Crypto assets held for others – maybe you see them, maybe you don’t!

Here’s the background to another issue recently discussed by CPA Canada’s IFRS Discussion Group

  • Crypto trading platforms (“Platforms”) facilitate the buying and selling of crypto assets and may also perform functions similar to one or more of exchanges, alternative trading systems, clearing agencies, custodians and dealers. Platforms allow clients to trade crypto assets for other assets, such as fiat money, or for other crypto assets. They also regularly hold crypto assets in a custodian capacity, securely store and protect the crypto assets for clients. The terms and conditions for such arrangements can vary significantly.
  • Platforms facilitating or proposing to facilitate trading of contracts involving crypto assets or crypto assets that are securities or instruments. Platforms store crypto assets for clients in a shared (commingled) wallet or in segregated wallets for each individual client. Each wallet has corresponding public and private keys that are generated together as part of the private-public key pairs. A public blockchain address is the identification (ID) where the crypto assets are held and a possible destination of crypto assets, functioning like an email address. A public blockchain address is a shortened version of the public key. A shared wallet is where the same wallet is used to facilitate transactions relating to multiple clients. A separate wallet may be used to facilitate transactions for each individual client on the blockchain.
  • Private keys are secure passcodes used to unlock and spend crypto assets belonging to a specific blockchain wallet address. Private keys are stored in either software wallets or hardware wallets, also known as “hardware security modules”. Software and hardware wallets keep the private keys safe using encryption and allow for the signing of transactions after the user has entered the correct password to access the private key.

The group discussed factors to consider when assessing whether crypto assets held by the Platform on behalf of others should be recognized in the Platform’s statement of financial position, something that (in common with everything crypto-related!) isn’t addressed directly in the standards. Analogizing with client money held in custody by banks, one might expect such recognition to be required if the Platform is acting in the capacity of the principal and is subject to substantial risks and rewards incidental to ownership of the crypto assets. The group laid out a long list of relevant considerations, including local laws and regulations, the extent to which the parties’ rights and obligations are clear or contractually enforceable, and whether the custodian bears the security risk. The discussion emphasized that the Platform’s client agreements are often complex and unique to each transaction, sometimes operating in both banking like and broker like models, and that a legal opinion may be needed in the control assessment.

The group applied this to a fact pattern in which an entity is a Canadian Platform that hosts crypto wallets and offers exchange services; among other things it offers a shared wallet as opposed to segregated wallets, uses shared blockchain addresses, and isn’t prohibited from lending the crypto assets out to other parties, or from making use of the crypto assets while they are in its possession. Most group members thought in this case that the entity is holding crypto assets in the capacity of a principal and should record the client crypto assets in its statement of financial position. There was one contrary view, that the assets shouldn’t be analogized to cash, and only recognized as an asset when the Platform uses them.

A second fact pattern had the entity offering a shared wallet and using shared blockchain addresses; recording the ownership of crypto assets in its books and records as belonging to the client, storing them in a custody account on behalf of the client, and at all times identifying the client’s crypto assets separately, with no rights, interest or title to them. In this fact pattern the entity obtained a legal opinion supporting that the crypto assets are not available to settle general claims from the entity’s creditors in the event of bankruptcy. In this instance the group agreed that the entity is holding the crypto asset in the capacity of an agent, is not subject to substantial risks and rewards incidental to ownership of the assets, and should not record the client crypto assets in its statement of financial position. The group noted that when significant judgments have been made in determining whether or not an entity should recognize the client’s crypto assets in its statement of financial position, the entity should provide disclosure of these under IAS 1.122.

The Canadian Accounting Standards Board highlighted the accounting for cryptocurrency as a priority in its recent submission to the IASB’s agenda consultation; that being the case, the group didn’t recommend any further immediate action. The IASB subsequently decided that other projects are of higher priority, so given the dubious societal advantages of such innovations, maybe their relevance will have dwindled by the time the standards catch up to them…

The opinions expressed are solely those of the author

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