Crypto Exchange Accounting Policy: Tackling the Risks and Regulatory Gaps for Financial Stability

Accounting policy need to adequately address the risks associated with crypto exchange operations, such as counterparty risk, operational risk, and marked risk, to safeguard assets, prevent fraud, and maintain financial stability. It is essential for virtual asset exchange operators and virtual asset deposit service providers to identify cryptocurrencies for accounting purposes whether they are:

• intangible assets;

• commodities;

• financial assets;

• cash, cash equivalents;

• crypto-assets as inventory, etc.

The problems of crypto assets as accounting objects will be identified in this article below.

The lack of clear regulatory guidance may drive inconsistencies in accounting practices, disclosures, and compliance across crypto exchange operating entities. An accurate classification, valuation, and disclosure are essential for maintaining trust an ensuring the integrity of crypto exchange accounting. For example Holding crypto-assets as inventory at fair value less cost to sell, will need to disclose the carrying amount of such inventories carried at fair value less cost to sell.

Despite the lack of legal and regulatory framework for us­ing the attributes of the digital economy, the emphasis is placed on the need to generate the accounting status of crypto assets. There are currently defined problems that we have interacted with:

1. of documentary evidence of transactions performed with crypto assets;

2. identification of the type of assets to which certain tokenized assets should be attributed;

3. determination of the method for evaluating crypto assets in order to ensure a reliable reflection of their value;

4. and ensuring an adequate system of internal control of transactions with crypto assets.

There is an assumption that applying a universal approach to reflecting crypto assets in the accounting system is problematic due to their diversity and varied functions. Accounting for crypto assets is acknowledged to be methodologically complex but presents a new and promising challenge that needs a comprehensive solution in practice.

Current best practice suggest what crypto assets can also be classified by their profile, indicating potential losses or value fluctuations. The relevant guidance on account policy of IFRS 9 and 15 under MiCA is for CASP's as regulated institutions.

Cryptocurrencies are one area where there are no current accounting standards that exist in the real world.

And thus many different interpretations may occur, such as a Cryptocurrency could be an intangible digital token that is recorded using a distributed ledger infrastructure, often referred to as a blockchain. These tokens provide various rights of use. For example, cryptocurrency is designed as a medium of exchange. While other digital tokens provide rights to the use other assets or services or can represent ownership interests.

These tokens are owned by a company that owns the key that lets it create a new entry in the ledger. Access to the ledger allows the re-assignment of the ownership of the token. These tokens are not stored on a company’s IT system as the company only stores the keys to the Blockchain (as opposed to the token itself). They represent specific amounts of digital resources which the company has the right to control, and whose control can be reassigned to third parties.

With the growth of interest in the crypto service industry, the number of intermediaries interested in the purchase, sale and storage of these assets will also grow. This increases the importance of implementing a balanced accounting policy and ensuring its consistent application for similar transactions, as well as appropriate disclosure in financial statements to inform users.

In the absence of special standards and directives in order to identify the crypto received in exchange for goods or services as a certain type of asset and accurately value it, the company must make a decision guided by professional judgment or seek qualified help from specialists. In order to determine the fair value of the crypto held.

There is no doubt that each crypto asset service should be considered according to its specific characteristics.

There are a range of significant aspects that require further research, while digital technologies and virtual markets continue to develop dynamically the accounting practices have proven unprepared for the challenges of the crypto industry and we invite any market participant to contribute to the creation of such standard internally or by regulatory mechanisms. We think, one way to start is by introducing a written Accounting Policy.

CASP’s would need to disclose in a written Accounting Policy:

1. the carrying amount by class;

2. the Company’s accounting policy for measuring inventory;

3. the amount of inventory recognized as an expense in the period, any write-downs and reversal of write downs to net realizable value that were recognized in profit or loss;

4. the reason for the reversal.

Holding crypto-assets as inventory at fair value less cost to sell, will need to disclose the carrying amount of such inventories carried at fair value less cost to sell.

Will need to disclose crypto-assets, by class, a reconciliation between the opening and closing carrying amounts, whether the useful life is assessed as indefinite, and, if so, the reasons supporting the indefinite use full life assessment, description of individually material holdings.

To measure intangibles under the revaluation model will also need to disclose, by class, the effective date of the revaluation, a reconciliation of the opening and closing balance of the related revaluation surplus and the carrying amount they would have been recognized had the cost model been applied. As the revaluation model requires a recurring fair value assessment, the relevant disclose requirements.

It’s important to consider disclosing your compliance efforts with relevant regulations, such as anti-money laundering (AML), know-your-consumers (KYC), and cybersecurity regulations. This transparency demonstrates the CASP’s commitment to adhering to regulatory considerations and maintaining a secure and compliant environment in the face of oncoming MiCA licensing to achieve accurate financial reporting and maintain transparency.

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