to hold its investment in bitcoin.
In the same way Japanese incognito Satonshi Nakamoto published the white paper on blockchain and created trillions of monies that did not exist before, many millions on cryptocurrency have also disappeared on an effective, but hard-to-trace system with instability that only creates more distrust.
In the U.S., SEC has expressed concern on regularizing this type of transaction, yet it’s still unlikely that the Federal Reserve will recognize a currency that competes directly to the U.S. dollar, assuming that it could be regularized as it is completely decentralized.
But cryptocurrency has its virtues in terms of flexibility, quickness and the fact that it avoids the fees of an intermediate bank. This saves money to the parties and breaks the dependency on other institutions. It is likely that new methods of payment will emerge, combining the flexibility of cryptocurrencies with the trust of governmental institutions. This is the case of the Central Bank Digital Currency (CBDC), that is currently being considered by the US Federal Reserve.
In the meantime, the tokenization of money is not to be taken lightly, it should not be ignored nor considered as another method of payment. Responsible financial people should recommend their business partners not to invest on speculative instruments. Although there are hedging instruments, they cannot cover all the potential losses in case of major declines.
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