Home » What is Stablecoin Accounting? 11 Key Considerations to Evaluate.

What is Stablecoin Accounting? 11 Key Considerations to Evaluate.

Stablecoins, designed to minimize volatility by pegging their value to stable assets, present unique challenges for accounting professionals due to the lack of specific standards, necessitating careful consideration of classification, reporting, and regulatory compliance for accurate financial statements.

by Alexis Nicolaou.
Partner Distributed Ledger Technologies Grant Thornton Cyprus | Blockchain Strategist and Educator

As investments in stablecoins increase, driven by their promise of stability, accounting professionals face many challenges. These include accurately reflecting these holdings in financial statements, particularly without a dedicated standard for guidance.

Differences between stablecoin and other cryptocurrencies

Generally, stablecoins differ from a typical crypto asset in that they include mechanisms designed to minimise price volatility. Stablecoins link their values (also “peg”) to the value of traditional asset, such as a fiat currency or a commodity. Given the differences in the underlying rights and obligations, the proper accounting for a stablecoin investment will depend on facts and circumstances of that token.

Despite their design to combat volatility, it’s essential to note that stablecoins cannot legally be equated with fiat currencies. In reality, for fiat pegged stablecoins, its value fluctuates slightly, rarely maintaining a perfect 1:1 peg at every moment. 

What are some types of Stablecoins?

The introduction of new forms of money in web3 presents a mix of potential benefits / risks for investors, and blockchain enterprises seeking capital. The categorization of stablecoins within this evolving ecosystem includes:

  • Crypto-Backed Stablecoins: Anchored to other digital currencies, examples include DAI, FRAX, etc.
  • Commodity-Backed Stablecoins: Tied to physical assets such as metals (gold, silver) examples include Paxos, IPMB or agricultural products (corn, soybeans, wheat).
  • Fiat-Backed Stablecoins: Linked to fiat currencies like the US dollar or Euro. Usually in a fixed ratio (1 stablecoin = 1 USD), examples include Tether (USDT), USDC, EUROe. These are usually the norm when evaluating stablecoins.
  • Hybrid Stablecoins: Initially pegged to fiat currencies and later to a diversified basket of assets off-chain through tokenized collateral. DAI, Reserve, Saga, and Aurora being examples.
  • Derivative-Backed Stablecoins: These are complex financial instruments on-chain and off-chain designed to protect against volatility and risks related to interest rates and transfers, through futures, forwards, swaps, or options.

What Should Accounting and Tax Professionals Know about Stablecoins?

Accounting for stablecoins involves determining the right classification. Whether as cash equivalents, financial instruments, or intangible assets. These will influence how they’re reported on balance sheets and how value changes are recognized.

Professionals must consider various factors when accounting for stablecoins. Including its purpose, the rights and obligations of holders, the issuing entity, and mechanisms to minimize price volatility.

Accounting Methodologies for Stablecoins

The accounting treatment of stablecoins necessitates careful consideration of their unique features. The key question revolves around whether stablecoins should be classified as cash equivalents, due to their liquidity and stability. There are doubts when they align more closely with financial instruments or intangible assets. This classification impacts how they’re reported on balance sheets and how value changes are recognized.

For stablecoins viewed as financial instruments, determining whether to report them at fair value or as available-for-sale assets involves analyzing their liquidity and the consistency of their pegged value. If considered intangible assets, the focus shifts to evaluating potential amortization and impairment issues.

Accounting for stablecoins also means grappling with the implications of gains and losses on a company’s financial health. This is more clear in regions mandating capital gains calculations for stablecoin transactions, like the U.S. This nuanced approach must be ready to evolve with regulatory and new accounting standards that could refine how stablecoins are accounted for in statements.

Insights under IFRS

Technical Insights under IFRS treatment:  While most cryptocurrencies do not grant a contractual right to receive cash, stablecoins with redemption conditions may qualify as financial assets, presenting a unique accounting challenge. 
Entities must carefully assess the specific terms and conditions of each cryptocurrency to determine its appropriate accounting treatment. 
This nuanced approach is especially relevant when considering the implications of staking income, a growing aspect of cryptocurrency management.

In many jurisdictions, like the U.S., the IRS requires companies to calculate and report capital gains or losses on stablecoin transactions. While these might be minimal, if the stablecoin’s peg is notably reliable, such financial details must be meticulously recorded and reported.

The IRS outlines a clear process for reporting digital asset income, which includes maintaining records, calculating capital gains or losses, determining one’s basis, and properly reporting the income on the appropriate form.

The IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how long standing tax principles applicable to transactions involving property apply to virtual currency.

What to consider when evaluating stablecoins for accounting purposes?

When evaluating the relevant facts and circumstances, some key questions an entity may want to consider when holding a stablecoin, include the following: 

  • What is the purpose of the stablecoin, and how does it achieve that purpose? 
  • What are the rights and obligations of the stablecoin holder? For example, is the stablecoin collateralized? If so, what are the eligible forms of collateral? Can the stablecoin be traded with parties other than the issuing entity? 
  • Who is the issuing entity or group of entities that is pooling resources to support the stablecoin? 
  • Does a legal entity that issues the stablecoin exist? If so, does the stablecoin convey to the holder an interest in the issuing entity? 
  • What is the legal form of the stablecoin (for example, is it debt or equity)? 
  • What mechanisms exist to minimize the price volatility? For example, can the stablecoin be redeemed for, exchanged for, or converted into its underlying asset? How do these mechanisms work, and how are the mechanisms governed? 
  • If it is redeemable, what is the redemption frequency? 
  • If it is collateralized, how is the collateral verified and to what extent is it (partially, fully, or over-collateralized)? 
  • How well do the mechanisms to minimize the price volatility work? For example, how volatile is the price of the stablecoin versus its intended peg? 
  • Do any credit or liquidity concerns exist? 
  • What laws and regulations apply to the stablecoin?

Current Challenges for the Crypto Accounting Profession

The accounting profession faces significant hurdles when it comes to dealing with stablecoins, underscoring a broader issue within the realm of digital assets and cryptocurrencies.

Specifically, the tasks of accurately recording, tracking, and disclosing transactional information present persistent challenges for accounting practitioners. This is further complicated by the absence of clear guidance and reporting frameworks from authoritative bodies like the Financial Accounting Standards Board (FASB) or the International Accounting Standards Board (IASB), which leaves a cloud of uncertainty over the correct approach to the taxonomy, reporting, and disclosure of stablecoin transactions.

Given the diversity of stablecoins and their operational frameworks, there is no one-size-fits-all rule for accounting for stablecoins. Relevant accounting principles should be considered. For example, the ownership of a stablecoin may provide the holder with an ownership interest in the issuing entity and should therefore be accounted for accordingly. Other types of stablecoins may be financial assets or financial instruments containing an embedded derivative that should be evaluated under the relevant standard.

The complexities surrounding stablecoin accounting highlight the need for detailed analysis of the underlying principles. As the digital assets landscape continues to evolve, so too will the accounting practices that govern it, requiring professionals to stay informed and adaptable.

Credits and Acknowledgment

This article was developed from the foundational notes and expertise of Alexis Nicolaou, Partner at Grant Thornton Cyprus, with contributions from Cryptoworth’s editorial team. We thank Mr. Nicolaou for his insights into stablecoin accounting, which served as the basis for this expanded analysis.

Author

  • Alexis Nicolaou

    Alexis is leading the distributed ledger technology services (DLT) at Grant Thornton (Cyprus) Ltd and he is the managing director of our subsidiary company Grant Thornton Blockchain (Cyprus) Ltd. He is a Fellow Member of the ICAEW, with a BA (Hons) from the University of Nottingham in Industrial Economics and Accountancy and a MSc in Blockchain and Digital Currencies from the University of Nicosia. Alexis has been for over 25 years’ in C-Suite positions in the accounting, finance, media, content production and electronic banking sectors.

Alexis Nicolaou

Alexis is leading the distributed ledger technology services (DLT) at Grant Thornton (Cyprus) Ltd and he is the managing director of our subsidiary company Grant Thornton Blockchain (Cyprus) Ltd. He is a Fellow Member of the ICAEW, with a BA (Hons) from the University of Nottingham in Industrial Economics and Accountancy and a MSc in Blockchain and Digital Currencies from the University of Nicosia. Alexis has been for over 25 years’ in C-Suite positions in the accounting, finance, media, content production and electronic banking sectors.

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