An alternate title for this issue might read, “the dichotomy of digital asset regulation.” We have weeks where we seem to take two steps forward with the FASB’s vote to account for crypto assets at fair value, only to take two back with Gary Gensler’s shenanigans.
Disclaimer: I poke fun at SEC Chair Gary Gensler quite a bit in this one. To be clear, I am all for implementing smart regulation around digital assets—smart being the keyword. I get the sense that Gensler is a smart guy that understands blockchain and digital assets better than most of us. Unfortunately, he seems caught up in his position’s politics, which prevents him from addressing the real issues at hand.
Fortunately for us, we all have a say in the future of this industry. But having a say starts with having the information. I hope this issue gives you a head start in understanding crypto’s current regulatory environment.
“Calc”-you-later,
Trevor
FASB: “Finally, Accounting Standards for Blockchain”
Last week, the FASB voted that companies following U.S. GAAP (Generally Accepted Accounting Principles) should report certain crypto assets at fair value on their balance sheets.
Wait, what was the old rule?
Until last week, companies with crypto holdings have had to classify them as indefinite-lived intangible assets—the same category trademarks and web domains belong to.
Under this accounting treatment, businesses have to assess the value of these assets at least once a year, and if they drop below the purchase price, they must write down the value—seems reasonable. Here’s the kicker: if the crypto holdings subsequently increase in value, the company can’t recognize a gain until they sell the asset. This is a massive problem, especially if you’re MicroStrategy and you have to explain to your investors why you have cumulative digital asset impairment losses hovering around $2 billion.
The New Guidance
The board decided to require companies to measure crypto assets at fair value and recognize increases and decreases in fair value in comprehensive income each reporting period.
They also decided that the costs of acquiring crypto assets, such as commissions, would be recognized as expenses (unless specialized industry measurement guidance required otherwise).
What crypto assets does the guidance apply to?
This change will impact crypto assets that meet the following criteria:
- Meet the definition of an intangible asset as defined in the Master Glossary of the Codification
- Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets (which excludes tokenized securities or other digital assets that give rights to physical assets)
- Are created or reside on a distributed ledger or “blockchain”
- Are secured through cryptography
- Are fungible (which excludes NFTs)
Why does it matter?
The new accounting guidance removes a significant hurdle for entities looking to hold crypto assets, which could lead to increased adoption by U.S. GAAP companies. Additionally, fair value reporting should provide investors with more useful financial information.
Financial statement preparers will get some relief by ditching the tedious impairment testing requirement, but mark-to-market accounting isn’t exactly a walk in the park. Either way, I’ll take it as a major win for the industry.
Gensler Hits OKRs, Congratulates Self
Last winter, my three-year-old niece approached me and told me she had a joke. When I asked if I could hear it, she blurted out, “come on, Gary!” and burst into laughter. I had no idea what she meant (and still don’t), but it became an inside joke, so I went with it. All this time, I thought she was referring to Spongebob’s pet snail Gary, but now it’s clear that she saw the writing on the wall regarding SEC Chair Gary Gensler’s aggressive stance on crypto.
Two weeks ago, it was Kim Kardashian. Last week, it was Bored Ape Yacht Club creator Yuga Labs. This week, it’s bankrupt crypto hedge fund Three Arrows Capital. If it seems like we get a new enforcement action from the SEC every week, it’s because we do. Take a gander at the list of crypto-related SEC actions just from the last month:
Oct. 17, 2022 – SEC, CFTC Probing Bankrupt Crypto Hedge Fund Three Arrows Capital: Report
Oct. 11, 2022 – SEC Probing Bored Ape Creator Yuga Labs Over Unregistered Offerings: Report
Oct. 11, 2022 – WisdomTree’s Spot Bitcoin ETF Rejected by the SEC
Oct. 3, 2022 – SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security
Sept. 28, 2022 – SEC Charges The Hydrogen Technology Corp. and its Former CEO for Market Manipulation of Crypto Asset Securities
Sept. 19, 2022 – Sparkster to Pay $35 Million to Harmed Investor Fund for Unregistered Crypto Asset Offering
Sept. 15, 2022 – SEC Charges Promoter and Companies with $4 Million Fraud
Sept. 14, 2022 – SEC v. Chicago Crypto Captial LLC, et al.
Why now?
The SEC’s fiscal year ends September 30th, so it’s their last chance to score big wins they can highlight in budget requests to Congress. And wow, our boy Gary crushed his OKRs!
According to my astute observation, Gary probably started stuffing the pipeline with some bizarre no-name cases in September, only to be told that the budget was pretty tight for FY 2023 (something about the Fed using it up). He then proceeded to sandbag the high-profile projects to start the new fiscal year with a bang.
Our Take
All jokes aside, the recent flurry of enforcement actions demonstrates Gensler’s overzealous ambition to become crypto’s regulatory watchdog. I’m no lawyer, but if you string together each case, you begin to get a feel for the precedents Gary is trying to set:
- The SEC should oversee ALL OF CRYPTO (even the entire Ethereum network).
- Everything in crypto is a security (including airdrops and Bored Apes).
- Everyone must register with the SEC (but you’ll probably get denied).
- We enforce all the rules (but don’t expect us to define them).
- If you break the rules, we’ll come after you (even if you’re a celebrity).
The true tragedy is that Gensler gets blockchain and digital assets; the guy taught a 24-part blockchain course at MIT, for goodness sake. He should be leveraging his expertise to prevent another $50 billion LUNA collapse, but instead, he’s gallivanting around giving celebrities slaps on the wrist.
I’m with John Hickenlooper when he says, “At the same time, as you have repeatedly noted, existing securities regulation does not cleanly apply,” he said. “Applying the old rules to the new market could inadvertently cause financial services to be more expensive, less accessible, and the SEC’s disclosure regime to be less useful to the American people.”
“Come on, Gary!”
Spotlight
Did you catch my annotated version of the FASB’s “Accounting for and Disclosure of Crypto Assets” Board Meeting Minutes? It’s a pretty low bar, but they just might be the most interesting FASB minutes you’ve ever read. 🤓
The Water Cooler 🚰
Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.
Other Significant Findings
- BNY Mellon, America’s oldest bank and the world’s largest custodian, is now offering crypto custody to its institutional clients. I guess it’s easy to give Gensler the finger when you have over $43 trillion in assets.
- Mastercard introduced a new program to enable financial institutions to offer crypto trading. In other words, Mastercard found another way to make boo-koo bucks by taking a small fee. We’ll see how this stacks up against Metamask’s new instant bank-to-crypto service that uses ACH, which is less likely to be declined and allows for higher limits.
- FTX is under investigation by Texas Regulators for potential securities violations. Did no one tell them that’s Gary Gensler’s job?
Funding
- SecondSight raises $3 million to build out their platform that “autonomously discovers, classifies and analyzes an organization’s entire landscape of digital assets, the unique risk profile for each digital asset across thousands of different risk factors, and the real business costs that would be incurred if a digital asset was compromised.”
- Citi Ventures Backs Its First Digital Asset Manager, Co-Leading a $6M Round in Xalts
Extraordinary Items
Because we’re feeling spicy today…
