What is a crypto asset?
From an accounting point of view.
In 2009, the definition of a crypto asset was quite simple, with one example: Bitcoin. A lot has been going on. We count thousands of crypto assets today. In our opinion, it makes sense to define what it is and to arrange them in categories.
The goal of this article is to provide a clear explanation of what a crypto asset is from the point of view of an accounting professional, in a non-exhaustive way.
There are technical parts we may have omitted to ease understanding. We have cited references to allow to dig further.
Definition of an “asset” from an accounting meaning
Basically we find assets on one side, and liabilities and equity on the other side on balance sheets. The total assets correspond to the sum of liabilities and equity. An asset is a resource owned by the business which can be tangible or intangible. Accounting-wise, we distinguish fixed assets from current assets.
Tangible assets are real and measurable, they are physical such as inventory. Intangible assets are digital (not physical). They range from bonds, stocks & digital currencies to intellectual property (trademarks, copyrights, etc). Trade secrets, training material and licenses are also intangible assets.
We call some of them fixed assets, especially because they lack liquidity, i.e. it’s hard to convert them to cash. They include property, plant and equipment. On the opposite, the current assets include cash itself and other assets that we can convert to cash within a year.
Definition of a crypto asset
A crypto asset and a cryptocurrency have the same definition accounting-wise. Either it emphasizes on the cryptographic asset or the cryptographic currency. In both cases, those are digital assets, not physical ones, and they stand on the asset part of the balance sheet. It’s sometimes challenging to clearly define in which category of assets they stand. We need to understand more.
A crypto asset (cryptocurrency) is part of digital currencies (all electronic money). Digital currencies are intangible e-money, sometimes regulated, sometimes unregulated.
Among digital currencies, we count cryptocurrencies and virtual currencies. Some characteristics make a currency more cryptographic vs a virtual one:
- encryption/cryptography allowing privacy, pseudonymity or anonymity.
- decentralization, preventing the control by a centralized third party, thus censorship-resistant.
- unregulated or not yet regulated. (the know your customer and anti-money laundering rules are not always applied).
- the code guarantees functionalities/characteristics on a public ledger (blockchain). Examples are mining, staking, governance, and immutability.
Examples of crypto assets (cryptocurrencies) are bitcoin and ethereum. While examples of digital currencies are Paypal or virtual game money.
Among the thousands of crypto currencies today, most of them launched in the last few years. Some of them are minable, some of them are not. Some are independent, others are dependent. Some are securities, others are not. It’s a bit messy as there is no precise definition of categories getting accepted by all.
Moreover, as the years are passing, new categories that we did not imagine so far are appearing. It’s thus leading to an exciting evolution of definitions in this promising domain. We’ll define a few categories which are not exclusive. For example, a cryptocurrency can be part of different categories at the same time. Or even become part of another category later in its development.
We distinguish 5 big categories:
- The first one is the platform tokens powering a technology of smart contracts. The precursor is ether (ETH). NEO and EOS form with ETH the most famous tokens with this functionality. They allow to power crypto-assets by code. Thus leading to the creation of many other tokens.
- Most of the tokens generated using platforms such as Ethereum are utility tokens. They have a specific purpose and a specific usage. There are many utility tokens, such as BAT, CRO, KNC, LINK, MKR, OMG, REQ, ZIL and ZRX. Their purpose is wide and ranges from different industries. Fintech, marketing, exchanges (KNC, KCS) and oracles are some of them.
- Another category of crypto assets is the set of transactional tokens, such as XRP or IOTA. They also have specific purposes such as interbank transactions, cross border payments or cross objects payments.
- We can call the 4th category the decentralized (crypto)currencies, or “decentralized money“. They are like payment means. Their initial goal was to upgrade our payment means with electronic cash such as Bitcoin. It’s inventor’s words to describe the project were: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”. Many other similar cryptocurrencies appeared afterward such as Litecoin (LTC). Privacy coins such as Monero (XMR) and DASH also add value by removing some levels of traceability.
- Last but not least, tokenized assets are emerging. Some companies work hard to tokenize existing assets. They work on property titles, certificates, diplomas and shares. Tokenizing such assets improves liquidity, transparency and management
From a CPA point of view, tokenized assets look like tangible assets but they are digital. Platform and transactional tokens look like technologies but they are also cryptocurrencies. Decentralized currencies and utility tokens seem to fit more in the category of current assets.
One way to better understand the crypto assets is to get to know more about their purpose. The organizations deciding to use crypto assets have specific goals and purposes.
The goals for the creation of crypto assets can have various motivation sources such as:
- to attract early adopters and get international access to financial resources. Thus making the project sustainable.
- to use blockchain tech characteristics such as immutability. Speed and low fees are key for international money transfers, for example. The goal can also be to prove ownership, digitize property, or adapt to a specific industry.
As an example, one of the bookkeeping rules is to have immutable invoices, i.e. we can only cancel an invoice by asking the issuer to create a credit note while it is forbidden to simply delete the invoice. For this rule to be respected, we need to ask the supplier to manually create a credit note. It’s a long and manual process. This leads to believe that Blockchain is an accounting technology as it guarantees immutability by essence.
The value of such crypto-assets is key for sustainability but the environment is volatile. That’s why some stable coins such as DAI have successfully launched (a stable coin is a cryptocurrency indexed on a FIAT currency like USD).
Each crypto asset value depends on the company issuing, on the media coverage and the secondary market. Some theoretical models for a calculated value of the token are starting to emerge.
Some cryptos are like gold and are quite rare with a limited supply. For example, Bitcoin’s code limits the total number of Bitcoins created. Other criteria have effects on the value of cryptocurrencies such as quantity, liquidity, staking and usage.
By choosing the specificities, the organization creating the crypto asset might have some responsibility in defining what category it fits in.
The purpose of crypto assets such as Bitcoin was “decentralized electronic money”. Some emerging crypto assets have proven to be quite innovative. Those changes challenge our understanding from an accounting point of view. Are they a store of value, electronic money or an open-source technology? Let’s think different. It might be fine to be a store of value and electronic money and an open-source technology at the same time. Or even evolving from one to another over time.
It is important to understand the technology behind crypto assets. Most of them have similar technical characteristics.
The biggest common point is the use of blockchain technology.
Blockchain technology is underlying all cryptocurrencies. This can make transactions public. Being public does not mean that we can identify the payers and payees. On Ethereum for example, we can only identify their address. The transactions are pseudonymous. Moreover, being on a blockchain means that decentralized technology is powering the cryptocurrency.
Those blockchains use cryptography as an encryption method. They power cryptocurrencies based on transparent, open-source code.
More than ten years ago, crypto-assets did not exist. And today we’re still trying to define what they are. One crypto asset can fit in many categories at the same time, such as platforms or payment means.
This is challenging for companies and accountants.
We went through innovative crypto assets and there are bigger revolutions to come. This is a continuous definition process as many new ones are coming. We will need guidance and common acceptance.