Author: Cody Carbone

Guide to FASB Guidance on Fair Market Value for Digital Assets

by Cody Carbone

Overview

The Financial Accounting Standards Board (FASB) has issued new guidance on the accounting treatment of digital assets, requiring them to be measured at fair market value (FMV). This marks a significant shift from the previous practice of recording digital assets at their lowest historical value, under the “lower of cost or market” method. The guidance went into effect for fiscal years beginning after December 15, 2024.

What Does This Mean?

  1. Fair Market Value Measurement:
    • Companies must record digital assets on their balance sheets at their current market value as of each reporting date.
    • Gains or losses due to market value fluctuations will be reported in the company’s income statement.
  2. Enhanced Transparency:
    • Investors and stakeholders will have a clearer picture of the real-time value of a company’s digital asset holdings.
    • Companies with significant digital asset holdings will need to prepare for increased scrutiny and volatility in financial reporting.
  3. Applicable Assets:
    • This guidance applies primarily to digital assets like Bitcoin and Ethereum, and others that:
      • Lack physical form,
      • Exist solely on a blockchain or distributed ledger,
      • Are fungible, and
      • Are not securities or derivatives under current U.S. regulations.
    • NFTs, tokenized real-world assets, and assets classified as securities are excluded.

Key Implications for Companies

  1. Operational Adjustments:
    • Finance and accounting teams need to establish robust processes for valuing digital assets, potentially requiring real-time pricing feeds and valuation tools.
    • External audits may focus more on the reliability of the valuation methodology and data sources.
  2. Tax Implications:
    • Tax strategies may need adjustment since the recognized fair value changes could have implications for deferred tax assets and liabilities.
  3. Internal Controls:
    • Companies must ensure their internal controls and systems are capable of accurately tracking and valuing digital assets.
    • Policies should be updated to comply with fair value accounting standards.
  4. Disclosures:
  • The guidance requires enhanced disclosures, including:
    • The nature and extent of digital asset holdings.
    • Risks associated with these holdings.
    • Methods used to determine fair value.

    Final Thoughts

    The FASB’s move to adopt fair market value accounting for digital assets is a long-overdue milestone that TDC has advocated for years. This shift bridges the gap between traditional finance and digital asset markets, providing a much-needed framework for transparent and accurate reporting. It reflects the growing maturity of the digital asset ecosystem and a recognition of its increasing relevance in the broader financial landscape.

    While the new guidance enhances transparency, it also introduces complexities related to volatility and valuation processes. Companies should take proactive steps to ensure compliance, mitigate risks, and communicate effectively with stakeholders about the changes.

    This achievement underscores the importance of thoughtful integration of emerging assets into traditional financial frameworks—an effort TDC has championed tirelessly to ensure that innovation is supported without compromising regulatory clarity.

    Advocating for Fair Value: TDC Sends Letter to the International Accounting Standards Board/IFRS Foundation

    by Cody Carbone

    The Digital Chamber’s Accounting Initiative took a significant step in advocating for clearer financial reporting standards by submitting a formal letter to the International Accounting Standards Board (IASB). Our letter calls for the adoption of Fair Value accounting standards for digital assets, aiming to provide greater transparency and consistency in global financial reporting. With the rapid evolution of the digital economy, it’s crucial that accounting practices reflect the true market dynamics of assets like Bitcoin and Ethereum.

    We look forward to engaging with the IASB and other stakeholders to drive this important initiative forward.

    Opinion: Chair Gensler’s Unlawful Expansion of the Custody Rule Through Enforcement

    by Cody Carbone

    Galois Capital Case

    Background

    In February 2023, in a major departure from current market practices and the SEC’s existing custody rules, the SEC proposed sweeping rule changes requiring registered investment advisors to maintain a diverse new range of assets with qualified custodians. It imposed a broad new array of requirements on such qualified custodians.  This proposed “Safeguarding Rule” would significantly impact the digital asset industry, raising entry barriers for qualified custodians. 

    Notably, the SEC offered two overlapping 60-day comment periods for the proposed rules.  This led to hundreds of mostly negative responses and numerous meetings where industry leaders voiced their concerns.

    The proposed Safeguarding Rule specifically encompasses most crypto assets, regardless of whether such assets are securities, as well as a wide range of other non-security assets not covered by the existing custody rules.  In addition, and quite without a statutory basis, throughout the Proposing Release, the SEC also expresses new interpretations and endorses unwritten staff views of the current custody rules that have never been subject to public notice and comment. 

    As a result of this additional unsupported dicta, investment advisors have been in a holding pattern since 2023, not knowing if the staff’s unsupported positions included in the Proposing Release require that they adjust their current activities to comply with the “new interpretations” of the existing custody rules in the absence of formal adoption of the Proposing Release – including the SEC’s unsubstantiated new interpretation that most digital and crypto assets are already subject to the existing custody rule. 

    As of September 24, 2024, the SEC hasn’t finalized the rule, and it wasn’t listed on their regulatory priorities. However, through enforcement actions like the recent case against Galois Capital, the SEC has been acting as if the new interpretations are already in place. This approach bypasses the proper legal process, raising concerns of regulatory overreach and underscoring the need for Congress to step in.

    Galois Capital Case: Enforcement of a Nonexistent Rule

    On September 3, the SEC announced settled charges against Galois Capital for failing to comply with “requirements related to the safeguarding of client assets, including crypto assets being offered and sold as securities.” This enforcement action illustrates how Chair Gensler is using enforcement to implement the expanded safeguarding rule—despite it not yet being finalized through the proper rulemaking process.

    In the case of Galois Capital, the SEC cited violations of the existing custody rule but relied on reasoning that mirrors the broader, more expansive provisions in the proposed safeguarding rule. These include heightened requirements for the segregation of client assets, which extend beyond securities to include non-security crypto assets, of which Congress has not delegated authority to

    the SEC to regulate. Despite the rule being delayed for re-proposal, the SEC moved forward with enforcement, effectively bypassing the APA’s requirement for a transparent notice-and-comment period. This tactic exemplifies Gensler’s strategy of enforcing politically unpopular rules through legal action rather than adhering to the established regulatory framework.

    The Galois Capital case stands as a prime example of how the SEC is shaping the market under a rule that has not yet been finalized, raising serious concerns about regulatory overreach and the erosion of due process.

    Legal Issues and Unlawful Enforcement

    Chair Gensler’s efforts in this case go beyond the SEC’s statutory authority under the Investment Advisers Act and other relevant legislation. By attempting to apply the existing custody rules to non-security crypto assets—again, assets outside the purview the of SEC’s statutory authority—the Chair is not only undermining Congressional intent but also violating principles of separation of powers and due process.

    The SEC’s actions in the Galois Capital case illustrate a troubling pattern: the agency is bringing enforcement actions against market participants based on staff positions concerning the existing custody rules first publicly disclosed in the Proposing Release without basis or proper process. The Proposing Release has not been adopted and the SEC has not yet addressed the overwhelmingly negative public comments provided on the Proposing Release and the basis dicta included in that release. Applying any position taken in the Proposing Release before formal rule adoption is a clear violation of the APA and an unlawful expansion of the SEC’s powers, bypassing Congress and flouting statutory limitations.

    Call to Action

    This regulatory overreach must not be tolerated, and the SEC must be brought back within the boundaries of its statutory authority, or we risk crippling innovation and accepting new precedents of bad faith actions by a rouge agency head without oversight. This is not just a policy disagreement but a fundamental issue of upholding constitutional principles. Congress must act immediately to ensure that the SEC operates within its legal limits and adheres to the APA’s rulemaking process.

    Conclusion

    Chair Gensler’s attempt to expand the custody rule to cover non-security crypto assets, without proper legal authority or adherence to the rulemaking process, represents a direct challenge to constitutional norms and regulatory transparency. The SEC’s enforcement actions, such as those in the Galois Capital case, set a dangerous precedent of regulatory overreach that undermines the rule of law and due process. Congress must take immediate action to hold the SEC accountable, prevent further erosion of legal safeguards, and ensure that a clear, legally sound regulatory framework is established for the future of the crypto industry. The time for decisive Congressional action is now.

    TDC Joins the Crypto Market Integrity Coalition’s Call to Action To Biden Administration

    by Cody Carbone

    Today, The Digital Chamber (TDC) proudly joins the Crypto Market Integrity Coalition (CMIC) in a collective call to action directed at the Biden administration. As a founding member of CMIC, TDC is committed to advocating for a regulated U.S. market for digital assets that prioritizes market integrity and consumer protection. We extend our heartfelt thanks to Solidus Labs for their leadership in founding this vital organization and bringing together industry leaders dedicated to these principles.

    Call to Action

    We urge the administration to establish clear rules for the digital asset market, fostering a compliance mindset that aligns with U.S. financial norms and democratic principles. Enacting foundational legislation this year will cement the U.S. dollar as the primary currency for digital transactions globally and reduce costs for businesses and consumers alike.

    Missing this opportunity would be a significant setback for the U.S. on the global stage. TDC, alongside CMIC and its members, stands ready to serve as a resource, advocating for regulated and responsible digital asset practices.

    We commend the administration’s recent affirmations that creating a balanced regulatory environment for digital assets is essential. We agree wholeheartedly that this will promote responsible development, foster payment innovation, and reinforce U.S. leadership in the global financial system. The Digital Chamber and CMIC members stand ready to collaborate with the administration to transform these affirmations into concrete actions.

    Read our call to action here.

    What’s Next for SAB 121 Following Bipartisan Passage of H.J. Res 109

    by Cody Carbone

    After last week’s bipartisan vote in the Senate, where H.J. Res 109 passed by a vote of 60-38 (with 2 members not voting) and support from 11 Democrats, 1 Independent, and 48 Republicans, repeal of the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) 121 is now on President Biden’s desk. He has a decision to make by May 28th, which is the 10-day deadline excluding Sundays. Here are the potential scenarios:

    Veto

    The President can veto the Joint Resolution as he indicated he would in a Statement of Administration Policy (SAP) on May 8th. A veto would effectively end the congressional effort to nullify SAB 121, as Congress likely does not have the votes to override the veto, which requires a two-thirds majority in each chamber.

    Sign the Joint Resolution

    President Biden can sign the Joint Resolution into law, nullifying the SEC’s SAB 121 and preventing the SEC from issuing a similar rule in the future.

    Do Nothing

    President Biden can choose to do nothing and let the 10 days lapse without signing or vetoing the Joint Resolution. This is where it gets tricky:

    • If Congress is in session, the President’s inaction will mean that the bill is effectively signed into law, nullifying SAB 121.
    • If Congress is not in session, the bill could face a pocket veto, where the President’s inaction prevents the bill from becoming law.

    Analysis

    The outcome remains uncertain. There is precedent for a President backtracking on a veto threat issued in a SAP and ultimately signing the bill into law. Under President Obama, four bills that received a presidential veto threat in a SAP were ultimately signed by him.

    Despite May 28th falling during a congressional recess week for Memorial Day, Congress is likely to remain in session through pro-forma sessions, even if they are expected to be away from Washington, DC on Memorial Day recess. Pro-forma sessions are brief meetings that can prevent a pocket veto by keeping Congress technically in session. As either House can call a pro forma session, a pocket veto is unlikely. 

    We should know the outcome soon. Supporters of the Resolution, particularly Democrats, have been increasing pressure on SEC Chair Gary Gensler to withdraw SAB 121 to avoid forcing the President to make a decision. While the SEC has been resistant to backtracking on crypto policy actions, they have succumbed to pressure in the past (e.g., Bitcoin Spot ETPs). 

    The next few days will be very interesting to watch.

    The Digital Chamber Condemns SEC’s Latest Regulatory Overreach Following Wells Notice to Robinhood Crypto 

    by Cody Carbone

    Washington, D.C. – The Digital Chamber, the leading trade association representing the digital asset industry, expresses its profound disappointment and concern following the news that Robinhood Crypto (RHC) has received a Wells Notice from the U.S. Securities and Exchange Commission (SEC). This alarming development is yet another instance of the SEC’s unchecked regulatory overreach, coming on the heels of similar notices issued to major industry players like Uniswap and Consensys.

    Robinhood’s statement earlier today highlighted their rigorous efforts to comply with SEC regulations, including their attempt to register a special purpose broker-dealer specifically for their crypto operations. Despite these good faith efforts, the SEC has chosen a path that significantly undermines innovation and investor protection in the digital assets space.

    The Digital Chamber has consistently argued, through multiple amicus briefs and advocacy initiatives, that the SEC is extending its regulatory reach over the digital asset industry without proper congressional authorization. When Congress is actively deliberating legislation that would define regulatory jurisdictions for digital assets, the SEC’s actions contradict the legislative process.

    Moreover, the SEC’s aggressive stance does not align with its stated investor protection mandate. By threatening to stifle a major part of the financial sector through potentially unwarranted enforcement actions, the SEC risks not only alienating innovative enterprises but also undermining the financial autonomy of millions of Americans who participate in the digital economy.

    We urge immediate legislative action to address these jurisdictional discrepancies and clarify the regulatory framework governing digital assets. Additionally, SEC Chairman Gary Gensler must be called to testify before Congress to explain the rationale behind the SEC’s continued attempts to stifle an industry pivotal to our economic future.

    The Digital Chamber stands ready to support Robinhood Crypto and other affected companies in seeking a resolution that protects their ability to operate and innovate, as well as defending the rights of digital asset users and entrepreneurs nationwide.

    For media inquiries, please contact press@digitalchamber.org.

    Navigating the Future: The Digital Chamber’s Comment on Proposed IaaS Regulations

    by Cody Carbone

    The Balance Between Innovation and Regulation

    As the foremost advocate for blockchain technology, The Digital Chamber has consistently championed a regulatory environment that nurtures innovation while safeguarding the public interest. It’s a delicate equilibrium, particularly when new proposals surface that could significantly affect the industry. That’s why we’re getting involved to shape the dialogue around the U.S. Bureau of Information Security’s (BIS) notice of proposed rulemaking aimed at U.S. Infrastructure as a Service (IaaS) providers.

    Our Concerns with the Proposed Rule

    Our commitment to fostering growth within the blockchain ecosystem compels us to address the well-intentioned but potentially overreaching aspects of the current proposal. Our concerns hinge on the broad language of the rule, which may not fully account for the unique attributes of decentralized systems and the way blockchain technologies operate.

    The Unintended Consequences for Decentralized Services

    The proposal, as it stands, could impose significant compliance hurdles for decentralized IaaS providers. These entities, often small-scale operations without the vast resources of traditional cloud services, face the real possibility of being subject to impractical Know Your Customer (KYC) mandates. Moreover, the expansive definition of an IaaS product in the proposal does not seem to encapsulate the specialized nature of blockchain-based services, which often fall outside the realm of conventional cloud computing.

    The Path Forward: Recommendations for Consideration

    We have provided several recommendations to the BIS, advocating for the explicit exclusion of blockchain-based IaaS and decentralized, permissionless products that do not offer traditional cloud-computing solutions from the proposed rule’s scope. We also urge a re-examination of traditional approaches to compliance such as KYC protocols, ensuring they adapt to the decentralized and digital nature of blockchain technology.

    Embracing Technological Solutions

    We suggest a collaborative effort with DLT experts to develop identity verification systems that respect privacy and align with decentralized principles. Emerging technologies, such as zero-knowledge proofs and secure multi-party computation, present promising avenues for compliance that do not compromise individual privacy.

    Our Call for Collaborative Engagement

    The Digital Chamber believes in proactive engagement with regulators like BIS. By working together, we can integrate technological solutions that ensure safety and compliance without undermining the values of privacy and decentralization that are central to the blockchain community.

    Read Our Full Comment Letter

    We invite you to read our comment letter to grasp the comprehensive implications of the BIS’s proposed rulemaking. It is our hope that by contributing our perspective, we can assist the BIS in recognizing the importance of preserving the innovative spirit that drives blockchain technology forward.

    Join the Conversation

    We stand ready to serve as a resource and look forward to continuing the conversation with BIS and the blockchain community. Your thoughts and participation are crucial in this journey towards a regulatory framework that fosters growth, ensures security, and maintains the freedom fundamental to our digital future.

    Accounting Initiative Response to PCAOB Proposed Rule 2400

    by Cody Carbone

    The Digital Chamber (TDC) has submitted feedback on the Public Company Accounting Oversight Board’s (PCAOB) Proposed Rule 2400, specifically addressing the implications for Proof of Reserves (PoR) in the blockchain sector.

    PoR is a pivotal transparency tool within the cryptocurrency industry, providing a verification method for the reserves held by platforms and issuers. We support the use of PoR and similar attestations to ensure the integrity of digital asset holdings, enhancing consumer and investor trust. The PCAOB’s proposal aims to extend its oversight to include audits and attestations like PoR that are beyond its traditional regulatory scope. Our comments argue this expansion is unsupported by the PCAOB’s statutory authority and lacks concrete evidence of investor harm or confusion that the rule purportedly addresses. Instead, PoR has been instrumental in promoting transparency and accountability, particularly highlighted during the failures of several large cryptocurrency platforms.

    We urge the PCAOB to use a more measured approach that involves further study and dialogue, which could lead to more informed and effective regulations that foster innovation while protecting investors.

    Urgent Call to Action: American Citizen and Crypto Sector Worker Detained by Nigerian Government

    by Cody Carbone

    In a distressing breach of international law, U.S. citizen Tigran Gambaryan has been detained by the Nigerian government. Employed by Binance as the head of their criminal investigations team, Mr. Gambaryan appears to have been invited to Nigeria under false pretenses, only to be arrested on February 26, 2024, without any charges, except for his current employment for Binance.

    It appears that Mr Gambarayan is being held coerce a $10 billion fine from Binance. This egregious act appears to be a state-sponsored kidnapping. Both Gambaryan and a colleague from Binance were deprived of their passports and taken to an undisclosed location by armed personnel, where they have remained in custody. The absence of criminal charges and the refusal to allow unsupervised legal counsel highlight the arbitrary nature of this detention.

    The implications of this act are chilling. Tigran Gambaryan’s detainment under such dubious circumstances sets a dangerous precedent, signaling that any American businessman abroad, particularly those in the cryptocurrency sector, is vulnerable to similar unlawful actions by foreign governments.

    This action is a flagrant violation of international law. And while Iran, Russia and China have similarly arrested American citizens in their countries as leverage or on dubious arguments, this is notably very different: Nigeria is a U.S. ally and recipient of substantial U.S. foreign aid, exceeding $1 billion annually. The Biden Administration must act to secure Mr. Gambaryan’s release and return him to his family.

    Mr. Gambaryan has made notable contributions to the fight against cybercrime, including his involvement in resolving high-profile cases such as AlphaBay, the Welcome to Video child exploitation ring, and the Silk Road cryptocurrency theft. His career, dedicated to upholding justice and security, starkly contrasts with the unfounded circumstances of his arrest.

    This incident demands a robust response from the United States. We call upon President Biden and the U.S. government to employ every diplomatic measure to ensure Mr. Gambaryan’s immediate release. The unwarranted detention of Tigran Gambaryan is more than a legal issue; it is a matter of national dignity and the protection of American citizens worldwide. We stand in solidarity with Mr. Gambaryan and his family during this trying time.

    The Chamber Voices Strong Support for Digital Asset Investment in Arizona Retirement Systems

    by Cody Carbone

    The digital asset revolution is here, and the Chamber of Digital Commerce is committed to ensuring the state of Arizona is at the forefront of this financial transformation. That’s why we have voiced our strong support for SCR 1016, a concurrent resolution that encourages the Arizona State Retirement System and the Public Safety Personnel Retirement System to explore investing in digital assets and bitcoin exchange-traded funds (ETFs).

    In a letter to Governor Katie Hobbs, the Chamber emphasized the rapidly evolving digital asset landscape and the importance of state retirement systems positioning themselves to capitalize on this innovative asset class. With bitcoin’s market cap surpassing $1 trillion and growing institutional adoption, including approval for several bitcoin ETFs by the SEC, the potential for portfolio diversification and returns is too significant to ignore.

    “The Chamber of Digital Commerce believes that Arizona’s state retirement systems must explore all viable investment opportunities that can generate returns and safeguard the financial futures of their members,” the letter states. It highlights that even the federal government recognizes bitcoin’s value by holding approximately 200,000 bitcoins.

    By closely evaluating developments in digital asset ETFs and considering their inclusion in investment portfolios, the letter argues that Arizona’s retirement systems can position the state as a leader in embracing innovative financial technologies that benefit its members.

    The Chamber calls on Governor Hobbs and the Arizona legislature to support SCR 1016 and provide the necessary resources for a comprehensive feasibility study on investing state retirement funds in digital assets. This forward-thinking approach can unlock new economic opportunities while securing a prosperous future for all Arizonans.

    As advocates for the growth of digital assets and blockchain technology, the Chamber of Digital Commerce stands ready to assist Arizona in navigating this cutting-edge financial frontier. The organization’s unparalleled expertise, combined with its broad network of industry leaders, makes it an invaluable ally in shaping policies that foster innovation while protecting consumer interests.

    What’s next?

    The state Senate passed the resolution in a 16-13 vote in February. Senators followed party lines, with all Democrats voting against the measure. The text is now before the state House Ways and Means Committee. As a concurrent resolution, the measure can proceed with support from the House and Senate, bypassing a signature from Arizona Governor Katie Hobbs. 

    If passed, the resolution will ask the ASRS and PSPRS to create a “report on the feasibility, risk and potential benefits of directing a portion of state retirement system monies into digital asset ETFs, including a list of options and recommendations for how the state might safely invest in the digital asset class.”

    The time is now for Arizona to seize the immense potential of digital assets. With the Chamber’s support and guidance, SCR 1016 can pave the way for the state to become a model for other jurisdictions seeking to harness the power of this transformative technology responsibly.  Stay tuned as we continue our efforts to drive the secure and sustainable integration of digital assets into the financial mainstream.