Digital Asset Custody Accounting: Treatment of Custodial Services for
Cryptocurrency and Digital Asset Holdings
Introduction
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
As cryptocurrencies and digital assets gain mainstream adoption, businesses must determine
the appropriate accounting treatment for holdings of these assets. In particular, accounting for
custodial services which securely store, transfer and track ownership of digital assets presents
unique challenges. This paper aims to analyze the key considerations and evolving standards
around accounting for digital asset custody.
It will provide an overview of digital asset types and custodial models. The paper will then
examine relevant accounting frameworks and assess their applicability to digital assets, along
with emerging industry practices. Case studies of accounting approaches taken by leading
custody providers will also be discussed. Overall, the goal is to delineate practical guidance
for classifying and valuing custodial arrangements based on economic substance over legal
form. The paper thus seeks to address a pressing need as digital assets transition from niche
experiment to established financial instruments.
Digital Asset Overview
Cryptocurrencies like Bitcoin are digital assets which use cryptography for security. They
operate on decentralized, immutable public ledgers called blockchains which record
transactions. Other digital assets may represent securities, receivables or collectibles only
transacted electronically. Asset types include:
- Cryptocurrencies: Exchange tokens designed as mediums of exchange, like Bitcoin or
Ether.
- Security tokens: Digital assets securitizing real-world assets and providing cash flows or
ownership rights, like equity or real estate tokenizations.
- Collectibles: Rare digital representations of tangible assets, for example Non-Fungible
Tokens (NFTs) for art, real estate, domain names.
- Utility tokens: Digital assets granting access to a product or service, such as tokens enabling
cloud computing resources.
Holding and managing these digital assets securely requires specialized custodial solutions
due to risks of loss from hacking or fraud. The two dominant models are:
- Software wallets: Applications controlling access to private keys for a user's holdings stored
on decentralized blockchains. Custodians lack control over private keys.
- Hardware wallets: Offline devices securely generating, storing and signing transactions with
private keys in an isolated environment. Custodians control private keys on customers'
behalf.
Accounting Frameworks
International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting
Principles (GAAP) provide limited explicit guidance on cryptocurrencies or digital asset
custody. Available frameworks include:
- IAS 38 - Intangible Assets. Cryptocurrencies may qualify if reliably measurable and future
economic benefits probable. However, holding for trading is precluded.
- IFRS 9 - Financial Instruments. Cryptocurrencies qualify as financial assets at fair value
through profit or loss unless designated at fair value through other comprehensive income.
Impairment testing required.
- IFRS 15 - Revenue from Contracts with Customers. Custodial services entailing continuous
performance obligations over time should be recognized ratably. One-time setup fees
recognized at inception.
- ASC Topic 815 - Derivatives and Hedging. Cryptocurrencies treated as indefinite-lived
intangible assets unless derivatives or held for trading in which case marked to market.
- ASC Topic 321 - Investments-Equity Securities. Investments in digital assets elected at fair
value through net income statement. Impairment reviewed if decline in value extends to
quarter-end.
While these frameworks set general recognition and measurement principles, application to
digital asset custody requires judgment due to asset uniqueness and evolving practices.
Substance over form takes precedence.
Accounting for Digital Asset Holdings
For holdings of cryptocurrencies and tokens purely as long term investments and without an
active trading program, accounting as indefinite-lived intangible assets under IAS 38 is
appropriate where:
- Assets are not derivatives, liabilities or equity instruments.
- Reliable measurement of fair value is possible using valuation techniques corroborated by
observable market prices from exchanges.
- Management intends to hold assets for long-term capital appreciation rather than short-term
profit-taking.
This treatment denotes assets at cost less accumulated impairment losses. Impairment only
occurs if fair value falls significantly below cost and recovery is deemed unlikely in the
foreseeable future.
For actively-traded holdings involving frequent purchases and disposals, classifying as
financial assets at fair value through profit or loss under IFRS 9 provides a more decision-
useful representation since changes in fair value form part of normal business activities. Fair
value gains/losses reported in income.
Regardless of classification, note disclosures around digital asset purchase/disposal policies,
risk exposures, sensitivity of fair values and valuation techniques used are critical to enhance
transparency. Regular impairment assessments supplement quantitative disclosures.
Accounting for Custodial Services
Providing custody over customers' digital asset holdings triggers revenue recognition under
IFRS 15. Key considerations include:
- Custodial arrangements typically involve both initial setup/onboarding services and ongoing
maintenance/administration throughout the custody period.
- The custody period is often indefinite with no fixed term since customers can withdraw
assets at any point.
- Control over the benefit of services passes to customers continuously as cryptoassets are
securely stored online/offline.
Best practice is to recognize setup fees on completion of onboarding when control passes.
Ongoing custody revenue is recognized ratably over time reflecting continuous transfer of
control. Disclosures around performance obligations, transaction price allocation and timing
of revenue recognition enhance understanding.
For expenses, direct and incremental costs incurred to obtain customer contracts like
acquisition commissions are capitalized as contract assets and amortized congruent with
related revenue recognition. Other operating expenses charged as incurred.
Some custody providers elect to recognize digital asset holdings and customer deposits as
assets and liabilities respectively due to custody arrangements in substance being bailee
relationships rather than ownership. In these instances, IAS 32 treatment as financial
instruments may be most representative.
Regardless of specific accounting approach, disclosures around fiduciary responsibilities,
insurance protections and risk exposures associated with safeguarding customer assets are
essential for transparent reporting. Clear separation of corporate versus custodial activities
aids understanding.
Industry Practices
Leading global digital asset custodians are applying the above concepts with some variations
reflecting the evolving landscape. For instance:
- Coinbase recognizes cryptocurrency holdings as assets measured at fair value with changes
through profit/loss. Custodial services revenue accrued ratably over time as
access/maintenance is provided.
- Gemini treats cryptocurrencies held for customers as off-balance sheet fiduciary
assets/liabilities since private keys are held by a qualified custodian. Access fees for software
wallets recognized upfront.
- BitGo classifies digital assets holdings for trading/arbitrage at fair value with changes
through profit/loss. Custodial fees recognized over time, initially deferring contract costs.
Clear distinction made of custodial versus corporate activities.
- Fidelity reports cryptocurrency investments as intangible assets, either indefinite-lived if not
primarily held for sale or as trading assets measured at fair value with changes through
profit/loss.
While no uniform approach exists, these examples show industry players substantively
tracking the accounting frameworks discussed to faithfully represent their business models
and risk profiles regarding digital assets. Transparent reporting practices continue to develop
in parallel with the evolving asset class.
Future Considerations
Issues warranting ongoing analysis and guidance include:
- Regulatory classification of digital assets and characterization of custodial relationships vis-
a-vis banking, trusts and asset management.
- Accounting implications of tokenized securities, NFTs, stablecoins and utility/governance
tokens embedding more complex features versus basic cryptocurrencies.
- Valuation aspects around measuring and disclosing Level 3 cryptoassets lacking active
markets along with reliance on pricing services/models.
- Income tax treatment and asset location rules for decentralized finance protocols spanning
multiple jurisdictions.
- Offsetting cryptocurrency purchases/sales and netting of currency versus crypto holdings
for financial reporting.
- Presentation challenges around custody business performance reporting separate from own
trading/investment activities.
- Event-driven revenue recognition for non-recurring crypto donation/endowment
arrangements.
While short-term application focuses on established concepts, accounting standard setters
must actively monitor developments to promote consistency and steward the evolutionary
process. Interpretive guidelines will smooth practice globally.
Conclusion
Digital asset custody necessitates accounting approaches reflecting both underlying nature as
well as business substance over legal form. Leading practices demonstrate established
principles can address recognition, measurement and disclosure for custodial services and
held digital assets. Regular monitoring of industry innovations ensures continued alignment
with the strategic priorities of promoting transparency, comparability and faithful
representation. Such stewardship reinforces accounting as a value-added activity supporting
responsible growth of this burgeoning asset class.
