Preface

Understanding key concepts in cryptocurrency like coins, tokens, and stablecoins, and mechanisms such as staking and proof-of-stake protocols, is crucial for navigating the evolving digital asset ecosystem.

With the rise of non-fungible tokens (NFTs) and Initial Coin Offerings (ICOs), entities must ensure proper compliance with regulatory considerations and accurate accounting for digital assets under various frameworks.

Platforms, custodians, and exchanges play a critical role in managing crypto assets, with robust reporting obligations tied to the fair value of assets safeguarded for customers.

Coin/Token

A cryptographic asset might be described as either a ‘token’ or a ‘coin’. The difference is based on the asset’s functionality but, in practice, the terms can be used interchangeably, because no universally accepted definition of either exists. Currently, the term ‘coin’ generally refers to a cryptographic asset that has the express purpose of acting solely as a medium of exchange, while the term ‘token’ refers to an asset that gives the holder additional functionality or utility. The rights conveyed by a token are typically set out in a whitepaper or similar document by the issuing organization.

Whitepaper

A whitepaper is a concept paper authored by the developers of a platform, to set out an idea and overall value proposition to prospective investors. The whitepaper commonly outlines the development roadmap and key milestones that the development team expects to meet.

Platform

The term ‘platform’ refers to software that provides a utility or services to users of the software. To facilitate the use of the software, users must own or use a particular coin or token.

Initial Coin Offering

Initial Coin Offerings or ‘ICOs’ have become a prevalent means for developers to sell blockchain tokens or coins to investors. When an ICO is undertaken, the issuer receives consideration in the form of cash or another cryptographic asset (most commonly, a cryptocurrency such as Bitcoin or Ether). In exchange, the developer might issue (or promise to issue) a digital token to the parties that provided contributions for the development of the digital token.

It should be noted that ICOs might be subject to local securities law, and significant regulatory considerations might apply.

Fiat currency

A fiat currency denotes paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver but made legal tender by fiat (order) of the government (such as US Dollar or Euro.

Custodians and exchanges

Custodians provide digital wallet services that allow customers to store and manage digital assets. Online trading platforms (exchanges) allow investors to buy and sell digital assets, price orders, execute trades and provide transaction data. Exchanges may also host digital wallets for customers to store their digital assets.

Entities responsible for safeguarding these assets for customers should present a liability to reflect the obligation to safeguard the assets, measured at initial recognition and each reporting date at the fair value of the assets held for customers. Additionally, a corresponding asset should be recognized, similar to an indemnification asset as described in ASC 805, at the time the liability is recorded. The asset should also be measured at initial recognition and each reporting date at the fair value of the assets held on behalf of customers.

Stablecoins

Stablecoins are a subset of digital assets that are pegged to a reference asset (e.g., cash, gold). The main difference between a stablecoin and a crypto asset is the mechanism designed to minimize price volatility by linking the value of the stablecoin to that of a more traditional asset such as a fiat currency. The appropriate accounting for stablecoins depends on the specific rights and obligations associated with holding the asset, especially any potential redemption rights held by the holder.

Non-fungible tokens

A non-fungible token (NFT) is created, maintained and transferred on a blockchain (typically, a public blockchain, such as the Ethereum) that represents ownership of a digital or physical asset. For instance, NFTs are generally unique or serialized (i.e., one of a limited number) while crypto assets like bitcoin are fungible (i.e., trading one bitcoin for another bitcoin leaves you with the same asset).

NFTs are generally used to convey the ownership or rights in purely digital assets, such as songs, pictures, images or art, though they could also be used to reflect rights to tangible assets or the delivery of services. An NFT is created through a process known as “minting” the same term used to describe the creation of certain crypto assets. While an NFT is intangible, it is certifiably unique, similar to many tangibles that exist today, such as a signed baseball with a hologram from a certified authenticator.

Staking

Blockchains, such as Cosmos and Tezos, are governed by a proof-of-stake consensus protocol, under which a validator can contribute a specified number of crypto assets for a period of time to the blockchain (or stake) for a chance to earn the right to validate the next block and earn block rewards. The probability of being chosen to validate the next block is generally proportional to the amount of crypto assets at stake (i.e., the more crypto assets at stake, the higher the chances of being chosen as the validator).

A proof-of-stake protocol is a less resource-intensive alternative to the proof-of-work model, which requires miners to use large amounts of computing power to solve cryptographic algorithms in exchange for a reward.

In a proof-of-stake network, entities engage directly by staking their own crypto assets. Some networks may use a variation of the proof-of-stake protocol that allows entities to delegate their stake to another party that acts as a validator. The delegating entity is commonly referred to as the delegator, and the other party is commonly referred to as the lead validator. The crypto assets at stake are earmarked on the blockchain and cannot be used for any other purpose in the period during which they are staked. The crypto assets are not transferred on the blockchain to another public address when staked (or delegated).

Our CFO services provide expert insights into the accounting and compliance complexities of cryptocurrency, NFTs, and digital asset management, ensuring your financial practices align with industry standards and regulations.