Crypto Market Suffers Fresh Selloff (Wall Street Journal Podcasts, 13 June 2022)

Widely used crypto market lender Celsius Network froze customer withdrawals, swaps between cryptocurrencies and transfers between accounts "due to extreme market conditions." Wall Street Journal Asia markets editor Quentin Webb joins WSJ What's News host Luke Vargas with more on the turbulence in the crypto market. Below is the full transcript of their conversation.

Luke Vargas: One of the largest cryptocurrency lenders, Celsius Network told users on the night of Sunday, June 12th, that it was pausing all withdrawals, swaps, and transfers between accounts due to extreme market conditions. The company, which lends out consumer deposits to other users to earn a return, said on Sunday it hoped to lift its suspension as quickly as possible, but couldn't predict when that would happen. I'm Luke Vargas with The Wall Street Journal. WSJ Asia markets editor, Quentin Webb, is here with a look at the brutal weekend that's just occurred for cryptocurrencies. Hi, Quentin.

Quentin Webb: Hi there.

Luke Vargas: So just how bad is what has been playing out in crypto markets?

Quentin Webb: I think the last few months have been very tough for the crypto industry. Think of it in broad terms. Late last year, the total market cap of crypto assets was something in the order of $3 trillion. Now we're close to $1 trillion, so it's been a real wipe out. It seems as if the fresh let down in the last few days was partly spurred by this broader sell-off as US inflation has proved to be hotter and stickier than expected. The fear is that the Fed will have to keep raising interest rates and potentially risk a recession. That's hit more conventional assets as well as digital assets pretty hard.

Luke Vargas: Yeah. Why else is this happening to the crypto market now beyond what you just sketched out?

Quentin Webb: Well, it's not clear really whether this is cause or symptom, but as you said at the beginning, this crypto lender, Celsius, has basically put a halt to withdrawals and swaps. That is not a reassuring sign. In a way, it's a worrying signal about the stability of that market. Of course, we've seen more serious issues recently with the collapse of algorithmic stablecoins[1]. I guess this is just a fresh question mark about the stability of some of the institutions in the crypto space.

Luke Vargas: Quentin, are cryptocurrencies and companies dealing in them more exposed to market volatility? If so, why might that be?

Quentin Webb: Well, yes, crypto assets do tend to be highly volatile. There's a couple of reasons there. One of course, is that in general, they're not really susceptible to fundamental analysis in the same way that you might say companies are. That probably makes them more speculative and more susceptible to swings in investor sentiment. The second thing of course is that these are markets that trade all the time, whereas most traditional asset markets have slightly better-defined opening hours. So, it can foreshadow now what's happening on the markets and that is becoming increasingly important, I think. As we're seeing more traditional investors tiptoe into the crypto market, the linkages between the two are increasing.

[1] Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference, such as the US dollar or the price of a commodity like gold. As such, stablecoins are considered more useful than more-volatile cryptocurrencies.

FASB Settles on Fair-Value Accounting for Measuring Crypto Assets (Wall Street Journal, 12 October 2022) - Selected Excerpts

The Financial Accounting Standards Board on Wednesday said companies should use fair-value accounting for measuring bitcoin and other crypto assets, moving a step closer to a standard that could clear up uncertainty over reporting how much such holdings are worth.

There are currently no specific accounting or disclosure rules for cryptocurrency assets, so businesses classify them as indefinite-lived intangible assets similar to intellectual property such as trademarks. Companies must review the value of such assets at least once a year and write it down if it drops below the purchase price. If the value rises, companies can only record a gain when they sell the asset, not if they continue holding it.

Companies and accountants want the FASB to adopt fair-value accounting instead, which would allow them to recognize losses and gains immediately and treat digital assets as financial assets.

The FASB on Wednesday said fair-value accounting best captures the economics of crypto assets and determined the method would be a requirement rather than an option for companies. "We've heard from investors that they want transparency through disclosure, and the only way to get to that is fair value," board member Gary Buesser said.

The current approach to accounting for digital assets requires businesses to put together financial statements in a manner that doesn't accurately reflect the results of their operations or financial condition, according to MicroStrategy Inc. Chief Executive Officer Phong Le.

"We expect the disconnect between the reported carrying value on our balance sheet and the fair market value of our bitcoin holdings to grow significantly over time," Mr. Le said in a comment letter to the FASB last year, when he was MicroStrategy's chief financial officer.

This is due to the volatile nature of bitcoin and MicroStrategy's inability to adjust for future increases in value, he said, adding that digital assets should be measured at their fair value. The company declined to comment on the FASB's decision.

New accounting rules in this area could change this or alleviate companies' reluctance, said Deniz Appelbaum, assistant professor of accounting and finance at Montclair State University. "Without these standards for the accounting and valuation of crypto assets, companies are reluctant to hold them," she said.

The FASB in August detailed criteria for assets it will include in its cryptocurrency project, leaving out nonfungible tokens and certain stablecoins. The board will next consider what will have to be included in disclosures about the assets and how companies should inform investors.

Question:

1. Identify any accounting issues/problems arising from the two articles on pg. 2-3. Your answers to this question should identify issues/problems and not their solutions.

2. From the excerpts above,analyseandexplain whyFASB is proposing fair-value accounting for measuring crypto assets.

3. Earlier, in June 2019, the International Financial Reporting Interpretations Committee (IFRIC) concluded that cryptocurrencies are not financial assets and should be accounted for under International Accounting Standard (IAS) 38 Intangible Assets, or under IAS 2 Inventories (if they are held for sale in the ordinary course of business). For IAS 38, a conservative historical cost model plus annual impairment test (mentioned in the second article) is recommended to measure intangible assets. Evaluate the asset classification and measurement approaches suggested by IASB and FASB. In your view, which one is a more appropriate accounting treatment for crypto assets?Explain your reasons and assumptions.

4. Suppose that as a professional accountant you have been asked to put together a position paper for submission to the FASB regarding fair value accounting for crypto assets if it is adopted. In your position paper, will you recommend that fair value gains and losses on crypto assets holdings be reported as components of net income (aka fair value through profit or loss) or as components of other comprehensive income (aka fair value through other comprehensive income) and why? In other words, choose a recommendation and provide arguments to support it.