Mark to market accounting meets crypto: New FASB changes

In early September 2023, the US Financial Accounting Standards Board (FASB) finally approved the commonly accepted accounting practice of mark to market accounting to apply to corporations and businesses holding crypto digital assets.

Previously, companies like Microstrategy and Tesla needed to file crypto digital assets as intangible assets like goodwill and Intellectual Property (IP). If the value of these intangibles went down, they needed to declare a loss. However, if the value of the intangible went up, these companies were not allowed to declare a gain of asset values. 

Michael Saylor of Microstrategy, perhaps the most visible Bitcoin bull who has accumulated a lot of Bitcoin for his company, pushed the FASB to make the move. Every time the Bitcoin spot price took a dive during reporting season, Microstrategy had to declare a loss. However, when the spot price rose during reporting season, they could not declare the higher asset price. Saylor felt it was unfair that the negative downside needed to show up in the balance sheet, but not the positive upside. 

The new FASB rule puts crypto in a separate digital asset category, where the gain or loss based on the acquisition price, would be declared in a mark to market fashion. Although the rule formally takes effect in 2025, companies that choose to adopt it earlier may do so.

This accounting rule change has massive consequences for Bitcoin and crypto adoption into the corporate treasury world. Previously, management and CEOs felt that acquiring digital assets would penalize their quarterly performance. With this change, corporate finance managers can determine the adequate portfolio allocation based on the upside potential (alpha) and volatility (beta) of the digital asset. 

The FASB announcement seems timed with the impending SEC approval of a Bitcoin (or even Ethereum) spot ETF, the world of digital assets will no longer be the market that started with crypto punks and adventurous individuals. A spot Bitcoin ETF will give the corporate holder the protections of the law that the SEC provides. Prior to any approval, the SEC asked all proponents to ensure that the entity selling the ETF (like Blackrock or Fidelity) will be separate from the custodian (like Coinbase), and trade monitor (like the Chicago Mercantile or the NASDAQ).

Recently, Grayscale won a DC Court of Appeals decision against the SEC. The three judge court said that since the SEC had approved a futures ETF, there was no reason why it could not approve a spot ETF which was correlated in most cases to the futures price anyway.

Once corporations, family offices, sovereign wealth, hedge funds and other institutional clients adopt Bitcoin and crypto, the high price volatility may go away because these entities are not prone to sudden selling. Also their tranches of orders will not be in the tens or hundreds of dollars that finicky retail investors do, but in the millions and billions.

The volatility of Bitcoin and other cryptos is really more a function of who is buying and selling these assets. Right now, most holders on the market are retail traders and speculators. With the advent of institutional buyers, it is expected that the volatility could dampen somewhat because these larger parties do not really go in and out of the market that quickly.

Once a spot Bitcoin ETF gives these institutions the protections that the SEC provides to investors, coupled with this accounting change, the market cap and usage of these digital assets could grow substantially over the next few years.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Zain Jaffer is the CEO of Zain Ventures focused on investments in Web3 and real estate.

This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.