On crypto financial reporting: The Statement of Digital Assets
In an ideal world, every company holding digital assets would follow a standard reporting practice — allowing operators and investors to intuitively and transparently understand the liquid value of their assets.
This is the purpose of the new Statement of Digital Assets (SoDA), a standardized report that aims to provide a lasting and transparent bridge between accurate GAAP reporting of digital assets and the details from multiple wallets, centralized exchanges, and other cryptographically based ownership and/or custody arrangements. SoDA is designed to address many of the accounting nuances associated with businesses that interact with digital assets.
The need for SoDA
Traditionally, this is what the balance sheet is for: to report what a business owns (assets), what it owes (liabilities) and what the ownership or equity in the business is. Unfortunately, existing reporting standards for businesses interacting with digital assets can make the balance sheet opaque. And current US GAAP (Generally Accepted Accounting Principles) reporting for recording digital assets “breaks” several core purposes of a balance sheet – primarily understanding and assessing liquidity. While the balance sheet should, in principle, tell the complete financial story for any entity, for those that hold and transact in digital assets, it does not.
And the need for such clear reporting has only grown. The number of “crypto native” and traditional businesses that transact with digital assets has seen unprecedented growth. This adoption of a new asset class has necessitated an increased focus on accounting for tax reporting and operations management purposes. But IRS (The U.S. Internal Revenue Service) and FASB (the Financial Accounting Standards Board) rules continue to evolve, and the systems required to convert on-chain activity to the general ledger are developing in lockstep with the blockchains they monitor. But even with recent FASB (Financial Accounting Standards Board) changes for digital asset accounting, the guidance isn’t complete.
Further, recent FASB guidance requires fair market value reporting of select digital assets. But the new rules are not complete: They exclude NFTs (non-fungible tokens), native tokens (tokens created or issued by the reporting entity), select tokens representing real world assets (RWAs), and wrapped tokens. These excluded digital assets continue to be defined as indefinite-lived intangible assets that necessitates the valuation at the lower of cost or impaired value (“LOCOM” or “BV”) and can only be marked down, never marked to market. This range of treatments complicates balance sheet reporting, by reporting significantly different valuation methodologies alongside one another. Further complicating matters is the balance sheet reporting of stablecoins, essentially adding a third distinct type of digital asset that should be broken out in the same context. This is essentially comparing Cars (crypto @ FV) vs. Motorcycles (crypto @ LOCOM) vs. Boats (stablecoins).
At the highest level, this challenges the operation of digital asset-based businesses because questions persist regarding operating runway, tax liability, and fully understanding a companies’ digital asset treasury. It also makes it difficult to assess, and nearly impossible to report, a firm’s true liquidity to analysts, investors, regulators, and auditors.
What SoDA does
SoDA also helps calculate fair market value to provide a more rational sense of liquidity. Taken with a company’s fiat holdings and select other assets, SoDA presents a complete picture of a company’s digital asset liquidity. By reporting at the wallet/asset level and providing the corresponding FV and LOCOM, SoDA provides all the backup for the digital asset balance sheet entries in addition to providing better visibility into the aforementioned operating metrics.
Additionally, when it comes to investor reporting best practices, most investors expect some level of regular financial reporting in accordance with investor information rights reflected in their deal terms. Under the current guidance, evaluating the liquidity or operating runway of a company with material digital assets on the balance sheet can be difficult. SoDA is a tool that can help both operators and investors alike.
This project brought together many people across the industry who embraced the collaborative, open source crypto ethos to create our own “public benefit” best practice that was a grassroots effort — not something imposed or created by FASB. Sharing best practices with one another is something that comes naturally in the space, and creating clear reporting that anyone with a basic financial background can understand will move the industry forward. We started with the balance sheet because of a treasury’s importance to crypto-native businesses, but we’ll continue to work on additional sections, and have started thinking about how to include overall financial and operational best practices for crypto startups more broadly.
Crypto companies should implement this standard in their financial reporting and operations. The bottom line: More transparency in financial statements leads to better business decisions.
If these tools work for you, please consider giving them your endorsement at sodafinance.xyz. By using and endorsing SoDA, you are joining a growing network of professionals committed to advancing transparency, accuracy and best practices in the rapidly evolving landscape of digital assets.
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Emily Westerhold is a partner on the crypto team, focused on finance and operations advisory. Before joining Andreessen Horowitz, she was most recently the CFO of VSCO, where she spent 7 years helping to build and scale the company and still serves on the board. Prior to VSCO, she worked in various finance and accounting roles and began her career at PwC.
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