How Accounting Changes Will Unlock Corporate Bitcoin Adoption.

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16 Jan 2024

For over a decade, Bitcoin has faced skepticism and distrust from mainstream finance. But incremental endorsements from authoritative bodies are ushering in an era where Bitcoin moves from the fringes into the inner circles of corporate balance sheets and institutional portfolios. Recent accounting policy changes regarding Bitcoin mark a watershed moment in this integration process. Let’s examine why accounting matters, what specific changes were made, and the likely ramifications for broader Bitcoin adoption.

Why Accounting Treatment Matters for Asset Perception

Accounting standards wield tremendous influence over corporate decision-making and investor perceptions. They dictate how companies must record and report financial information related to assets and liabilities on balance sheets. If an asset is saddled with unfavorable or restrictive accounting treatment, most public companies avoid holding it altogether. Even if the asset exhibits tremendous long-term appreciation, short-term balance sheet optics take precedence.
For many years, Bitcoin was categorized as an “indefinite intangible” asset under GAAP (Generally Accepted Accounting Principles) in the United States. This required companies to value Bitcoin holdings on their balance sheet at the lowest historical price acquired. This stands in stark contrast to normal accounting for investments like stocks, bonds and commodities which are “marked to market”, meaning regularly revalued to current fair market value.

The Problem With Indefinite Intangible Accounting for Bitcoin

To illustrate the problems faced under indefinite intangible accounting, imagine a company purchases $10 million worth of Bitcoin at an average price of $10,000 per BTC. This adds $10 million of Bitcoin to the company’s assets.
Now let’s say the price of Bitcoin subsequently drops to $5,000. Under indefinite intangible rules, the company must mark down the value of its Bitcoin asset to the lowest historical purchase price. So the $10 million of Bitcoin would be marked down to $5 million on the balance sheet, recognizing a $5 million accounting loss.
Now imagine over the following years, Bitcoin rises 5x to $50,000. The company’s original investment of $10 million would now be worth $50 million. But indefinite intangible accounting does not allow the company to recognize these gains. The Bitcoin asset would remain locked in at $5 million value on the balance sheet.
This results in absurd outcomes:

Wild swings in Bitcoin price lead to exaggerated volatility in company financials unrelated to core business performance.
Balance sheets become less credible as they diverge drastically from reality when Bitcoin appreciates.
Investors can no longer accurately compare financials across different reporting periods for the same company.
It becomes challenging to benchmark financials across different companies that hold Bitcoin.
Bitcoin holdings are not “marked to market” like most liquid investment assets.

The Campaign for More Favorable Bitcoin Accounting

The restrictive indefinite intangible treatment all but prohibited public companies from holding Bitcoin. Especially for enterprises that depend on predictable financial reporting. But the rise of MicroStrategy kickstarted a campaign for accounting reform. As the first public company to adopt Bitcoin as its primary treasury asset, MicroStrategy had an existential need for fairer accounting treatment.
Other advocates joined the fray, arguing Bitcoin merited the same “mark to market” accounting as securities or commodities. This would enable transparent quarterly or annual revaluation to fair market value. It took years of proposals and lobbying. But finally in September 2022, the door cracked open.

FASB Opens Door for Fair Value Accounting of Bitcoin

The Financial Accounting Standards Board (FASB) issued a proposal that would enable companies to account for crypto assets like Bitcoin under fair value accounting similar to other financial assets.
This represented a monumental shift from the archaic indefinite intangible treatment. Following a comment period, FASB is expected to finalize official guidance in early 2024 which would take effect for fiscal years starting after December 2024.
Although the new standards are still being finalized, it’s clear Bitcoin will no longer be considered an intangible asset. This pave the way for accurate quarterly or annual revaluation of corporate Bitcoin holdings at fair market prices.

Broader Ramifications of Bitcoin Accounting Reform

FASB’s policy update amounts to an endorsement of Bitcoin’s viability as a mainstream financial asset. Companies can now hold Bitcoin without fears of accounting-driven volatility thrashing financial statements unrelated to business fundamentals. Investors also benefit from transparency, with balance sheets better reflecting reality. The fog of misleading comparisons across time horizons and competitors dissipates.
For Bitcoin, accounting reform could unlock a massive wave of corporate treasury allocations over coming years. Michael Saylor estimates “hundreds of boardrooms” will consider allocating portions of cash and bond holdings to Bitcoin. This creates a potent reflexive dynamic. More corporate investment validates Bitcoin’s legitimacy in finance, which removes roadblocks for further corporate adoption down the line.

The Path For Bitcoin Adoption is Clear

With favorable accounting treatment secured, the last major missing piece enabling corporations and institutional investors to embrace Bitcoin is an SEC-approved spot ETF in the US. ETF access would eliminate the friction these entities currently face in investing through crypto exchanges and wallets. The stage is set for a cascade of Bitcoin adoption once ETFs come to market. Of course, nothing is guaranteed. But accounting reform was a necessary condition for Bitcoin inclusion in conventional finance. That box is now checked.

While the path may not be linear, accounting endorsements mark a pivotal leap towards Bitcoin’s maturation into a mainstream institutional asset class.

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