Michael Saylor is happy.
The Financial Accounting Standards Board’s (FASB) published an Accounting Standard Update regarding digital assets, including Bitcoin. This is something that will completely alter how corporations account for cryptocurrency they are holding.
This was something that many, including the aforementioned Saylor, believed hindered the adoption of Bitcoin. Fortunately, the standards apply to all cryptocurrency, not just BTC.
So what is taking place and why is this important?
Let us dig through this and see how a new buyer could be entering the market.
Treasury Accounting
At the center of this discuss is the treasury of a company. Basically, we are looking at the excess money that an entity has on hand. Apple, as an example, has a couple hundred billion worth of assets due to the profitability of the company over the years. When it is generating so much cash, what does a firm do with it?
The most obvious choice is to reinvest in the business. That usually nets the best return. There does, however, come a point where the cashflow is so large, it cannot be put back into operations. After all, one can build factories only so fast.
Another reason for not investing everything is for a prudent reserve. Recessions happen and there are times the profits flip to losses. Companies are wise to keep cash (or cash equivalents) on hand.
All this leads to companies buying assets and holding them on their balance sheet. This can be different forms of commercial paper, sovereign debt such as US Treasuries, or Bitcoin. The problem was the latter was handled differently for accounting purposes.
With this change, cryptocurrency is treated the same as other asset. Many believe this could open the door for other companies to buy Bitcoin as an investment vehicle. They will hold it in their treasury, hoping for the price appreciation over time.
Fair Value
The change essentially moved the end of quarter reporting to a fair value method. Before, it was only net loss that was recognized. With this move, any positive change will be shown as net income.
What does all this mean?
Under the old standard, any corporation reporting that held Bitcoin would have to value it at the end of the quarter at the lowest price during that time period. For example, if Bitcoin was purchased for $45K in Q2, ended that quarter at $47K, it would be on the books at the purchase price.
Suppose during Q3, the price dropped to $37K. No matter what the price was at the end of the quarter, this would be shown at that level, with an $8,000 net loss recognized. Even if the price was $50K at the end of Q3, it was on the books at the low.
As you can see, with such a volatile asset, this could be a deterrent. That obstacle was removed.
Now, if the same scenario hits, the BTC will be shown at the price at end of quarter, with a net loss or income being recognized. This treats cryptocurrency the same as any other asset.
Major Players Joining The Party?
Could this open the door for major players to enter the market? Here is where people like Saylor believe Bitcoin is going to get a massive push.
Up to this point, the biggest name to buy Bitcoin was Tesla with its $1.5 billion purchase. It has since sold off most of the position, something that could change in the future.
Does this allow other entities such as Apple to acquire Bitcoin? The accounting is no longer an issue, deterring companies from moving into the space. Couple this with new custodian standards and it is possible that some corporations take a look at this.
That is not to say we are going to see a race to acquire Bitcoin. Any company buying it will have it as a small allocation of the treasury. We would likely see most entities putting a couple percent of their holdings into it. It is not going to be a large makeup of the portfolio.
This move does do one other thing. In my view, it further legitimizes crypto-assets as viable alternatives for companies. While most will still shy away from them, it is a step forward. The accounting board is now treating the asset like any other.
In essence, the "penalty" for holding Bitcoin on the balance sheet by reporting companies is removed. It is one less obstacle in the way of corporate treasuries moving into this asset class.
Of course, knowing Wall Street, this is only the beginning. While we focus upon asset such as Bitcoin or Ethereum, this really enters when we start to discuss crypto derivatives. Bet the ranch Wall Street, over the next half decade, will create an assortment of financial products that derive their value from the underlying cryptocurrency. This is what these financial institutions do.
Now they have a market for them since they will be treated the same from an accounting perspective.
Major corporations can now enter the game if they so desire.