The Breakdown - UPDATED: How Big A Deal Are The Changes to Crypto Accounting Standards?

Episode Date: September 9, 2023

The board that oversees corporate accounting standards has voted unanimously to change the way corporates account for cryptoassets on their balance sheets, and some argue it eliminates a major barrier to enterprise adoption. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Thursday, September 7th, and today we are asking how big a deal are new crypto accounting rules. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. link of the show notes or go to bit.ly slash breakdown pod. Now, reiterating that point, I said this on my AI show as well, but today you are listening to a birthday episode. Yes, 39 years ago today, I was born. And if you would like to give me a beautiful gift, leaving a rating or a review for this show, wherever you happen to listen to it

would be an awesome, awesome thing to do. I appreciate all of you listeners and participants. And so let's talk new crypto accounting rules. The Financial Accounting Standards Board, or FASB, have changed their recommendations for how crypto holdings should be recorded in corporate financial statements. The FASB oversees reporting and accounting standards for companies that follow generally accepted accounting principles or GAAP guidelines. On Wednesday, the FASB unanimously passed a vote to recommend fair value accounting for crypto assets held on corporate balance sheets. This means crypto will be marked at the prevailing market price in financial reporting. Previously, corporations were recommended to record impairment losses on their

balance sheet when the price of crypto fell. This impairment was not removed if crypto prices recovered, making it difficult to quickly determine the value of corporate crypto holdings using this method. Michael Saylor, the chairman of Micro Strategy, has been railing against this recommended accounting for years, claiming that it made little sense it was misleading to investors. Micro Strategy and some other companies worked around this problem by providing an alternative accounting within their financial disclosures, which included the current fair value of crypto holdings. Now, the FASB kept the proposed changes simple. and elected not to address NFTs, rap tokens, or stable coins for now.

Companies may begin using this method in their official accounting immediately, with the rules officially changing in 2025. FASB member Christine Bodasan said, It's not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those. Jeff Runlitt, the head of accounting strategy at accounting software company Cryptio said, It's a great step forward for the entire crypto market.

I think it's a great step towards mainstream adoption. I can see finalizing this proposal to help large corporations that are maybe scared to hold crypto on their balance sheet because they're scared of the technical complexities. Now, by and large, the community greeted the news as something that was unlikely to cause big widespread attention, but which was quietly significant. Michael Saylor tweeted, fair value accounting is coming to Bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of Bitcoin as a treasury asset.

Stack Hodler says, Huge FASB votes in favor of fair value accounting. accounting for Bitcoin on corporate balance sheets. Most public corporations couldn't stack Bitcoin without this rule change. Now, cash-rich companies have a way to ensure their bond portfolios against debasement. Dr. Chris Dark said, they voted unanimously to change the rules to fair value accounting, which is logical by the end of the year. FASB rule change for crypto matters for corporates a lot. It's boring and wonky, but it fixes one of the most silly accounting rules where it was an indefinite-lived, intangible asset. TLDR, corporates will be able to hold Bitcoin or ETH or crypto, and in quarterly accounts,

it will be valued at its fair value, not by the current rules, which is at its purchase cost minus impairment. Genuinely big news that no one will care much about. Well, Dr. Dark, we care about it here at the breakdown. Next up, another bit of news along the same theme of institutionalization, which really one could joke pretty reasonably that the perpetual bull narrative in crypto is institutions just around the corner. Anyway, a pair of asset managers filed applications for spot Ethereum ETFs on Wednesday. Arc, in partnership with 21 shares as well as Vanek, will try their luck to get the first of their kind products approved by the SEC. Now, a reminder about process, once the regulator acknowledges the applications, that will start

the clock on a 240-day deadline for a final SEC decision. The first interim deadline for the regulator comes after 45 days, and these spot-Eath filings join 16 existing applications for products offering exposure to Ethereum futures. Now, if you want a little more insight, into 21 shares and their parent, 21.co, go check out my interview with CEO, Hannie Rochwan, on Bitcoin Builders. We talk about how much the company and the industry has changed since they got their first ever crypto exchange-traded product approved in December of 2018. Now, back to this news, both of the applications filed on Wednesday featured a surveillance sharing agreement with Coinbase. This feature is intended to monitor spot crypto markets for

manipulation, and has been seen as a key difference in the latest round of spot Bitcoin ETF applications. Coinbase will also serve as the custodian for the ARC21 shares ETF, although Van Eck has not yet named a custodian. Up until now, the SEC has always summarily requested the withdrawal of spot ETF applications. And yet, Grayscale's recent courtroom win has been widely viewed as making the SEC's continued rejection of spot crypto ETFs for major tokens, if not untenable, then certainly

at least on borrowed time. One of the key rulings is that there was no fundamental difference between how futures-based and spot-based ETF should be considered, given that the markets are 99% correlated. When all is said and done, Bloomberg analysts expect additional spot ETH ETF applications to pour in over the rest of the week. Bloomberg analyst James Safart tweets, The spot Ethereum ETF race is officially on. It's early, but I'd estimate a final deadline on these applications to be around May 23,

Now, all the same, many crypto traders noticed that, once again, a bullish piece of news had basically no impact on price. ETH pumped anemic 2% on the news and then fully retraced. Based Carbon tweeted, We used to pump coins harder on fake grayscale trust filings than we did on a real ETH ETF filing. Still, I think analyst Ilo has it when they write, price action still looks like it's going to be bleak in the short term. No liquidity, no volume, everything basically dead.

But 2024 is shaping up like this. Approved ETH Futures and Spot ETFs? Hard to ask for a better setup. You get to buy the lows before all the flows are with us again. Shoot your shot. However, because we are in this in-between moment, that means that any day that has a bunch of good news is also going to have, if not bad news, then at least news of the cleanup and fallout of last year. On that front, bankrupt crypto lender Genesis have sued parent company Digital Currency Group for payment of over $620 million in loans, which came due in May. These loans have been at the center of the Genesis bankruptcy, with allegations that they were made in an attempt to paper over problems within the DCG Empire

after the collapse of Three Arrow's capital in May of last year. And yet, despite their notoriety, relatively little has been known about the details of these loans until this lawsuit was filed. According to the complaint, Genesis loan DCG almost 19,000 Bitcoin in June 2022, under the terms of an open loan agreement first signed in 2019. In November, the loan was converted to a fixed term, due on May 11th this year. The filing states that the loan was partially repaid with a balance of $4,550.5 Bitcoin outstanding. The two parties underwent mediation, which ended in August, but continued to negotiate. According to a separate document also filed on Wednesday, Genesis extended four cash loans to DCG throughout 2022 worth a total of $500 million. DCG claimed that it was

able to convert the loans back to open-term loans under the prior agreement, but Genesis disagreed. Genesis is seeking the repayment of principle without late fees. Now, it's unlikely that this lawsuit will move forward anytime soon, as Genesis has stayed the court process. A DCG spokesperson said, Genesis has agreed to stay the turnover action so that we can move forward with documenting the deal in principle that was reached with Genesis, the Unsecured Creditors Committee, and DCG. We are documenting a forbearance agreement and expect to file it with the court shortly. At that point, we will initiate the distribution of funds and continue on the path to significant

recovery for Genesis creditors. Now, you'll remember that this in-principle agreement was filed in late August and promised repayment of 70 to 90% on unsecured creditor claims. The deal was widely panned as a bad deal by commentators, and Gemini, who are the largest creditor in the Genesis bankruptcy, do not support the agreement. Rowe Ryder tweets, SEC needed a new reason to deny Grayscale ETF. Well, they just got it. Pending litigation against the parent company from lenders, involving substantial underlying shares and assets is all the excuse they'll need. D.C. can only hide behind its entity structure for so long. Now, one more smaller side story staying in the DCG world, Arkham Intelligence believes that they

have identified a Bitcoin wallet cluster belonging to Grayscale. The on-chain tracking platform is flagged over 1,750 wallet addresses linked to Grayscale's Bitcoin Trust holdings. Each wallet holds less than 1,000 Bitcoin worth around $25.7 million. In total, the wallet cluster sums to $16.1 billion in Bitcoin holdings, matching Grayscale's public disclosures. Arkham did not disclose the full list of wallet addresses. In addition to the Bitcoin in wallets, though, Arkham has also identified grayscale wallets containing other assets, including $4.9 billion in Eath. Moving on to other Fallout stories, the assets of former Celsius CEO Alex Machinsky

have been frozen according to a court order unsealed on Wednesday. The order was originally issued on August 16th, and the list of assets included accounts held with Goldman Sachs, Merrill Lynch, and SoFi Bank, as well as a property in Austin, Texas. It included assets held in the name of companies, Koala LLC, and AM Ventures Holdings, as well as in the personal names of Alex Mishinsky and his wife, Christine. Financial institutions are no longer permitted to facilitate transactions to and from the listed accounts. Mishinsky was of course arrested in July in relation to criminal fraud charges surrounding his operation of SELCUS. Prosecutors claim Mishinsky defrauded customers and lied about Celsius's profitability. Mishinsky has pleaded not guilty to the criminal

charges, which his lawyers have called baseless. He was released on bail after posting a $40 million bond. Mishinsky also faces civil lawsuits from the SEC, the CFTC, and the Federal Trade Commission. Over in FTX world, SBF's request for immediate release from jail has been rejected pending appeal. Sam is currently appealing a decision to revoke his bail made last month by the Federal Circuit judge assigned to his criminal case. The Court of Appeals denied a motion for immediate release on Wednesday, but will hear the appeal before a panel of three judges at the next available opportunity, although it's unclear how long that will take. Now, Sam's trial is set to begin in less than four weeks. Defense attorneys have been protesting Sam's lack of access to a

suitable laptop to review volumes of evidence, which have been disclosed by prosecutors in discovery. They've complained of low-quality internet access and a laptop with insufficient battery life, when Sam is brought to the courthouse to look over documents in a holding cell. But, according to a joint letter filed by the DOJ on Tuesday, Sam now has an upgraded battery and access to the laptop seven days a week, with copies of the discovery documents downloaded to hard drives. The letter also claimed that the internet access provided is, quote, sufficient for most internet review activities. Sam's defense team has until the close of this week to apply for a delayed start to the trial on account of the claim difficulty accessing documents.

That said, during a hearing last week, the judge made no indication of whether they were likely to grant a delay on the information currently disclosed. Now, earlier this morning, Bloomberg also reported that Ryan Salem was going to be pleading guilty, but as of recording, we don't have more info as to what, so we'll have to circle back to that later this week. Lastly, today, tornado cash developer Roman Storm was arraigned on Wednesday. He has pleaded not guilty to charges of conspiracy to operate a money transmitter, facilitate money laundering, and sanctions evasion. Storm was released on a $2 million personal recognizance bond secured by his residence in Washington State immediately after his arrest last month. The tornado cash co-founder

will remain on house arrest with limited travel allowed in Central California, as well as to New York and New Jersey to attend court hearings. A Russian passport was seized from Storm who maintains dual citizenship. Fellow Tornado Cash co-founder Alexei Persev is facing similar charges in the Netherlands, and remains on house arrest awaiting his trial, and a third co-founder, Roman Seminoff, has been charged by the DOJ but remains at large. Authorities allege the trio knowingly facilitated over $1 billion in money laundering through Tornado Cash without mitigating its illegal use. Tornado Cash was for a time believed to be the primary money laundering system used by notorious North Korean hackers, the Lazarus Group. Storm's lawyer,

considered one of the top criminal defense attorneys in the crypto legal community, has said that authorities are using a, quote, novel legal theory to prosecute someone for developing code. In that, this case will be much more significant than just whether this set of people happen to do wrong. Anyways, friends, that is going to do it for this birthday edition of The Breakdown. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.