Digital Assets and Crypto Currency

Digital Assets and Crypto Currency

GASB Chair Joel Black

I want to share some thoughts with you about a rapidly evolving area that we’re monitoring very closely from a governmental accounting perspective—digital assets including cryptocurrencies.

While the GASB hasn’t defined a digital asset at this stage, the AICPA’s Working Group on Digital Assets defines them broadly as: “digital records, made using cryptography for verification and security purposes, on a distributed ledger.” The GASB is following various types of digital assets, including cryptocurrencies in all of the various forms and non-fungible tokens.

The Board added a monitoring activity in this area in December of 2021. We thought it was important to do that because we’re seeing cryptocurrency discussed in many states in many different ways. We felt we needed to understand the different implications that these types of assets have for state and local governments, how they are being used, and how the activity around them is evolving.

Our monitoring shows that governments are currently using digital assets in three primary ways: as an investment, as a form of payment, and with respect to unclaimed or confiscated property.

Digital Assets as an Investment

We are increasingly seeing pension funds invest in digital assets. ?Due to the nature of these funds, they’ve likely purchased the asset for investment purposes – for its ability to generate income or profit. Under that scenario, we think that the guidance already exists on how to account for them.

If a digital asset meets the GASB Statement No. 72, Fair Value Measurement and Application, paragraph 64, definition of an investment, our guidance tells you to account for that digital asset at fair value.

That paragraph defines an investment as “a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.”

In addition, paragraph 68 says the determination of whether a government meets that definition is made at acquisition. So, once you make that determination at acquisition, paragraph 68 says you don’t go back and change your intent or the resulting accounting treatment.

Digital Assets as a Form of Payment

Nearly two thirds of U.S. states have proposed some kind of legislation on digital assets within the last year. Not all of that legislation deals with accepting digital assets as a form of payment—some were more regulatory in nature with others encouraging cryptocurrency activity.

To date, two states have passed legislation accepting certain cryptocurrencies as a form of payment for taxes. ?One began accepting certain cryptocurrency as a method of payments for taxes in September 2022 and the other anticipates being up and running on this in early 2023.

The GASB is looking closely at: How are they doing it? Where is the risk? How are they converting it to U.S. dollars? Between the time the state accepts payment and then converts it to dollars, who retains that risk of fluctuation in value – and how does that work? So, we’re going to work with those states to understand how they’re doing it. Ultimately, we’re looking to see how prevalent these types of activities become.

Unclaimed or Confiscated Property

Some states are beginning to include, or consider including, cryptocurrency and other digital assets–including assets related to digital gaming–in their definition of property. This has implications for issues relating to unclaimed or confiscated property, including: when is the property considered abandoned, and, if it meets that threshold and then reverts to the state, how and when should the related assets be recognized?

We haven’t investigated this area in depth at this stage but clearly governments are beginning to make decisions about this, and we are keeping a close watch on what they’re doing.

Beyond Monitoring

There are two factors that would cause the GASB to elevate its monitoring efforts to the next stage. One is prevalence – the number of state or local governments, the number of taxpayers within those governments, and the dollars involved. The other is: with governments who are accepting it for payment, where is the risk? If a third-party intermediary assumes the market fluctuation risk, then there is likely no accounting dilemma for the government. But if a government accepts the digital asset directly and holds it for some time period in which the value can change, that’s when we have an accounting dilemma. We need to know: how should a government record it – at what amount should it be measured? We’ll have to evaluate those kinds of issues very closely.

The private sector is farther along on digital assets than governments are. Earlier this year, our sister organization the Financial Accounting Standards Board, initiated a project on digital assets on its technical agenda. We’re watching their project very closely and would look forward to sharing what we’ve learned with the FASB in this area in the future.

If you have any questions about digital assets or cryptocurrency as they relate to governmental accounting or have information to share with the GASB, I invite you to reach out to us – we’d be glad to hear from you.

Joel Black

GASB Chair